pm-tax wednesday 30 july 2014 - pinsent masons · continued from previous page pm-tax our comment...

PM-Tax | Our Comment>continued from previous page

Wednesday 30 July 2014

In this Issue

News and Views from the Pinsent Masons Tax teamPM-Tax

Our Comment• A strict regime for high risk promoters by Ray McCann• Aggressive tax avoidance: time to pay upfront by Jason Collins• Accelerated payment notices to be extended to NIC avoidance schemes by Ray McCann• VAT: Technology should not count against investment platforms by Darren Mellor-Clark

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Recent Articles• Property Tax: VAT and TOGCs by John Christian• Self-certification of tax-advantaged employee share plans – HMRC’s guidance published by Matthew Findley and

Suzannah Crookes• German Federal Court of Finance: Last days of the German Interest Barrier Rule? by Werner Geisselmeier and Veit

Kachelman

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Our perspective on recent casesProcedure• Easinghall Ltd v HMRC [2014] UKFTT 677 (TC)

15Substance• Airtours Holidays Transport Ltd v HMRC [2014] EWCA Civ 1033• HMRC v Murray Group Holdings and Others [2014] UKUT 0292 (TCC)• Turullols v Revenue & Customs [2014] UKFTT 672 (TC)• Fazenda Pública v Banco Mais SA C 183/13

• Zipvit Ltd v HMRC [2014] UKFTT 649 (TC)• Mr & Mrs M Rockall v HMRC [2014] UKFTT 643 (TC)• Beacon Estates (Chepstow) Limited v HMRC [2014]

UKFTT 686 (TC)

Events 23 People 24

© Pinsent Masons LLP 2014

@PM_Tax

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PM-Tax | Wednesday 30 July 2014


New legislative tools will enable HMRC to severely curtail activity on aggressive tax planning but it’s rather after the fact.

A strict regime for high risk promotersby Ray McCann

This comment appeared on Accountancylive.com on 17 July 2014

There are very difficult times ahead for tax planners. On top of recent changes such as the GAAR or General Anti-Abuse Rule, the Finance Act 2014 provides HMRC with new and very radical ‘tools’ to combat the promotion of aggressive tax schemes by firms referred to by HMRC as ‘high risk promoters’.

These provisions will impose severe restrictions on those who continue to promote abusive tax schemes despite warnings from the government and HMRC that such activities must stop.

For users of schemes the government has already made clear that it will resort to retrospective changes in tax law to defeat the continued use of tax schemes, for example as was the case in 2012 and 2013 in respect of SDLT schemes. As part of the latest crackdown many taxpayers who have used schemes in the past that were disclosed under DOTAS will soon start to receive ‘accelerated payment notices’ (APNs) requiring upfront payment of any tax affected by the scheme.

Controversially these high risk promoter and accelerated payment provisions do not require HMRC to show that the scheme will fail as they will apply before any tribunal or court has been able to determine the merits and there will be no separate appeal rights for promoters or scheme users.

This has raised concerns that HMRC will, in future, be able to act as judge, jury and executioner. It is easy to conclude that the combination of these rules will kill off what remains of the more aggressive end of the tax planning market and all in all the future for anyone labelled by HMRC as a ‘high risk promoter’ looks bleak.

This is especially so since it appears relatively easy to breach at least some of what are referred to as the ‘threshold conditions’ in the high risk promoter rules. Such conditions include, for example an adverse GAAR panel opinion being given (even a split opinion) or non-compliance (in HMRC’s opinion) with DOTAS and the Code of Practice for Banks.

Where a promoter falls foul of one or more of these threshold conditions HMRC can issue what is referred to as a ‘conduct notice’ (in effect the tax equivalent of an ‘electronic tag’) allowing HMRC to impose behavioural conditions on the promoter that must be met if the promoter is to avoid even more severe action.

HMRC will decide what conditions should apply and importantly judge whether the conditions have been met. Where the promoter does not comply with any of the conditions life will become even more difficult.

A breach of the conduct conditions will allow HMRC to issue a ‘monitoring notice’ and only at this stage is any independent oversight built into the rules, as HMRC will be able to issue a monitoring notice only with the permission of a tribunal judge.

Promoters subject to such a notice will be required to publicise that they are a monitored promoter and failing to do so could mean a penalty of up to £1m, in effect ‘naming and shaming’ the promoter. Also being classified as a monitored promoter will cause additional obligations to be imposed on intermediaries and clients of the promoter.

Given the undoubted reduction in the use of aggressive schemes over the past few years and so soon after the introduction of the General Anti-Abuse Rule, these additional changes, welcomed by many have some feel of slamming the stable door not so much after the horse has bolted but well after the horse has died!

Ray McCann is a Partner (non-lawyer) leading our private wealth tax practice and also advises corporate clients on a range of advisory and HMRC related issues, especially in relation to tax planning disputes. Until 2006, Ray was a senior HMRC Inspector where he held a number of high profile investigation and policy roles including, work on cross border tax avoidance issues with tax authorities in the US, Australia and Canada. In 2004, Ray was responsible for the introduction of the “DOTAS” rules.

E: [email protected]: +44 (0)20 7054 2715

PM-Tax | Our Comment

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PM-Tax | Our Comment>continued from previous page PM-Tax | Our Comment

HMRC is planning to issue ‘warning letters’ ahead of demands for tax involving aggressive avoidance schemes under dispute but this isn’t enough clarity for taxpayers who need to understand when exactly their tax becomes due.

HMRC has published a list of the reference numbers of over 1,200 tax avoidance schemes where it will require payment of tax before any dispute over the efficacy of the scheme is resolved.

However, the list just shows the numbers and not names of the various schemes and gives no indication of when an actual notice to pay will be issued to users of each particular scheme.

Provisions in this year’s Finance Act, which became law on 17 July, give HMRC the power to demand upfront payment of any disputed tax associated with certain avoidance schemes by issuing an accelerated payment notice (APN). Until now, in direct tax cases, HMRC has had to win a tribunal hearing in the particular case before it can demand the disputed tax.

HMRC says that it will use APNs against tax avoidance schemes it disputes, which generally fall into six broad categories:• Sideways loss schemes• Stamp duty land tax (SDLT) schemes• Self-employment schemes• Artificial loss deduction schemes• Capital gains schemes• Employment schemes.

The new rules have been criticised as they will allow HMRC to issue an APN where a scheme has been notified to HMRC under the Disclosure of Tax Avoidance Scheme (DOTAS) rules, even if the scheme was entered into and notified under DOTAS a number of years ago. The retrospective nature of the change ‘moves the goalposts’ for people who entered into schemes a number of years ago, before the public backlash against tax avoidance.

The list gives the scheme reference number for DOTAS schemes where users will receive an APN at some stage – not necessarily straight away. For existing schemes, HMRC has two years to issue APNs. HMRC has said that, beginning in August, it will phase the issuing of notices over approximately 20 months. HMRC has issued

guidance on how the APN and the follower notice rules work. In relation to APNs the guidance confirms that taxpayers will be contacted by HMRC before an APN is sent out. HMRC has said that it will also be contacting promoters of schemes around six weeks before notices are issued.

If a notice is issued, the taxpayer has 90 days to pay the tax – unless they make representations that the notice should not have been issued to them. In this case, if they are unsuccessful they have a further 30 days from being notified of HMRC’s review decision, provided that this expires after the end of the original 90 day period. HMRC is not under any statutory time limits to complete its consideration of the representations.

It is helpful that HMRC has listed the schemes where it plans to issue APNs, but it now needs to publish its timetable for phasing the issue of notices in relation to the individual schemes. Those affected need to know whether they have a few months or a couple of years to come up with the tax. HMRC’s normal “time to pay” arrangements may be available if a taxpayer will suffer financial hardship – but it has been reported that many will go bust as a consequence of these notices.

Stick or twist?Payment of the APN does not extinguish the taxpayer’s right to challenge HMRC in litigation and, if successful, the money will be returned.

If the taxpayer would prefer to settle, HMRC has offered terms to settle certain kinds of partnership schemes, although they are not particularly attractive. Affected taxpayers may want to weigh up the financial difference between accepting the offer against paying the APN and litigating.

A crucial factor will be that interest on late paid tax is only payable now under the settlement route. The APN, on the other hand, is just a payment on account of the disputed tax, and any reckoning up of interest will take place once the dispute has been finally determined, which may be some years down the line.

Aggressive tax avoidance: time to pay upfrontby Jason Collins

This is an updated version of a comment that appeared on Accountancylive.com on 15 July 2014.

http://www.hmrc.gov.uk/specialist/acc-pymts-f-notices.pdf



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Aggressive tax avoidance: time to pay upfront (continued)

Whilst HMRC will justify these measures by saying that it warned back in 2007 that it would use all its ‘litigation firepower’ with a view to discouraging people from entering into the schemes in the first place, this strategy was buried away in the detail of a document on its website.

Scheme promoters are unlikely to have brought it to their customers’ attention when encouraging them to sign up to these schemes. HMRC needs to consider offering more attractive settlement terms if it plans to avoid a tsunami of litigation.

The HMRC list of notified scheme numbers is available here. For more information on APNs see our FAQs.

Jason Collins is Head of our Tax group. He is one of the leading tax practitioners in the UK, specialising in handling any form of complex dispute with HMRC in all aspects of direct tax and VAT, resolving the dispute through structured negotiation and formal mediation. Where necessary, he also handles litigation before the Tax Tribunal and all the way through to the European Court – with a particular expertise in class actions and Group Litigation Orders. He also represents clients under civil investigation, such as HMRC’s Code of Practice 9 procedure – and under criminal investigation including representation at ‘dawn raids’ and interviews under caution.


https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/326655/Reviewed_Tax_Avoidance_Scheme_Ref__Numbers_July_2014.pdf

http://www.pinsentmasons.com/PDF/FAQs-Accelerated-payments-and-follower-notices.pdf

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by Ray McCann

Accelerated payment notices to be extended to NIC avoidance schemes

As mentioned in the previous article, the accelerated payment provisions give HMRC the power to demand upfront payment of any disputed tax associated with avoidance schemes by issuing an ‘accelerated payment notice’ (APN). Previously HMRC had to win a tribunal case before it could demand disputed tax in respect of these schemes.

Since the Finance Act became law on 17 July, the provisions have applied to income tax, capital gains tax, corporation tax, inheritance tax, stamp duty land tax (SDLT), and the annual tax on enveloped dwellings (ATED). The government wants to extend the measures to NICs at the earliest opportunity and it has now announced that this will happen two months after the National Insurance Contributions Bill 2014 becomes law.

The new rules allow HMRC to issue an APN where a tax scheme has been notified to HMRC under the Disclosure of Tax Avoidance Scheme (DOTAS) rules or where HMRC has issued a ‘follower notice’ to a taxpayer who has entered into a scheme where HMRC have won a ruling against a taxpayer in another similar case. A follower notice will require the taxpayer to either settle their dispute or face a large penalty if their dispute with HMRC is ultimately unsuccessful. Follower notices will also be extended to NIC schemes.

The move to extend the APN rules to NICs may in fact prove even more controversial if HMRC look to collect PAYE and NIC from users of a range of employee trust schemes. Many employee benefit trusts (EBTs) and employer-financed retirement benefit schemes (EFRBS) have been disclosed under DOTAS, but HMRC has been largely unsuccessful in persuading the Tax Tribunals that loans made to beneficiaries are earnings. Earlier this month the Upper Tribunal decided in a case involving Rangers Football Club (see our summary of the case of HMRC v Murray Group Holdings), that loans made to players and other employees who were beneficiaries of an employee trust were not earnings for tax purposes.

Given the very broad approach of the law relating to APNs, HMRC could in theory issue a payment notice in circumstances where it had no realistic prospect of successfully pursuing the disputed tax and NIC liability through the courts.

HMRC estimates that accelerated payment notices relating to existing avoidance cases currently under dispute will be issued to approximately 33,000 individual taxpayers concerning £5.1 billion of tax and NICs and around 10,000 companies for £2.1 billion of tax and NICs. However, there is currently no breakdown of the figures to show specifically those taxpayers using NIC avoidance schemes.

The National Insurance Contributions Bill was introduced into Parliament on 17 July. It also contains provisions simplifying the collection NICs paid by the self-employed, applying new information powers and penalties to high-risk promoters of avoidance involving NICs and a Targeted Anti Avoidance Rule to prevent people from circumventing new legislation tackling avoidance involving employment intermediaries and offshore employers. It is expected to have its second reading debate in the House of Commons on 8 September 2014, but it is not known when it will become law.

For more information on APNs see our FAQs.

Ray McCann is a Partner (non-lawyer) leading our private wealth tax practice and also advises corporate clients on a range of advisory and HMRC related issues, especially in relation to tax planning disputes. Until 2006, Ray was a senior HMRC Inspector where he held a number of high profile investigation and policy roles including, work on cross border tax avoidance issues with tax authorities in the US, Australia and Canada. In 2004, Ray was responsible for the introduction of the “DOTAS” rules.


New provisions requiring accelerated payment of tax in certain tax avoidance schemes will be extended to National Insurance Contributions (NICs). However, they will be controversial if HMRC looks to collect PAYE and NIC from users of a range of employee trust schemes.


http://www.pinsentmasons.com/PDF/FAQs-Accelerated-payments-and-follower-notices.pdf

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The UK ‘platforms’ industry faces a potential administrative headache if the services they provide to investors are caught by new EU VAT rules. ‘Platforms’ are online shops for shares and funds. The new rules, if they are said to apply to platform services, could require platforms to account for varying VAT rates in 28 different countries.

The application of the rules to platforms would penalise the use of technology that helps improve accessibility and reduce costs for businesses and consumers in the investment market. It may also mean that digital services provided by banks and insurance companies will be subject to increased scrutiny to determine whether those services should also fall subject to the new VAT rules.

Earlier this month Deloitte warned that investment platforms could be swept up in significant VAT changes taking effect on 1 January 2015. Under the rule changes, the supply of broadcasting, telecommunications and electronically supplied services by businesses to consumers will be subject to VAT in the country where the individual lives.

Because investment platforms are not currently taxed in a uniform manner across the EU, those businesses could face a significant additional compliance burden if the services they provide are classed as ‘electronically supplied services’.

Under current EU law, supplies of services to individuals or non-business recipients are generally subject to VAT in the country where the supplier is located. However, the increasing size of the business to consumer (B2C) digital economy has led to a rethink of these rules, amid fears that the present law is leading to distortion of competition and an un-level playing field. In particular this has caused concern about the sale of e-books, music downloads and other digital content.

In such areas, some suppliers have established themselves in countries such as Luxembourg and sold e-books to UK consumers at a VAT rate of 3%. By contrast suppliers located in the UK and selling to UK recipients have been required to charge UK VAT at 20%. Understandably this has led to a growing group of suppliers crying foul over this legal disparity.

Applying the VAT rules for ‘electronically supplied services’ on a point of consumption basis could have significant implications for platforms. Deloitte said that platforms could be classed as ‘electronically supplied services’, with the effect being that a UK platform supplier could be required to charge VAT on any clients living in France, for example. Currently, the UK generally exempts from VAT the services supplied by investment platforms whereas in France such services are usually subject to VAT.

Affected businesses have to think hard about how to comply with the new law. Essentially there are two options available to businesses. A business may register for VAT in each EU country in which it supplies relevant services to consumers. Local VAT may then be charged and accounted for normally. The downside to this is that administering 28 VAT registrations and tax returns is a compliance burden.

As a simplification measure, however, businesses may opt to use the VAT Mini One Stop Shop (VAT MOSS) regime which has been set up in the UK by HM Revenue and Customs (HMRC) to facilitate the broader EU measure. The simplification allows businesses to register for VAT in only one EU country and submit a single, combined, VAT return. Under the scheme, the centralised data is sent to each individual EU country in which there are declared sales and the relevant VAT payment is also remitted in accordance with the local applicable rate.

Under either model, the business is left with problems of ensuring that it is able to determine the location of its customers and charge local VAT accordingly.

Deloitte’s warning has raised the prospect that the new ‘point of consumption’ regime for VAT in the EU may not be limited to e-commerce platforms but may also apply in a financial services context.

Whether this is correct or not depends upon how platform services are viewed. In its legislation and guidance the EU views electronically supplied services as being those delivered over the internet or electronic network, the nature of which means that they are largely automated and involve minimal human intervention. Further, it states that in the absence of information technology those services would be impossible to provide.

Delivering services to consumers using digital channels should not trigger tax obligations for businesses that do not exist where the services are delivered via other channels.


VAT: Technology should not count against investment platformsby Darren Mellor-Clark

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VAT: Technology should not count against investment platforms (continued)

Specific examples which are subject to such treatment include: digitised products; internet service packages, but not the bare provision of access to the internet; and services automatically generated from a computer via the internet in response to data input by the recipient. Specifically excluded are the services of lawyers and financial consultants who advise via email; advertising services; and telephone helpdesk services.

In terms of whether or not to apply VAT to platform services, HMRC recently consulted with the UK industry to understand the nature of the services supplied. HMRC’s conclusion was that platforms supply services, online, which are designed to transact, administer and safeguard financial investments. In particular they noted that platforms undertake activities such as: acting as nominee for investors; acting as distributor for investment product providers and executing orders received from investors. Platforms may be accessed by the investor directly or only via an adviser or other regulated intermediary.

It would seem that at the heart of these services are the financial transactions themselves, including specialised functions such as nominee services and execution. The platform is a way for the investor, or his adviser, to better access the underlying financial services. However, the platform is merely a channel to access the services desired by the investor.

Considering the guidance provided by the EU, it cannot be said that such services would be impossible to provide in the absence of information technology. Financial advice, trade execution and nominee services have historically been supplied without the internet or electronic networks. In this context IT merely adds a convenience of access and availability which is consistent with the ‘everything and everywhere’ mindset of the digital generation.

To allow the channel by which these services are provided to determine the treatment of the services themselves could lead to an unwelcome level of uncertainty. In particular where would one draw the line to identify the tipping point at which delivery method determines character? For instance would mobile banking apps and facilities fall to be treated as electronically supplied services? If that could be the case then why not online insurance brokers? Taxing on the basis of the delivery method rather than the substance of services will introduce significant uncertainty.

Treatment of platforms as electronically supplied services is likely to increase cost for consumers and business both in terms of growing the compliance burden and more frequent imposition of VAT. For this reason, it is expected to be strongly resisted by the UK platform industry, especially when such a possibility emerges as an unwelcome visitor at the 11th hour.

Darren Mellor-Clark is Head of our indirect tax advisory practice and advises clients with regard to key business issues especially within the financial services, commodities and telecoms sectors. In particular, he has advised extensively on the indirect tax implications arising from regulatory and commercial change within the financial services sector, for example: Recovery and Resolution Planning; Independent Commission on Banking; UCITS IV; and the Retail Distribution Review.


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HMRC has issued a business brief setting out further changes in its interpretation of the rules relating to leases and transfers of a going concern (TOGCs). John Christian considers what has changed.

BackgroundBefore 2012 we had the unsatisfactory situation where two transactions that would be regarded in commercial terms as very similar had different treatments for VAT purposes. A sale of the freehold of a let building where the seller had opted to tax would be treated as a transfer of a going concern (TOGC) so that the seller would not charge VAT and the buyer would not have the cashflow disadvantage of paying the VAT and then claiming input tax credit. However, the grant of a long (eg 999 year) lease of the property was not regarded as a TOGC because as a matter of law the seller was creating an asset rather than transferring one.

Periodically people would manage to get a ruling from a local VAT office that the grant of a 999 year was a TOGC but HMRC guidance in Notice 700/9 (paragraph 6.3) unequivocally stated that it would not be. It said “If you own the freehold of a property and grant a lease, even a 999-year lease, you are not transferring a business as a going concern. You are creating a new asset (the lease) and selling it while retaining your original asset (the freehold). This is true regardless of the length of the lease. Similarly, if you own a headlease and grant a sub-lease you are not transferring your business as a going concern.”

Finally the case of Robinson Family Limited [2012] UKFTT 360 (TC) TC02046 reached the FTT and the FTT said that it was necessary to look at the substance of a transaction rather than its precise legal form. Robinson Family Limited (RFL) was a property development company which purchased a 125 year interest in a site which it intended to develop into six units and grant sub-leases of these to third parties. RFL had been negotiating to let one unit. There was a restriction imposed by Belfast Harbour Commissioners against any sub-division of the site other than by way of the creation of sub-leases, so rather than sell its interest, RFL granted an interest of 125 years less three days to a purchaser subject to and with the benefit of the proposed letting.

The Tribunal found that, although RFL retained the headlease, the distant interest in a three day reversion and the small economic interest which it represented in no way altered the substance of the transaction. The substance of the transaction was to put the transferee business in a position where it was able to continue the previous lettings business of RFL. The grant of the long lease should therefore be treated as a TOGC.

Brief 30/12In November 2012 HMRC issued Brief 30/12 in which it accepted that the fact that the transferor of a property rental business retains a small reversionary interest in the property transferred does not prevent the transaction from being treated as a TOGC for VAT purposes “provided the interest retained is small enough not to disturb the substance of the transaction”.

HMRC said that a reversion is sufficiently small for these purposes if the value of the interest retained is no more than 1 per cent of the value of the property immediately before the transfer (disregarding any mortgage or charge). Where more than one property is transferred at one time, the test should be applied on a property by property basis rather than for the entire portfolio. If the lease is only over part of the building HMRC has recently confirmed (in Brief 27/14) that the 1 per cent calculation will be based only on the part of the building over which the lease is granted and not the whole building.

If the interest retained by the transferor represents more than 1 per cent of the value of the property HMRC will regard that “as strongly indicative” that the transaction is not a TOGC.

When it issued Brief 30/12, HMRC said that it was reviewing its policy on whether the surrender of an interest in land could result in a TOGC and whether the grant of a lease of a property used in a business other than property letting (such as a property used as trading premises) could be treated as a TOGC.

The latest briefSome 20 months later, HMRC has finally completed the review of its policy and issued Brief 27/14.

It has now accepted that a surrender of a lease can be a TOGC if all the normal conditions are fulfilled. So there could now be a TOGC where a tenant subletting premises by way of business subsequently surrenders its interest in the property together with the benefit of the subtenants, or where a retailer sells its retailing business to its landlord. In substance the landlord has acquired the tenant’s business. HMRC says that this applies equally where the landlord’s interest is held via one or more nominees, so that the transaction involves a transfer to the nominee(s) for the landlord’s benefit.

Property Tax: VAT and TOGCsby John Christian

PM-Tax | Recent Articles

http://www.hmrc.gov.uk/briefs/vat/brief3012.htm

http://www.hmrc.gov.uk/briefs/vat/brief2714.htm

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PM-Tax | Recent Articles>continued from previous page

Property Tax: VAT and TOGCs (continued)

HMRC has also accepted that the grant of a lease other than in a property letting business can be a TOGC.

For any future transactions, HMRC’s change of view needs to be taken into account and VAT should not be charged. However, HMRC has allowed a 4 week grace period from the date of its Brief (9 July) when the change does not need to be implemented if both parties agree.

Implications for past transactionsHMRC’s change of policy means that anyone who paid VAT on a transaction which as a result of HMRC’s announcement should have been a TOGC, may be able to claim a repayment of the VAT, provided the transaction was in the last four years. In order for a property transaction to be a TOGC the buyer must notify the seller in accordance with article 5(2A) of the VAT (Special Provisions) Order 1995 that an option to tax would not be rendered ineffective. Since this notification will not have been given where the parties assumed TOGC treatment was not available, HMRC has said that it will accept that this requirement has been complied with if the parties can satisfactorily evidence that article 5(2B) did not apply at the time.

Stamp duty land tax (SDLT) is payable on the VAT inclusive price so if VAT was charged it will have increased the SDLT liability. The overpaid SDLT can be reclaimed, if the four year time limit for obtaining a repayment has not expired. A repayment of the SDLT cannot be obtained unless a repayment of the VAT is also claimed. Whether it is worth incurring the costs of making these claims, will depend upon the size of the transactions concerned and the amount of VAT and SDLT at stake.

TOGCs of new developments of dwellings, relevant residential and relevant charitable buildingsHMRC has also announced a change of interpretation in relation to ‘person constructing’ status for zero rating. The first grant of a major interest (freehold sale or long lease) in residential or relevant charitable property by the person constructing is generally zero-rated.

HMRC has previously taken the view that ‘person constructing’ status does not move to a person acquiring a completed building that is transferred as a going concern. It now accepts that a person acquiring a completed residential or charitable development as part of a transfer of a going concern inherits ‘person constructing’ status and is capable of making a zero rated first major interest grant in that building or part of it as long as: • a zero rated grant has not already been made of the completed

building or relevant part by a previous owner (for this purpose, HMRC consider that the grant that gives rise to the TOGC should be disregarded)

• the person acquiring the building as a TOGC would suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business. This entails the transfer (as a TOGC) of its entire property portfolio of newly constructed residential/charitable buildings to an associated company, which will make first major interest grants. If these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the Capital Goods Scheme or partial exemption ‘claw back’ provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances – HMRC would consider this to be an unfair disadvantage)

• that person would not obtain an unfair VAT advantage by being in a position to make zero rated supplies (for example, by recovering input tax on a refurbishment of an existing building).

The guidelines also apply in respect of ‘person converting’ status (for buildings converted from non-residential to residential use) and ‘person substantially reconstructing’ status (for substantially reconstructed listed buildings). However, the ‘change of use provisions’ still need to be considered in the case of relevant residential and charitable buildings.

CommentHMRC’s announcements are welcome – although the fact that it has taken so long to clarify its view in relation to surrenders and property used other than for property letting, has meant there has been a considerable period of uncertainty.

Although VAT and SDLT repayment claims may be possible as a result of the change of view, in many cases the tax potentially repayable (especially in the case of VAT if the input tax has been fully recovered) will not be significant enough to make the costs of the claims worthwhile.

John Christian is head of our Corporate Tax Team. He specialises in corporate and business tax, and advises on the tax aspects of UK and international mergers and acquisitions, joint ventures and partnering arrangements, private equity transactions, treasury and funding issues, property taxation, transactions under the Private Finance Initiative and VAT.

E: [email protected] T: +44 (0)113 294 5296

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HMRC has now published its updated guidance in relation to ‘tax-advantaged’ share plans reflecting the changes to the legislation made in 2013 and 2014. The guidance is to be welcomed, as it brings further detail of HMRC’s approach to the operation of plans in the context of the new ‘self-certification’ regime in force since 6 April 2014 for the Share Incentive Plan (SIP), the Save-As-You-Earn share option plan (SAYE) and the Company Share Option Plan (CSOP).

For an outline of the self-certification regime and online registration for all employee share plans and awards, see our April update.

Self-certification – a reminderFrom 6 April 2014, there is no longer a regime of formal pre-approval for SIP, SAYE and CSOP by HMRC. Instead, companies are required to register their new and existing tax-advantaged share plans online, and to “self-certify” that they are compliant with the applicable legislation. Annual returns for the current and future tax years will also need to be submitted electronically – this applies to EMI and non-tax advantaged arrangements as well as to SIP, SAYE and CSOP, and whilst these do not need to be self-certified, they must still be registered in order for companies to be able to comply with filing requirements.

The deadline for self-certification is 6 July after the end of the tax year in which a new plan is first operated – or 6 July 2015 for existing plans which were previously approved by HMRC under the old regime. Equivalent deadlines apply for the registration of EMI and non-tax advantaged arrangements in order to comply with year-end filing obligations.

HMRC has suggested a timetable for a staged approach to registration based on the place of a company’s name in the alphabet. This has been reiterated in their recent Bulletin 17, in which HMRC suggests that, although companies can register at any time prior to the deadline, it will be starting to issue reminders to those companies with names beginning A to E.

What else has changed?In addition to, and to support, the new self-certification regime, a number of other changes to the legislation affecting tax-advantaged plans are now in force.

HMRC’s updated guidance on the operation of tax advantaged plans is to be welcomed. The new regime represents a shift in focus from having HMRC’s sign-off under the formal approval regime, to companies having the responsibility, working as appropriate with their advisers, to confirm that their plans are compliant and to make the relevant self-certification declarations required. It is helpful to have guidance indicating HMRC’s agreed approach in particular to those areas where the legislation has recently been updated, and where there has previously been uncertainty as to HMRC’s interpretation of particular provisions.

We understand that HMRC intends a full review and rewrite of its guidance during the next year, and although this is not specific to the recent legislative changes, companies and their advisers will need to keep up to speed with any developments in HMRC’s approach relating to employee share plans more generally.

What have we learned from the updated guidance?The guidance confirms a number of points arising out of the changes made to tax-advantaged plans in Finance Act 2014, including the following:• Existing approved plans: one key area of uncertainty around

self-certification was the position for existing plans approved by HMRC under the old regime. Companies have been concerned to understand whether they need to reconsider the terms of approved plans, to confirm whether they are able to make the self-certification declarations required.

HMRC has confirmed in its guidance that where it has approved a plan prior to 6 April 2014, that approval is confirmation that the legislative requirements were met at the date of approval. It will not review that approval in the course of an enquiry conducted under the new self-certification regime, unless new information comes to light which was not previously available.

Self-certification of tax-advantaged employee share plans – HMRC’s guidance publishedby Matthew Findley and Suzannah Crookes


http://www.pinsentmasons.com/PDF/brave-new-world-april-2014-share-plans-update.PDF

http://www.hmrc.gov.uk/shareschemes/erss-bulletin-17.pdf

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PM-Tax | Recent Articles>continued from previous page

Self-certification of tax-advantaged employee share plans (continued)

• The new purpose test: the purpose of the plan must be to give employees a continuing stake in the company by providing benefits only in accordance with the relevant legislation, and must not provide participants with a cash alternative to shares. This applies to new plans and for existing plans from the date a change is made to a “key feature” of a plan on or after 6 April 2014. HMRC has confirmed in its guidance that the purpose test need not be written into plan rules – this is helpful perhaps in particular in relation to existing plans in the case of a key feature amendment, as it is clear that if the plan is operated in accordance with the purpose test, it does not matter that the test has not been written into the rules themselves.

• Grant of CSOP options: specifying the terms which must be stated when a CSOP option is granted, and notified to an optionholder as soon as practicable following grant. HMRC’s guidance outlines the terms they would expect to be included in option grant documentation (superceding the previous position where these documents were part of the formal approval process).

• Period for exercise following death in service: if SAYE and CSOP plans permit the exercise of options granted on or after 6 April 2014 following the optionholder’s death, fixing the exercise period at 12 months. The guidance now clarifies that this 12 month period is not curtailed by any other provision – for example a shorter period for exercise following a subsequent corporate event, although it notes that there would have to be an exception in the case of the winding up of a company where the full 12 month exercise period would be impossible to implement.

• “Grace period” for exercise on a change of control: provisions allowing companies to permit tax-advantaged exercise of SAYE and CSOP options within a period of 20 days before a change of control, or 20 days after a change of control, as a result of which the company’s shares cease to meet the required conditions set out in the legislation. HMRC has confirmed in guidance that where a company’s plan rules permit exercise on a change of control, the new 20 day grace period provision can be introduced without this being regarded as a “new right”, and so these provisions can apply to existing options (as well as new options) without upsetting the tax status of the options.

• Non-UK parent companies: the list of corporate events in relation to which SAYE and CSOP options can be exercised on a tax-advantaged basis before the third anniversary of grant has been extended to include a shareholder-approved reorganisation of a non-UK company’s share capital. A change is also made to permit options to be rolled over in such circumstances. Groups with a non-UK parent company should consider HMRC’s guidance on the application of the new provisions in the context of existing plans.

• Option roll–over and variation of capital: to support the self-certification regime, there have been changes to the equivalency and valuation requirements for a roll over of SAYE and CSOP options or a variation of share capital affecting SAYE and CSOP options. HMRC’s guidance sets out the circumstances in which approval from its Shares and Assets Valuation (SAV) division is still required in connection with option roll over, which will be helpful for companies looking to implement these provisions.

What should companies be doing now?Companies should consider the revised legislation and the recently published guidance, to determine whether any changes to their existing plans will be required (or would be desirable). If plans were not updated to reflect changes made by Finance Act 2013, we recommend companies consider whether such changes are now appropriate so they can be adopted at the same time. Whilst a number of the changes will take effect automatically, others can only be introduced into plan rules if the company so chooses. In relation to those changes which take effect automatically, to bring the drafting of the rules in line with their interpretation under the revised legislation will assist administration and avoid the risk of errors in application going forward.

The increases in limits for both SAYE (up to £500 per month from £250) and SIP (up to £3,600 (previously £3,000) of Free Shares and £1,800 (previously £1,500) of Partnership Shares per tax year) took effect from 6 April 2014. Companies who have not already done so should consider whether they wish to increase the limits offered under these plans, and confirm whether any changes are required to plan rules or ancillary documentation to achieve this.

Further commentThe move to self-certification of tax-advantaged share plans is a big change for companies and their advisors. HMRC is aware of this and, whilst the Employee Share Schemes Unit (ESSU) is not able to operate any form of approval or advance clearance procedure any longer, they are providing support through regular bulletins including FAQs on procedural matters, and with ESSU advisers available to answer specific queries not covered in published guidance.

As mentioned above, the publication of updated guidance covering the most recent legislative changes and implementation of the self-certification regime is helpful and whilst some queries will inevitably remain in the early phase of a new regime, we hope to see the continuation of a collaborative process with companies, administrators, advisers and HMRC working together to ensure the best outcome.



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Self-certification of tax-advantaged employee share plans (continued)

If you would like any help in reviewing your UK employee share plans in the light of the recent changes, or to discuss in more detail what you should be doing now, we’d be happy to hear from you.

Matthew Findley is a Partner and Head of our Share Plans & Incentives team. Matthew advises companies in relation to the design, implementation and operation of share plans and employee incentive arrangements both in the UK and internationally. His experience extends to both executive plans and all-employee arrangements. Matthew has been quoted in both Houses of Parliament on employee share ownership. He also has considerable experience of the corporate governance and investor relations issues associated with executive incentives and remuneration planning generally.


Suzannah Crookes is a Legal Director who advises companies on the implementation and continuing operation of employee share and incentive plans, including the design and establishment of new plans (both tax-advantaged and non-tax-advantaged plans), managing grants and maturities under existing plans, analysis of technical tax and legal matters and co-ordinating advice on international aspects where appropriate. In addition, she advises on the impact of corporate transactions both for buyers and target companies or groups, and assists companies planning towards exit by sale or IPO. She works for a range of listed plcs, AIM companies and unlisted companies including as private-equity backed and owner-managed businesses.


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Under German tax law, expenses resulting from business activities of a taxpayer are generally tax deductible and thereby reduce the tax base. In the case of interest expenses, the Interest Barrier Rule (so-called ‘Zinsschranke’) limits the full deductibility of interest as a business expense under certain circumstances.

In a decision of 16 April 2014 the German Federal Fiscal High Court (BFH) expressed its doubts about the constitutionality of the German Interest Barrier Rule and may submit the case to the German Federal Constitutional Court.

Background Since 2008 the German Interest Barrier Rule has applied to all loans (including group and third-party loans, regardless of recourse) and to businesses resident in Germany, businesses residing abroad but maintaining a permanent establishment in Germany and partnerships with a German branch. Under the Interest Barrier Rule, the deduction of interest expense exceeding interest income (net interest expense) is limited to 30% of taxable earnings before (net) interest, depreciation and amortization (EBITDA). Tax-exempt income and partnership income are not considered in the calculation of the taxable EBITDA.

The limitation rule does not apply if one of the following exemptions applies:• Exemption threshold: The annual net interest expense is less

than EUR 3 million.• Group clause: The company is not a member of a consolidated

group (a group of companies that can be consolidated under the relevant group financial reporting standards e.g. IFRS). The group clause does not apply in cases of loans granted by qualified shareholders of the company concerned (i.e. more than 25% of the shares) or the shareholder loan bears interest exceeding 10% of the company’s net interest expense.

• Escape clause: The equity ratio of the German subgroup is at least as high as the equity ratio of the worldwide group (a shortfall of up to 2% will not prevent the exemption applying).

Unused EBITDA and non-deductible interest expenditures are carried forward indefinitely but are subject to German change-of-control rules which may (partly) limit the deductibility of tax losses carried forward.

German Federal Fiscal High Court (BFH) rulingThe BFH stated that there are serious doubts as to whether the limitation of the deduction of interest expenses under the Interest Barrier Rule is compatible with the general Principle of Equality provided by the German constitution. In summary proceedings, the BFH regarded the tax deduction limitation of interest expenses as a breach of constitutional law.

It should be noted that the BFH stated its doubts only in proceedings about the application of interim suspending measures. In these proceedings, tax law is only inspected for doubts about constitutionality from a high level perspective. A detailed investigation would take place as part of the subsequent principal proceeding. If the BFH concludes, in the principal proceedings, that the German interest barrier rule is unconstitutional, it will request the German Constitutional Court to give a ruling on the point.

ConclusionIt has been long anticipated that the German Interest Barrier Rule would eventually be brought before the German Constitutional Court. The important question to be answered will be whether the German legislature’s rationale for introducing the German Interest Barrier rule into German tax law provides sufficient justification for the inconsistency with the corresponding constitutional law. At the time of the introduction of the legislation in 2008, the legislature wished to prevent tax structures shifting taxable profits from Germany abroad. The Court will also have to decide whether any invalidity will be applied retroactively.

It is strongly recommended that companies affected by the German Interest Barrier Rule (e.g. resident in Germany, maintaining a German permanent establishment etc.) should raise an objection as part of any open tax assessment in order to benefit from a corresponding future decision by the German Constitutional Court.

German Federal Court of Finance: Last days of the German Interest Barrier Rule (“Zinsschranke”)?by Werner Geisselmeier and Veit Kachelman




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German Federal Court of Finance: Last days of the German Interest Barrier Rule (“Zinsschranke”)? (continued)

Werner Geisselmeier leads our tax practice in Germany. He has over thirty years’ experience providing national and international tax advice on corporate and financial transactions, as well as supporting clients regarding ongoing tax matters and tax litigation. His main practice areas are the income, corporation, trade, sales and property transfer tax aspects of corporate transactions of all kinds, for example concerning corporate and financial restructuring (including conversion operations) or classic and structured financing, as well as self-disclosure and tax litigation matters.

E: [email protected] T: +49 89 203043 572

Veit Kachelmann is a lawyer and tax advisor based in our Munich office. He advises national and international companies, as well as private individuals, regarding a wide range of commercial, corporate and tax matters. His experience includes advising investment funds, institutional investors and private equity investors on the legal and tax implications of international corporate and real estate transactions, restructuring and structured finance arrangements. He has particular expertise in the areas of legal accounting requirements, withholding tax, sales tax, investment and insolvency law matters. He also represents clients in the management of tax appeals, the preparation of tax related voluntary disclosures and in the context of civil and fiscal court disputes.

E: [email protected]: +49 89 203043 556

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PM-Tax | Cases

Easinghall Ltd understated its profits in its return for the 2010/11 tax year. HMRC conducted an investigation into the company and found that the company had deliberately not accounted for all sales and profits in an attempt to reduce its corporation tax liability. A closure notice assessing the company for the additional tax due was issued

The HMRC officer conducting the investigation believed that the bad accounting practices of 2010/11 would have continued into the 2011/12 tax year, although at this stage he did not have any evidence for that assumption. Instead of opening an enquiry into the 2011/12 return, which he could have done, the HMRC officer issued a discovery assessment for the 2011/12 year on the same day as he issued a closure notice into the 2010/11 year.

The company requested a review, in which it was found that the 2010/11 assessment was valid, the company had deliberately concealed its profits and therefore merited a penalty, and the 2011/12 assessment should be reduced to nil on account of there being insufficient evidence that the profits were understated. The reviewing officer stated that if he did not hear from the company within 30 days, then the matter would be treated as settled under s. 54(1) TMA 1970.

The company appealed against the 2010/11 assessment – but obviously not against the nil assessment. HMRC then opened an enquiry into the 2011/12 return as the twelve month period allowed for opening an enquiry had not expired. The company applied to the tribunal requesting a closure notice.

The FTT said that where a matter had been agreed on an appeal against an assessment for a particular year, the agreement binds the parties and must be taken into account by HMRC in closing any enquiry for that year. However it said that the agreement between Easinghall and the HMRC officer was not that the company’s profits were precisely those shown on the return or that profits had not been suppressed. The FTT said that the agreement was that HMRC was not justified in making the additional assessment on the basis of an assumption that the company’s bad accounting practice had continued.

The FTT decided that it was reasonable for HMRC to ask for further information and also that there was no issue of legitimate expectation as that expectation was only limited to the scope of the agreement.

Easinghall’s application for a closure notice was therefore rejected and HMRC was able to open its enquiry into the company’s 2011/12 tax return.

CommentIt was unusual that HMRC made the assessment for 2011/12 without first opening an enquiry, considering that it was within time to do so. However, the decision is a reasonable result.

Read the decision

Easinghall Ltd v HMRC [2014] UKFTT 677 (TC)

Agreement in relation to discovery assessment did not prevent HMRC opening an enquiry for the same period.

Procedure

http://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03800.pdf

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PM-Tax | Our Comment>continued from previous page PM-Tax | Cases

In 2002 Airtours was in severe financial difficulties. In order for a refinancing of its debts to go ahead, PWC was appointed to report to the banks on Airtours’ financial situation, paid for by Airtours. The engagement letter was between the banks, Airtours and PwC. Airtours tried to recover the VAT but HMRC denied the recovery on the basis that the supplies were made by PwC to the banks and not to Airtours. The FTT held that Airtours had received supplies from PwC that were used for the purposes of its business and so it could deduct the input tax.

The UT found in favour of HMRC and denied the input tax recovery. It found that there was a supply of services by PwC to the banks and the engagement letter should be construed as a contract in which the banks agreed with PwC to supply services which the banks needed for the purposes of their own businesses. The UT said that Airtours contracted with PwC to pay the fees, rather than to receive something of value from PwC to be used for the purpose of its business. Airtours appealed to the Court of Appeal (CA). The case was originally held over pending the Supreme Court decisions in HMRC v Aimia Coalition Loyalty UK Ltd (formerly Loyalty Management UK Ltd) and WHA Ltd v HMRC.

The majority in the CA decided that the UT was entitled to overturn the decision of the FTT and they agreed with the UT’s conclusions. Moore-Bick LJ said that language of the letter of engagement was not consistent with the FTT’s conclusion that PwC undertook an obligation to Airtours to provide services to the banks. He said that Airtours’ participation in the contract was limited to incurring an obligation to pay for the services provided by PwC to the banks and to indemnify PwC against any liabilities they might incur in carrying out their task.

Vos LJ said that the true question was not whether Airtours needed the report to be produced or whether it obtained a benefit as a result of its production, but whether in producing it PwC were providing a service to Airtours for which Airtours paid.

In a dissenting judgment Lady Justice Glover decided that the case was analogous to Redrow and the input tax could be recovered. She decided that there were two distinct supplies provided by PwC and it supplied to Airtours the right to have the services provided by PwC to the banks.

Airtours’ appeal was dismissed.

CommentThis decision will be a disappointment to many companies who will have incurred fees in similar circumstances. However, the fact that the decision was not unanimous may make it more likely that it will be appealed. Although the Redrow principle was confirmed in the LM(UK) case, it is not wide enough to cover the situation where the party paying the costs is not controlling the services provided. Companies entering into similar tripartite arrangements need to make sure the transaction is structured to give as much chance of VAT recovery as possible.

Read the decision

Airtours Holidays Transport Ltd v HMRC [2014] EWCA Civ 103

A group could not recover the input tax on fees paid to accountants engaged on a refinancing to produce a report to bank lenders.

Substance

http://www.bailii.org/ew/cases/EWCA/Civ/2014/1033.html

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>continued from previous page PM-Tax | Cases

Substance (continued)

HMRC v Murray Group Holdings and Others [2014] UKUT 0292 (TCC)

The UT upheld the FTT’s findings that loans from an EBT were not subject to PAYE.

MGM Ltd set up an employees’ remuneration trust with over 100 sub-trusts in the names of Murray Group executives and Rangers footballers, for the benefit of their families. The trusts then loaned money to the employees. HMRC argued that the loans were earnings and were subject to income tax and NICs under PAYE.

The FTT decided (by a majority decision with one Tribunal member dissenting) that the loans were not subject to PAYE and that the Ramsay doctrine did not apply as they considered that the principles in the Mayes case applied as there was a highly prescriptive statutory code.

HMRC appealed on the basis that the FTT had made an error of law in their interpretation of Ramsay and the application of the Mayes case.

In the UT Lord Doherty sitting as a Judge of the Upper Tribunal dismissed HMRC’s appeal. He said that the majority in the FTT had not fallen into any material error in their consideration and application of the Ramsay principle.

He said that the decision and reasoning in Aberdeen Asset Management did not mean the FTT had erred in law. In Aberdeen the money held by each ‘cash box’ company was at the employee’s unreserved disposal. However in the present case, the FTT found that the reality was that the employees had a loan and no more – the funds were not at the unreserved disposal of the employee.

CommentThis is another example of a case where the courts have held that a purposive interpretation cannot be applied because there is a highly prescriptive code. In relation to employment income, this argument succeeded in the Court of Appeal in the cases of DB Group Services (UK) Limited v HMRC and HMRC v UBS AG [2014] EWCA Civ 452.

In relation to EBTs the decision in this case is of historic interest only as the disguised remuneration rules in Part 7A ITEPA were introduced to prevent this kind of scheme from working. HMRC has established a settlement opportunity for those who entered into this type of EBT arrangement. This decision is therefore problematic for HMRC.

Read the decision

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http://www.tribunals.gov.uk/financeandtax/Documents/decisions/HMRC-v-Murray-G.pdf

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Turullols v Revenue & Customs [2014] UKFTT 672 (TC)

Interim relief granted to a ‘whistleblower’ was not taxable as earnings income and could qualify for the £30,000 exemption.

An employee who was an internal auditor within an international group of companies was sent an email informing her that her employment was being unilaterally terminated by her employer with effect from the following day. She claimed interim relief from the Employment Tribunal on the basis that the principal reason for her dismissal was that she had made a number of protected disclosures to her employer. The Tribunal ordered the employer to continue to pay the employee – which it did, deducting tax in the normal way.

The Employment Tribunal subsequently found that the employee had been unfairly and wrongfully dismissed but that this was not as a result of the protected disclosure. She did not claim compensation as the employer had continued to pay her. However, she claimed a repayment of the tax that had been deducted on the basis that the payments she had received under the interim relief order should be regarded as part of her entitlement to compensation for the termination of her employment, and therefore the first £30,000 should be exempt from tax. HMRC said that the amounts were taxable as emoluments of her employment. The employee appealed.

In the FTT Judge Kevin Poole said “the true question is not whether the payments arise from the employment contract, but whether they arise from the employment.” He said that the employee’s employment came to an end before the payments were received and it was only as a result of the termination of her employment that she became entitled to claim interim relief. He said that when interim relief was granted, it did not have the effect of reinstating her employment, it merely entitled her to receive certain payments and other benefits equivalent to what she would have received if the employment had continued. The payments were therefore not emoluments of her employment.

CommentEmployers will need to take note of this decision when applying PAYE to such payments. Employees who have had tax deducted from interim payments may be able to claim repayment of the tax, if not prevented by time limits.

Read the decision

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http://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03795.html

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Fazenda Pública v Banco Mais SA C 183/13

EU law allows member states to require taxpayers to use a partial exemption method other than a turnover based method provided this gives a more accurate result.

Banco Mais is a bank which carried out leasing activities in the automotive sector and other financial activities. For VAT purposes it carried out both taxable and exempt activities. For mixed use goods and services, Banco Mais calculated its partial exemption method by bringing the entire value of leasing transactions, ie the rental element and the finance element, into its turnover based pro-rata calculation.

The Portuguese authorities challenged this method and took the view that just the finance element of leasing transactions should be brought in and not the rental element. The matter was referred to the CJEU.

The CJEU noted that the principle of neutrality requires that the method by which the deduction is calculated “objectively reflects the actual share of the expenditure resulting from the acquisition of mixed use goods and services that may be attributed to transactions in respect of which VAT is deductible”. It said that the Sixth Directive does not preclude Member States from using, for a given transaction, a method or formula other than the turnover-based method, provided that the method used guarantees a more

precise determination of the deductible proportion of the input VAT than that arising from application of the turnover-based method. It noted that whilst the carrying out, by a bank, of leasing transactions in the automotive sector may require the use of mixed use goods or services, “most often that use is primarily a consequence of the financing and management of the contracts entered into by the lessor and its customers, not of the provision of the vehicles”. However, it said that that it was for the Portuguese court to determine whether that was so in this case. It commented that if that was the case, Banco Mais’ method was less accurate than that suggested by the Portuguese authorities.

CommentAlthough the CJEU referred the matter back to the Portuguese court to decide on the facts, it gave a strong steer that it thought that the method proposed by the Portuguese authorities was most likely to give the most accurate result.

A UK case involving Volkswagen Financial Services (UK) Ltd has been held over awaiting this decision of the CJEU. That case relates to hire purchase transactions and many other businesses will be waiting to see how the Court of Appeal applies this CJEU decision to the facts in that case.

Read the decision

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http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62013CJ0183:EN:HTML

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PM-Tax | Cases>continued from previous page


Zipvit Ltd v HMRC [2014] UKFTT 649 (TC)

VAT could not be recovered from the supply of postal services which were thought to be exempt but should have been standard rated as HMRC had never claimed the output tax from Royal Mail and the customer did not have a VAT invoice.

Zipvit sells vitamin products by mail order, using Royal Mail to deliver the items and distribute advertising. At the time of these supplies both Royal Mail and HMRC had considered Royal Mail’s mailshot supplies to Zipvit to be exempt from VAT. However, following the CJEU’s ruling in the TNT Post UK Ltd case, contracts which are individually negotiated with Royal Mail are not contracts for the universal provision of postal services and therefore cannot benefit from VAT exemption.

The extent of the CJEU’s ruling is still to be decided in TNT Post UK Ltd (No. 2). However, HMRC has agreed that under EU law, Royal Mail’s ‘mailmedia’ service, which Zipvit used, should have been standard rated.

Zipvit argued that as a matter of UK law, the supplies by Royal Mail should have been standard rated and so Zipvit should be entitled to deduct input tax. Alternatively if it was wrong on this point, then Zipvit argued that it should be able to use its directly enforceable right under the Directive in order to claim an input tax deduction. Zipvit acknowledged that it did not have any VAT invoices but said it should be able to rely on alternative evidence instead.

The FTT agreed that the Marleasing case required it to give effect to the TNT Post UK Ltd decision of the CJEU and to read the UK law in conformity with EU law. On this basis the supplies should have been standard rated. The FTT also found in favour of Zipvit on their alternative submission that it could rely on the direct effect of EU law to argue that the supplies by Royal Mail were standard rated.

However, VAT can only be recovered if it was ‘due or paid’. HMRC argued that VAT was not recoverable as it had not been paid by Zipvit since the contract did not mention VAT. Zipvit relied on section 19(2) VATA, under which an invoice that should have been standard rated but has no reference to VAT is deemed to show the price inclusive of VAT. The judge did not accept that the contract between Zipvit and Royal Mail affected the question of whether VAT was ‘due or paid’ and she did not agree that section 19(2) could affect input tax recovery.

Without hearing submissions on the point (as the judge said the case was almost certain to be appealed and she did not want to hold the process up), Judge Mosedale considered whether ‘due or paid’ meant ‘due or paid by the person liable to pay the VAT’ rather than ‘due or paid by the person seeking to recover the VAT as input tax.’ She considered that it meant that the VAT was due or paid by the supplier. Since Royal Mail did not account to HMRC for any VAT, the question at issue was whether the VAT was ‘due’.

The judge said that in Zipvit’s case there was no enforceable claim, as there was no assessment of Royal Mail for the tax due. As a result, she said that the VAT was not ‘due’ from Royal Mail so Zipvit was not entitled to VAT recovery.

The FTT then considered the lack of a VAT invoice. Terra Baubedarf-Handel and Petroma Transport show that a VAT invoice is required to exercise a right of deduction under Art. 168(a) and that not having a VAT invoice or at least a remedied VAT invoice at the time of any claim for a deduction can be fatal. However, Article 180 of the VAT Directive affords Member States the discretion to allow claims for a VAT deduction in other circumstances. HMRC has discretion to allow other evidence. Zipvit argued that a failure on HMRC’s part to allow alternative evidence in lieu of a VAT invoice would amount to Wednesbury unreasonableness.

The FTT considered the HMRC officer’s decision not to allow alternative evidence. In doing so, the FTT found that the reviewing officer had failed to consider a number of factors, but considered that he would still have arrived at the same conclusion even if he had considered those additional factors.

Zipvit’s appeal therefore failed and the company was held to not be entitled to any input tax credit.

CommentThis is a lead case with some £1 billion or so of VAT riding on it, so it will be appealed. With other TNT cases pending it is likely to be some time before we have a final result.

Read the decision


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Mr & Mrs M Rockall v HMRC [2014] UKFTT 643 (TC)

Assets owned by a business and used for business purposes may still be a benefit in kind.

Mr and Mrs Rockall were investigated by HMRC for their use of assets owned by two companies which they jointly controlled and acted as directors. The assets consisted of a yacht, jewellery and antique grandfather clocks.

The FTT considered in detail the use of each of the assets. Mr and Mrs Rockall’s businesses consisted of hosting residential courses, a hotel and management courses. Due to the location of one of their businesses, next to Silverstone race track, the businesses had links to those in the Formula 1 industry. The Rockalls claimed that they used the assets in order to obtain and develop business opportunities.

For the yacht, the Rockalls submitted that they entertained business advisors and sailed to areas, including the Monaco Grand Prix, which had business opportunities. The FTT decided that the yacht was used for business use, not personal.

The jewellery, the most expensive item of which was a £150,000 diamond necklace, was worn by Mrs Rockall at “need to impress” company events, such as the British Grand Prix dinners and charity balls. Other than on company occasions, the jewellery was kept in a safe on business premises and not used.

The clocks were bought when the Rockalls were intending to develop a hotel close to Silverstone racetrack. The clocks were kept in Mr Rockall’s office at home, but this was also a location for his businesses. The FTT decided that as a matter of fact that the clocks and the jewellery were used for business purposes and not private use.

However, despite the assets being used for business purposes the FTT said that section 201(3) ITEPA gives a wide definition of the word ‘benefit’ and this meant there was a benefit provided by the assets that could give rise to income tax. The FTT noted that the benefit can be conferred even if there is a benefit to the employer and where the employee did not want a benefit. The FTT said the benefits fell to be charged to income tax in the hands of Mr and Mrs Rockall because the fact that they were “under the power and control” of the Rockalls meant that they were “placed at the disposal” of the two shareholder directors.

However the FTT said that the benefit of using the company yacht amounted to a benefit, the cost of which would have been deductible under section 365 ITEPA if it had been paid for as it was used wholly, exclusively and necessarily for the performance of their duties in employment.

However, the FTT said that payments for use of the jewellery and the clocks would not have been incurred in the performance of their duties, but instead to put them in a position to better perform those duties. As a result, the jewellery and clocks expenses would not have been obligatory expenses had the Rockalls paid for them and as such were not deductible.

The appeal was therefore allowed in part only.

CommentThe case illustrates the care that needs to be taken, particularly by owner managers of businesses to ensure that tax charges do not arise as a result of the use of business assets – even though as here the jewellery was kept on business premises.

Read the decision

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Beacon Estates (Chepstow) Limited v HMRC [2014] UKFTT 686 (TC)

The test of whether a trade is conducted with a view to making a profit is an objective one but there is no time limit by which the trade needed to be profitable.

Beacon Estates operated primarily in the construction industry but decided to diversify into yacht chartering and so bought a yacht. It made a loss in the first three years, as the yacht had to be upgraded in order to comply with the French requirements of a yacht with full commercial charter status.

For the next three years, the yacht made a profit but “catastrophic engine failure” and subsequent problems with the replacement engine meant that it could not be chartered at sea leading to losses from 2003-2008. The recession then led to losses from 2009-2012.

HMRC accepted that Beacon carried on the yacht chartering business on a commercial basis but said that the business was not undertaken with a view to making a profit or so as to afford a reasonable expectation of making a profit so that the losses arising as a result of the chartering activities could not be set against profits arising from Beacon’s other trading activities.

Beacon argued that the legislation envisaged a two part test so that the trade must either subjectively be carried on with a view to making a profit or objectively carried on so as to afford the reasonable expectation of making a profit. It argued that “with a view” meant that there was a realistic possibility and there was no time limit by which the company needed to be profitable. HMRC, on the other hand, highlighted that the yachting arm of Beacon’s business would not have survived without being propped up by other business’ activities.

The FTT decided that the test ultimately required an objective viewpoint and conducting a trade “with a view” to making a profit requires a degree of reasonableness and so the ‘view’ had to be an objective view.

However, the FTT still found in Beacon’s favour on the facts. It said that there is no time limit for there being a reasonable prospect of a profit. Despite the past losses it said that there was a realistic possibility or reasonable expectation of Beacon making a profit or gain from its chartering activities in the future, as the yacht met the regulations required, charters had been agreed for the future and it was managed by professional chartering agents.

Comment Although deciding that the test was objective, this decision was a generous interpretation of the rules to the facts. Other taxpayers may not be so lucky.

Read the decision

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http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j7868/TC03808.pdf

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Tax Disputes Symposium

The definitive update for the tax world on all issues relating to enforcement, resolution and litigation

The past twelve months have seen significant changes in the way in which tax disputes are handled – from their beginning to resolution. Pinsent Masons would like to invite you to our definitive conference with market-leading speakers.

The conference will cover everything you need to know about current issues in contentious tax from new residence rules and ground-breaking residence cases, through to the widespread use of penalties by HMRC and to the new ‘accelerated payments’ regime applicable to DOTAS cases.

We will have a distinguished panel of speakers including:• Kevin Prosser QC, Pump Court Tax Chambers • Andrew Hitchmough QC, Pump Court Tax Chambers • David Southern QC, Temple Tax Chambers • Emma Chamberlain, Barrister, Pump Court Tax Chambers • Pinsent Masons Tax Partners

Places for this event are strictly limited, so please register as soon as possible.

Date: Monday 8 September 2014Registration and buffet lunch: 12.30 – 1.30pm Seminar start: 1.30pm: Seminar finish: 6.15pm followed by drinks reception Venue: Pinsent Masons, 30 Crown Place, London EC2A 4ES

If you would like to attend please contact Zoé Tovell

Tax and Africa – lessons from the Tullow Uganda case

The Court of Appeal decision has recently been given in the case of Tullow Uganda v Heritage Oil and Gas which shows the importance of tax provisions in sale and purchase agreements. A disputed tax demand from the Ugandan tax authority led to litigation in the UK courts between buyer and seller.

David Wolfson QC, who acted as Counsel for Tullow, will give an insight into the strategic issues, as well as the nature of the litigation and local tax issues. The seminar will be followed by a Q&A session, chaired by Heather Self from Pinsent Masons.

The seminar will be of interest to Tax Directors and General Counsel, not only from companies investing in Africa but, more generally, anyone involved in the negotiation of commercial transactions.

Date: Monday 13 October 2014Time: Registration 5:30pm; Seminar Start 6:00pm; Drinks and Canapés 7:00pmVenue: Pinsent Masons LLP, 30 Crown Place, London EC2A 4ES

To register please email Caroline Fearnley

Events

mailto:[email protected]

mailto:[email protected]

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This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the

LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate

businesses for regulatory or other reasons. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. © Pinsent Masons LLP 2014.

For a full list of our locations around the globe please visit our website: www.pinsentmasons.com

Tell us what you thinkWe welcome comments on the newsletter, and suggestions for future content.

Please send any comments, queries or suggestions to: [email protected]

We tweet regularly on tax developments. Follow us at: @PM_Tax

PM-Tax | People

New Tax Investigations Head

We are very pleased that Fiona Fernie will be joining us in September as Head of Our Tax investigations team. Fiona is currently a tax investigations partner at BDO with over 25 years experience in tax investigations, assisting clients subject to investigations or enquiries by HMRC.

Our tax investigations team comprises former HMRC officials, tax managers, trust practitioners and lawyers and can assist taxpayers with disclosures to make, or who are being investigated by HMRC. We can also help accountants or other advisers who have clients who are under investigation or need to make disclosures.

Our team has particular expertise in advising those with offshore assets on the implications of the US Foreign Account Tax Compliance Act (FATCA) and other agreements between countries to automatically disclose information about accounts and other assets held by residents of one jurisdiction in the other. From 1 July, UK resident holders of direct or indirect interests in offshore trusts, companies, bank accounts and financial investments in Jersey, Guernsey, Isle of Man, Gibraltar, Bermuda, the British Virgin Islands, the Cayman Islands, Anguilla, Montserrat and the Turks and Caicos Islands have been subject to reporting. Banks, insurers and trust and company service providers in these countries will have to exchange data annually with HMRC about the accounts, including about amounts held in trusts, investment management and bank accounts, and distributions made from trusts and companies.

Offshore investments can be tax compliant, and are routinely used by UK resident ‘non-domiciles’. However, the rules are complex and it is very easy to create unintended UK tax issues. Our team can undertake ‘health checks’, advise on regularising the tax position and help to get certainty on uncertain issues.

People

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