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PM-Tax | Our Comment
PM-Tax
Wednesday, 5 November 2014
News and Views from the Pinsent Masons Tax team
In this Issue
Our Comment
•What do we expect in the Chancellor’s Autumn Statement? by Catherine Robins
•Why should businesses get tax relief for interest? by Heather Self
2
•Possible interest deduction restrictions could impact on infrastructure and energy projects by Eloise Walker
Recent Articles
•Is this the end for the ‘double Irish’ structure? by Heather Self
•What has happened since the CJEU’s Wheels judgment in 2013? by Darren Mellor-Clark
7
•Information exchange allows HMRC to place a further spotlight on offshore matters by Fiona Fernie and Paul Noble
13
Our perspective on recent cases
Procedure
Bruce-Mitford v HMRC [2014] UKFTT 954 (TC)
Substance
Trigg v HMRC [2014] UKFTT 967 (TC)
European Commission v UK (Case C-172/13 - AG opinion)
Isle of Wight Council and Others v HMRC [2014] UKUT 0446 (TCC)
Welmory sp. z o.o. v Dyrektor Izby Skarbowej w Gdańsku (C-605/12)
Westinsure Group Ltd v HMRC [2014] UKUT 00452 (TCC)
Thomas & Another v HMRC [2014] UKFTT 980 (TC)
Stuart Tranter t/a Dynamic Yoga [2014] UKFTT 959 (TC
Events
22
People
23
NEXT
@PM_Tax
© Pinsent Masons LLP 2014
What do we expect in the Chancellor’s
Autumn Statement?
by Catherine Robins
With the Chancellor’s last autumn statement before May’s general election now less than a month
away, we look at what announcements we can expect on 3 December.
Corporates
George Osborne announced at the Conservative party conference
that there would be a tightening up of the rules on multinationals.
Clearly, given the public mood, the Chancellor will need to be seen
to be clamping down on multinationals and ensuring that they pay
their “fair share” of tax. However with the OECD’s base erosion and
profit shifting (BEPS) project well underway and the government
committed to supporting multilateral action in this area, it is
difficult to see what the UK can do unilaterally to attack the
problem without making the UK an unattractive place to do
business in. This would run counter to the government’s strategy
to lower corporation tax rates to make the UK one of the most
attractive locations for international business.
In response to another recommendation from the BEPS project,
the government announced in October that it would be consulting
in the autumn statement on the implementation of rules to
prevent hybrid mismatches. Hybrid mismatch arrangements allow
companies to exploit differences between countries’ tax rules to
avoid paying tax in either country or to obtain more tax relief
against profits than they are entitled to. Under the OECD
proposals, published in September, companies would be prevented
from entering into these arrangements without reporting a
corresponding taxable profit and would be prevented from using
the reliefs set out in various international double taxation
agreements if their principal reason for doing so was to avoid tax.
The government has made clear that it will be considering, in
particular, the case for special provisions for banks’ and insurers’
hybrid regulatory capital instruments. However, we will need to
wait for the detail of the consultation to ensure that the proposed
rules are properly focused and do not impose unrealistic
compliance burdens on group treasury operations.
One concern is that restrictions on interest relief could be
announced. Action Point 4 of the OECD’s action plan on BEPS is
limiting base erosion through interest deductions. The OECD’s
discussion draft on interest is not due to be published until
mid-December and the OECD is not scheduled to make
recommendations until September 2015. However, the UK’s rules
on interest relief are some of the most generous, so there may be
scope for unilateral action here.
There could be other BEPS-related announcements, but these are
likely to be promises for future action rather than concrete measures.
However, this could show the direction of travel, should the
Conservatives win May’s election. After the UK was the first country to
commit to the OECD’s proposals for country by country reporting,
businesses will be keen to know when this may be implemented –
although it may be too early for this to be announced.
Any proposals to limit interest relief could have a particularly
adverse impact on infrastructure projects and the energy sector in
particular (see Eloise Walker’s article in this edition of PM-Tax for
more details click here). The infrastructure industry has
unsuccessfully called in past years for some form of capital
allowance to reflect the significant expenditure incurred. Restrictions
on interest relief could cause significant difficulties for these high
value, highly geared and often very long term projects. The financial
services sector will also be concerned about the implications.
Although the government has been defending the UK’s favourable
patent box regime for intellectual property (IP) from the European
Commission’s suggestion that it amounts to a “harmful tax
practice”, some tweaking of the rules could be announced to meet
EU concerns. The OECD’s interim report on harmful tax practices
states that encouragement of operations or arrangements that are
purely tax-driven and involve no substantial activities should
become one of the main tests of whether a tax relief should be
considered to be “harmful”. The OECD is still considering the best
method of applying the substantial activities test to IP regimes like
the patent box, but is currently favouring a “nexus” approach. This
The finance company partial exemption in the UK’s controlled
foreign company (CFC) legislation could be tightened up. The
exemption means that only a quarter of the profits derived from
such activities are subject to UK tax, giving a tax rate of only 5.25%
at current rates.
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PM-Tax | Wednesday 5 November 2014
2
What do we expect in the Chancellor’s Autumn Statement? (continued)
would limit the benefit of a favourable regime to income arising
from IP where the actual R&D activity was undertaken by the
taxpayer itself – excluding funding of activities undertaken by
other group companies. Under the patent box regime a group
company may qualify for the relief if it has developed the IP rights
itself or is actively managing them. This active management option
may not satisfy the OECD’s nexus test.
dropped when they went into coalition with the Liberal Democrats.
An announcement in the autumn statement is probably unlikely
given Liberal Democrat opposition to the policy.
At the Conservative party conference, the Conservatives promised to
raise the personal allowance to £12,500 and the higher rate tax
threshold from £41,865 to £50,000 by 2020. However, as these are
Conservative party, rather than coalition promises, it is unlikely that
any further announcements will be made in the autumn statement.
Business Secretary Vince Cable has been championing cuts to business
rates for SMEs, and has suggested that there will be some kind of
announcement in the autumn statement. This may be some form of
relief for small companies looking to move into improved premises.
The area where we are likely to get some announcements is in
relation to enhancing tax collection and clamping down on tax
evasion. The Chancellor will probably announce that the
government is going ahead with controversial proposals to enable
HMRC to recover tax debts of over £1000 direct from the bank
accounts of recalcitrant non-taxpayers.
The Chancellor announced in the 2013 budget that the loan
relationship rules would be modernised. A formal consultation and
some informal consultation through working groups has been
carried out. Some changes were made in Finance Bill 2014, but the
bulk of measures was scheduled for Finance Bill 2015. With the
election taking place in May, loan relationship changes will
probably not be sufficiently important to be included in a preelection Finance Bill and so their fate may depend upon the
outcome of the election.
He will probably also announce the outcome of the consultation
on another controversial proposal for a strict liability criminal
offence of offshore tax evasion. Although the proposals are more
moderate than many had feared when the measure was first
announced in the budget, they have been criticized on the basis
that they could result in prosecutions for some who have simply
failed to take advice or to understand the law.
Those in the oil and gas industry will be expecting the Chancellor
to respond to the initial consultation that took place on a new
fiscal regime for the UK continental shelf. The Treasury has
previously indicated that specific proposals for change coming out
of this review would be subject to full consultation.
We also expect to hear the outcome of the consultation on a CGT
charge on residential property held by non-residents. This will be of
interest to funds and investment structures, as well as individuals.
On the real estate front, property funds will be waiting for the
outcome of the consultation on a possible SDLT seeding relief for
unit trusts and the SDLT treatment of authorised contractual funds.
Conclusion
Inevitably much of what is announced in the autumn statement
will be seen in the light of May’s impending general election. There
is also a strong chance that, because of the logistics of getting a
Finance Bill through the House of Commons, much of what is
announced will stand little chance of becoming law until after the
election. This then means that whether it is enacted, and in what
precise form, will depend upon the outcome of the election.
Individuals
The Prime Minister has said in recent speeches that he would like
to see a substantial rise in the £325,000 threshold above which
inheritance tax must be paid on death. Increasing the threshold to
£1m was a previous Conservative party policy, but this was
Catherine Robins is the Tax team’s technical
partner, providing technical assistance to
clients and members of the team on all areas of
tax including corporate finance and M&A work,
private equity, employment tax, tax disputes
and property tax.
E: [email protected]
T: +44 (0)121 625 3054
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Why should businesses get tax relief for interest?
by Heather Self
This article was published on the CBI’s Great Business Debate website
on 22 October 2014.
As part of the CBI’s Great Business Debate (see www.greatbusinessdebate.co.uk and follow on twitter at
#taxdebate) Heather Self considers why businesses should get tax relief for interest.
In an article in the Daily Mail last year, Charlie Elphicke MP
accused utility companies of ‘abusing’ “generous tax reliefs that
allow companies to offset debt interest payments against tax”.
He called for tax relief on interest payments to group companies to
be withdrawn.
So why do people complain? It may be that they do not understand
the rules – they are complicated, and are very different from the
much simpler rules which apply to employees under PAYE. But the
rules should ensure that businesses, both large and small, only get
relief for genuine business expenses. If the rules are not being
applied properly, then that is a failure by HMRC to operate the
system as it was intended – the claim to tax relief should fail.
Companies do get tax relief for interest – but this is not restricted
to large companies. All companies, and indeed sole traders, get tax
relief for expenses they need to pay out in earning their profits. So
the owner of a small corner shop, who borrows from the bank to
buy stock, gets tax relief in just the same way as the big business
that borrows to build a factory.
The final problem is that some people do not agree with current
Government policy. That is a valid point of view - but it is an issue
which should be debated in Parliament, not hurled as an
accusation at companies which invest significant sums in the UK’s
infrastructure, and quite properly get tax relief on the costs of
financing that expenditure.
Where companies are in the same “group” (broadly, owned by the
same people) then interest paid by one company can be offset
against the profits of another company. This means that the tax bill
is the same, whether a group chooses to operate through separate
subsidiaries or a single company: again, the same rules would apply
to the small businessman, who decides to open a second shop - he
could operate as a single company, or as a holding company with
one or more subsidiaries.
Heather Self is a Partner (non-lawyer) in our
Tax team with almost 30 years of experience
in tax. She has been Group Tax Director at
Scottish Power, where she advised on
numerous corporate transactions, including
the $5bn disposal of the regulated US energy
business. She also worked at HMRC on
complex disputes with FTSE 100 companies,
and was a specialist adviser to the utilities
sector, where she was involved in policy issues
on energy generation and renewable. She is a
member of the CBI Tax Committee.
If interest is paid to an overseas lender – a bank, or a related party
– tax relief is still given in the UK, provided the interest is a genuine
business expense. The UK has rules to make sure that relief is only
given for the amount which could be borrowed from a bank: it is
up to HMRC to apply these rules properly. Sometimes, complicated
schemes are used which claim to give a UK tax deduction without
anyone paying tax on the interest income – again, anti-avoidance
rules should make sure that these schemes fail.
T: +44 (0)161 662 8066
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Possible interest deduction restrictions
could impact on infrastructure and
energy projects
by Eloise Walker
Officials from HM Treasury and HM Revenue and Customs (HMRC) have been meeting with
representatives of various industries, including the PPP/PFI industry, to discuss the implications of
possible future restrictions to tax relief for interest payments.
Changes to the UK’s favourable rules for interest deductions will
probably be required in response to the Organisation for Economic
Cooperation and Development (OECD) project for counteracting
base erosion and profit shifting (BEPS). Any changes would apply
to all companies but would have a particularly detrimental effect
for long term projects, which will have been priced by reference to
the current rules. Such projects are seen particularly in the
infrastructure and energy sectors.
Many countries have also introduced ‘structural’ interest
restriction rules that apply to all borrowings on a company or
group basis, rather than by reference to particular debt
transactions. For example Germany denies interest deductions (on
intra group and external debt) that exceed 30% of taxable EBITDA.
The UK itself already has the worldwide debt cap regime, which is
designed to limit interest deductions for groups with too much UK
borrowing relative to their worldwide third party financing.
BEPS refers to the shifting of profits of multinational groups to low
tax jurisdictions and the exploitation of mismatches between
different tax systems so that little or no tax is paid. Following
international recognition that the international tax system needs
to be reformed to prevent BEPS, the G20 asked the OECD to
recommend possible solutions.
The OECD is exploring the introduction of structural interest
restrictions and will make recommendations on best practice for
states to introduce domestic rules on interest restrictions to limit
base erosion from interest payments. It is understood that the
OECD BEPS working group is considering a limitation on interest
relief on a fixed financial ratio, such as a fixed percentage of
EBITDA (as in the German system) or a model, similar to the UK’s
worldwide debt cap (but going further), based on allocating
interest payments across the group.
In July 2013, the OECD published a 15 point Action Plan and the
first formal proposals dealing with seven of the 15 specific actions
were published in September 2014. Action Point 4 of the OECD’s
action plan is limiting base erosion through interest deductions.
The integrated global financial system means that, in theory, debt
finance can be relatively easily raised and moved across tax
jurisdictions by a group to facilitate the shifting of profits to low or
no tax jurisdictions. The OECD plans to issue a discussion
document on this action in mid-December 2014 and it is due to
make formal recommendations in September 2015.
Any structural restrictions on interest deductibility could have a
particularly detrimental effect for infrastructure projects which
tend to be very highly geared, and many of which already suffer tax
at much higher rates than the standard 21%, thanks to the current
lack of any proper infrastructure allowances for such capital assets
in the UK. Calls from the industry over a number of years for the
government to introduce an effective capital allowance regime for
infrastructure have so far fallen on deaf ears.
In a report on ‘tackling aggressive tax planning in the global
economy’ published in March 2014, the UK government set out its
priorities for the BEPS project. This report flagged that changes to
the UK’s rules on interest deductibility may be required, but that
the impact of any changes on the infrastructure and financial
services sectors would need to be considered.
HMRC’s March 2014 report recognises that most major
infrastructure projects are financed and delivered through special
purpose vehicles (SPVs), which have a very high level of debt
relative to equity. It states that it is “standard international
commercial practice” for most projects to be financed by around
80-90% senior debt. It says that “the characteristics of
infrastructure projects are such that their financing may be
sensitive to changes in the tax treatment of financing costs, in part
because of the very long term nature of the projects.”
The UK tax code includes anti avoidance provisions designed to
prevent the exploitation of interest deductions. These include an
unallowable purpose rule which prevents tax deductions where a
company is party to a loan with a main purpose of tax avoidance. A
thin capitalisation rule also applies to restrict deductions where a
company has more debt than it could borrow on an arm’s length basis.
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Possible interest deduction restrictions could impact on
infrastructure and energy projects (continued)
PPP/PFI transactions have a long timespan and will have been priced
on the basis that interest relief would be available. Any changes to
the availability of interest relief occurring part way through a project
would have a significant impact on cashflows and could put many
projects into default. State aid concerns mean that any sort of carve
out from any new rules for a particular industry are unlikely.
However, one solution to minimise the effect for existing projects
would be for any changes to apply only to new loans, with some
form of “grandfathering” for existing transactions.
Given the OECD is not due to make recommendations until
September 2015, any changes to UK law are unlikely to be
imminent. However, it is very important that those who may be
adversely affected by any possible changes make the government
aware of the problems interest relief restrictions could cause for
long term investment projects, so that this can be fed into the
BEPS project by the UK. It is helpful that Treasury and HMRC
officials are aware that any new rules could cause significant
problems, but particular “real life” examples that those in the
industry can provide – on a confidential basis if necessary – will
always be more persuasive to officials and ministers.
Eloise Walker is a Partner specialising in
corporate tax, structured and asset finance
and investment funds. Eloise’s focus is on
advising corporate and financial institutions
on UK and cross-border acquisitions and
re-constructions, corporate finance, joint
ventures and tax structuring for offshore
establishments.
T: +44 (0)20 7490 6169
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PM-Tax | Recent Articles
Is this the end for the ‘double Irish’ structure?
by Heather Self
This article appeared in Tax Journal on 24 October 2014
The ‘double Irish’ structure enables US companies to pay very low rates of tax on European sales. Income
is earned in an Irish trading company, which pays significant royalties to a tax haven company
incorporated in Ireland. Most of the profit ends up in the tax haven, with no tax payable. The recent 2015
Irish budget announced that the structure would be closed down, with a transitional period to 2020.
What is the double Irish structure?
It is a structure used by US multinationals, particularly in the tech
and pharma sectors, to reduce their taxes on European sales
income. The steps involved are as follows:
Why don’t the US CFC rules apply?
The US CFC rules, or “sub part F”, can impose US tax on passive
income such as royalties. However, the US regards HavenCo as Irish
resident, because it is incorporated there. Income paid from IrishCo
to HavenCo is therefore regarded as a payment between two Irish
companies, so is exempt under the “same country exception”.
•The US group transfers intellectual property (IP) to a company
incorporated in Ireland, but controlled and managed in a tax
haven (HavenCo)
What changed in the Irish Budget?
In the 2015 Budget, Ireland announced that the double Irish
structure would be stopped. From 1 January 2015, all companies
incorporated in Ireland will be tax resident there; for existing
companies there will be a transitional period to the end of 2020.
•HavenCo has an Irish subsidiary (IrishCo) which is incorporated
and managed in Ireland
•IrishCo makes sales to customers throughout Europe, but its
profits are reduced to a small amount by the payment of royalties
to HavenCo. The tax haven does not tax the royalty income, so
the overall tax rate is very low.
What else is happening?
Tax planning which results in low taxed income for multinationals is
being reviewed in great detail as part of the OECD Base Erosion and
Profit Shifting (BEPS) project. If Ireland had not announced the closure
of this structure, BEPS might have closed it down by other routes.
Is tax paid where the customers are?
In the case of online sales, there is usually no local permanent
establishment so no local corporation tax charge. All sales are
booked as Irish source income in IrishCo.
Note also the EU State Aid investigation into Ireland’s tax ruling
given to Apple. It has been reported that the EU had asked Ireland
for information about the double Irish structure, possibly in
preparation for launching a formal investigation.
The UK Public Accounts Committee has complained about this,
and there may be changes announced in the Autumn Statement.
But unless the BEPS process changes the definition of a PE for
digital companies, it will be hard to make unilateral changes to
increase the UK taxable income.
What about the US?
The US tax system, unlike that in most of the rest of the OECD, is a
global tax system. However, extensive use of tax planning techniques
such as the double Irish structure, and more generally “check the box”
planning, means that many US companies, particularly in the tech
sector, pay very low rates of tax on their non-US income.
What is the Irish position?
IrishCo has significant sales income, but this is reduced by the
payment of a significant royalty to HavenCo. The royalty must be
calculated on an arm’s length basis under OECD principles.
Although HavenCo is incorporated in Ireland, it is not regarded as
resident there because it is controlled and managed outside Ireland.
Whether the US will be able to enact fundamental reform remains
to be seen: many proposals have been put forward but achieving
political consensus is likely to be extremely difficult.
Ireland could impose withholding tax on the royalty payments, but
does not do so if the Irish Revenue Authority is satisfied that the
royalties are not Irish source income (SP CT/01/10).
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Is this the end for the ‘double Irish’ structure? (continued)
Is tax planning still possible?
Ireland still has a low rate of corporation tax, at 12.5%, and has also
announced that it will consider offering a “knowledge box” incentive
for IP. A number of other EU countries (including the UK) offer
patent box incentives, although the EU is currently considering
whether any of these constitute harmful tax competition.
Merely closing the double Irish structure will not stop tax planning
by US multinationals. However, achieving very low effective rates
is likely to get increasingly difficult as BEPS moves to a conclusion,
and there may be a move towards structures which pay at least
some tax, but are seen as less aggressive.
Heather Self is a Partner (non-lawyer) in our
Tax team with almost 30 years of experience
in tax. She has been Group Tax Director at
Scottish Power, where she advised on
numerous corporate transactions, including
the $5bn disposal of the regulated US energy
business. She also worked at HMRC on
complex disputes with FTSE 100 companies,
and was a specialist adviser to the utilities
sector, where she was involved in policy issues
on energy generation and renewable. She is a
member of the CBI Tax Committee.
T: +44 (0)161 662 8066
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What has happened since the CJEU’s Wheels
judgment in 2013?
by Darren Mellor-Clark
This article was published in Bloomberg BNA’s Indirect Taxes
International Journal and is reproduced with kind permission.
The VAT treatment of the management of collective investment vehicles is something of a muddle and has
been for a considerable time. This article looks at recent case law, and discusses the possible consequences.
Background
Legislation within the Sixth VAT Directive and latterly the Principal
VAT Directive has remained unchanged for some years. However,
case law at both the Court of Justice of the European Union (CJEU)
and Member States’ own domestic courts has created a web of
uncertainty which businesses, and tax authorities, are finding
difficult to navigate.
concerning both parts of the provision, both Wheels and ATP
concerned the definition of a SIF. While it is clear that the power to
define SIFs lies with Member States, the exercise of that power has
firm parameters in that the Member State must:
•have regard to the purpose of the exemption
•respect the requirements of fiscal neutrality.
The purpose of the exemption has been held as facilitating
investment in securities by smaller investors who are likely to
require advice and also a degree of collective investment to
achieve their aims. As direct investment via an execution broker
would likely benefit from a VAT exemption, the exemption in the
Wheels case looked to place the management of certain
investment vehicles in a similar position. As regards fiscal
neutrality, much could be written but it is sufficient here to note
that the concept requires that sufficiently similar goods and
services should be taxed in the same manner to ensure that VAT is
not a distortive factor in consumer choice.
A similarly troubling picture is to be found at the heart of UK
pension fund structures. In particular, defined benefit schemes are
struggling with increasingly large deficits in required asset values,
reaching around GBP108 billion earlier this year (for FTSE 300
companies) according to Mercer’s Pensions Risks Survey. In turn
this leads to significant, and burdensome, contributions being
required. Some GBP63 billion was put into UK schemes by UK
companies in 2010 according to Mercer.
As pension schemes occupy a leading place in the ranks of investment
vehicles, consideration of their VAT treatment was always likely. Such
scrutiny came almost immediately following the CJEU’s judgment in
the JP Morgan Claverhouse (C-363/05). If investment trust companies
could benefit from VAT exemption on their management fees, asked
the industry, why not pension schemes
Turning to the arguments advanced by Wheels, the position was,
broadly, as follows. The vehicles benefiting from exemption in the
UK at the time, mainly authorised unit trusts, open ended
investment companies and investment trust companies, all served
to facilitate investment in securities and saving by the investor.
Finally, a test case was found in the shape of the Wheels Common
Investment Fund. The CJEU gave its judgment in Wheels (C-424/11)
in March 2013 resulting in a clear defeat for the taxpayer. Since
then the position for pension funds has remained a nervous status
quo. Hundreds of millions of pounds in claims for potentially
overpaid VAT are still stayed at the UK Tribunal, pending HMRC’s
final determination of the Wheels judgment and also the ATP
judgment concerning defined contribution schemes (C-464/12).
How this happened and what should be done now are questions
many people are asking.
Looking at defined benefit (DB) schemes, it is clear that such vehicles
also serve an investor’s need to save for the future. As DB schemes
shared similar characteristics with the other type of vehicle
benefiting from exemption, then fiscal neutrality required that the
exemption should be extended to include such vehicles. The CJEU
rejected such a proposition. Primarily it held that the mechanics of a
DB scheme are such that the investor’s return (in the form of pension
payments) is determined by a formula typically involving a
consideration of final salary and years in service. As such the investor
did not bear the investment risk as he would in the other vehicles.
Secondly, if viewed from an employer perspective, DB schemes are,
effectively, a means of the employer meeting obligations arising
under a contract of employment with the employee, i.e. they are not
viewed as investment vehicles by the employer. Given these two
conclusions, the CJEU found against the taxpayer.
Special investment funds
Article 135(1)(g) of the Principal VAT Directive sets out the relevant
VAT exemption. It has two operative provisions, namely that it
requires Member States to exempt the ‘‘management’’ of special
investment funds (SIF), the definition of such funds to be
determined by Member States. Although case law has arisen
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What has happened since the CJEU’s Wheels judgment in 2013? (continued)
The result was a disappointment to many and some comment was
made as to why the reference did not concern defined contribution
(DC) schemes where investment risk is clearly on the investor. The
answer to this lies in a quirk within the UK VAT environment. In the
UK the vast majority of defined contribution schemes are formed
via a contract of insurance and are, effectively, managed by a
regulated insurance company. Historically, HMRC has viewed the
charges for such management as being VAT exempt as they
represent the activities of an insurance intermediary, namely the
insurance company itself. Against such a backdrop, the value of
irrecoverable VAT attaching to the management of DC schemes
has been comparatively low.
•It is clear that ATP is not the end of the road for these cases.
There is a pending CJEU reference concerning property
investment vehicles and a case has begun in the High Court
questioning HMRC’s historic distinction between insured and
non-insured pension schemes
•The Wheels appeal at the Tribunal has not yet been finally settled.
HMRC has advised that businesses with similar appeals should
continue to stand over their appeals behind this lead case. The
Tribunal has been issuing directions to this effect in many cases
•For DC schemes already benefiting from exemption there is the
question of the historic scope of that exemption. If DC schemes
are SIFs then the ‘‘management’’ of them is exempt. In this
context ‘‘management’’ is defined by EU law and includes a wider
range of services than just investment management. Therefore it
may be that some services, which were previously taxed, should
have benefited from exemption
Defined contribution schemes
Instead the question of management of a DC scheme was dealt with
in the ATP case at the CJEU. This case originated in the Danish courts
and, although the term DC was not used, the characteristics of the
scheme described make it clear that such a scheme was being
discussed. The main questions before the court were concerned with
whether a DC scheme should be exempt from VAT as it is sufficiently
similar to the other types of vehicle benefiting from exemption. In a
concise judgment the court found that a DC scheme should clearly
benefit from exemption. In arriving at such a conclusion it set out an
approach to be followed to decide such questions.
•Given the characteristics set out by the CJEU, are there further
vehicles which should benefit from exemption? Industry sectors
are already looking at this issue; further claims and appeals
appear likely
•In light of the ongoing uncertainty it would be prudent for
businesses to ensure that historic appeals claiming VAT
exemption continue to be stood over at the Tribunal, pending
final determination of these issues
First it asked whether exemption for a DC scheme is in line with
the aims of the exemption i.e. facilitating collective investment in
securities by smaller investors. Having satisfied itself of that being
the case, the court addressed the ‘‘sufficiently similar’’ question. It
identified the need for a baseline comparator vehicle, which is
clearly a SIF, against which the putative SIF could be judged. To
facilitate this analysis a fund regulated under UCITS (the EU
directives concerning Undertakings for Collective Investment in
Transferable Securities) was chosen as the baseline. The court held
that the DC scheme is sufficiently similar to require exemption to
be extended to it. In particular the following key criteria were
identified as being relevant to such a decision:
•Businesses should also keep in mind that, should exemption
succeed, the claim paid by HMRC to fund managers will be
reduced by the input tax impact upon the manager’s VAT
recovery rate. This will leave HMRC unjustly enriched by that
element and, as per the High Court judgment in ITC, the only way
to recover that money from HMRC is for the scheme or fund to
submit a High Court claim directly against HMRC
•Finally, businesses should also monitor HMRC’s guidance regarding
the PPG judgment which is also due out in autumn/winter 2014.
This CJEU judgment ruled that, in certain conditions, employers, as
opposed to the scheme itself, may recover VAT incurred on
investment management fees. This is contrary to historic HMRC
policy and could lead to significant tax claims for businesses.
•The investor should bear the investment risk of asset performance
•The vehicle should pool the investments of several beneficiaries
Darren Mellor-Clark is a Partner (non-lawyer) in
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 FS sector,
for example: Recovery and Resolution Planning;
Independent Commission on Banking; UCITS IV;
and the Retail Distribution Review.
•Investment should be conducted on a risk spreading basis
•The beneficiaries should fund the investment contributions
•Interestingly, the court held that an element of insurance in the
structure is irrelevant, provided that it is ancillary to the main
investment aims.
The judgment was released in March 2014 and, to date, there has
been no official guidance from HMRC as to its impact. HMRC has
stated that it is working on new guidance which it hopes to publish
during autumn 2014.
Conclusions
In the meantime what are the likely implications of the decision
and what should businesses do as regards VAT on pension funds?
T: +44 (0)20 7054 2743
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Information exchange allows HMRC to place
a further spotlight on offshore matters
by Fiona Fernie and Paul Noble
In this article Fiona Fernie and Paul Noble from our tax investigations team explain how automatic
information exchange will enable HMRC to find out about bank accounts and other offshore assets
owned by UK residents in the Crown Dependencies and British Overseas Territories.
Background
HMRC has long sought methods of uncovering “hidden” bank
accounts and assets held overseas by British taxpayers who they
believe have deliberately failed to pay UK tax.
Banks, asset management companies and trust and corporate
service providers are now required to identify UK resident
individuals, partnerships and companies holding ‘Financial
Accounts’ and to report information regarding their accounts to
HMRC, normally via their local income tax authority.
In 2007 they achieved some success in obtaining offshore bank
account details in the Channel Islands and certain other offshore
jurisdictions. This was followed by a major breakthrough with the
Liechtenstein Disclosure Facility in 2009 and the implementation
of the UK-Swiss agreement in 2013.
What information will be exchanged?
Names, addresses, dates of birth, account balances, income, gains,
and interests in and distribution from offshore companies and
trusts including benefits.
Following the passing of the US’s Foreign Account Tax Compliance
Act (FATCA), designed to give the US information about US
residents’ offshore assets, the UK decided to use similar measures
to find out about offshore assets of UK residents.
There is an Alternative Reporting Regime (ARR) for UK resident non
domiciled individuals designed to mirror the remittance basis of
assessment. Under the terms of the ARR certain elections must be
made by both the reporting financial institution and the UK
resident individual. There is also a complex certification procedure.
In the absence of an election, information may become available
to HMRC of which they were not previously aware.
At the end of 2013 the UK signed a series of Inter-Governmental
Agreements (IGAs) enabling the provision to HMRC of far-reaching
information by financial institutions in the Crown Dependencies
(Jersey, Guernsey and the Isle of Man) and certain British Overseas
Territories (Anguilla, Bermuda, the British Virgin Islands, the Cayman
Islands, Gibraltar, Montserrat and the Turks and Caicos Islands).
Under the terms of the IGAs, the initial provision of information
relating to the calendar years 2014 and 2015 will take place on 30
September 2016.
Action required
It is important that all clients with overseas assets are made aware
of FATCA, that clients and their tax advisers liaise with offshore
financial institutions to understand what information will be
exchanged and that a risk assessment is undertaken in advance of
the exchange of information to identify any irregularities, grey
issues or tax uncertainties which may need to be addressed.
In advance of the exchange of information HMRC intend to
introduce a new criminal offence of failing to declare taxable
offshore income and gains. They have been consulting on this
through their document “Tackling offshore tax evasion: A new
criminal offence”.
Where grey issues or tax uncertainties are identified these can be
discussed with HMRC on a “no name” basis, thus preserving
anonymity for clients under the terms of the available offshore
disclosure facilities. Any tax irregularities can be disclosed under
the facilities which provide beneficial terms.
Who and what is covered?
Since the end of June 2013 financial institutions in the Crown
Dependencies, and all of the British Overseas Territories with
financial centres have been collating information about UK
residents with offshore assets, under the terms of new automatic
exchange of information agreements.
Our tax investigations team offers support to professional advisers
and their clients and has considerable experience in making
disclosures to HMRC in a manner which minimises penalties and
avoids the risk of criminal proceedings.
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Information exchange allows HMRC to place a further
spotlight on offshore matters (continued)
Fiona Fernie leads our Tax investigations team.
She is a Chartered Accountant with over 25
years’ experience in assisting clients subject to
investigations/enquiries by HMRC with
particular focus on COP8 and COP9
(Contractual Disclosure Facility) cases and large
complex investigations. She also assists clients
who want to make a voluntary disclosure of tax
irregularities to HMRC, whether via one of the
available disclosure facilities such as the
Liechtenstein Disclosure Facility or the Crown
Dependency Disclosure Facilities or via an
independent approach outside a formal facility.
T: +44 (0)20 7418 9589
Paul Noble is a Tax Director in our tax
investigations team specialising in contentious
tax and private client matters. He is a former
tax inspector and a chartered tax adviser and
has over 20 years of experience in advising on
tax investigations involving both private
clients and corporates. Paul has wide-ranging
experience of contentious tax matters
including cases of tax fraud, tax avoidance,
disclosure of tax irregularities and is adept at
pro-actively resolving tax disputes and
advising on HMRC powers.
T: +44 (0)20 7418 8217
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PM-Tax |PM-Tax
Our Comment
| Cases
Procedure
Bruce-Mitford v HMRC [2014] UKFTT 954 (TC)
Judicial review is the appropriate way to challenge a failure by HMRC to apply a published concession.
The shares in Mr Bruce-Mitford’s company were acquired by VFB
Holidays Ltd by way of a share for share exchange. On 31 January
2003, deferred shares in VFB were issued to Mr Bruce-Mitford at
the price of 2 pence each. The deferred shares were restricted but
would automatically convert to ordinary shares on the company
completing an acquisition of shares in another company or the
business and assets of a going concern within a two year period. An
acquisition was made and the deferred shares converted into
ordinary shares.
HMRC argued that conversion was caught and that the FTT had no
power to decide whether the concessionary practice ought to be
applied in this case – any such challenge must be made by way of
judicial review. HMRC referred the FTT to the decision of Judge
Bishopp in Michael Prince and Others v HMRC in which the FTT
decided that it had no jurisdiction to consider the application of a
discretionary concession and struck out appeals brought on the
basis that it had.
The FTT said that the conversion of the deferred shares was a
conversion “on any ordinary meaning of the word ‘conversion’” and
so fell within s. 436(2) ITEPA. It said that it did not have jurisdiction
to decide whether HMRC should have applied the concession. Mr
Bruce-Mitford’s appeal was dismissed.
HMRC said that an income tax liability arose on the conversion of
the shares. When the deferred shares were acquired Mr BruceMitford was advised that there would not be an income tax charge
as conversion of his deferred shares was ‘automatic’, and
automatic conversions of securities were not covered by the
definition of ‘convertible securities’ in force when the shares were
acquired. However, by the time the share exchange had taken place
the rules had changed and Mr Bruce–Mitford was advised that
automatic conversions were caught but that a provision in HMRC’s
manual meant that the income tax charge would not be enforced.
Comment
The acquisition of shares in this case fell in the short period between
the enactment of ITEPA 2003 and the radical changes to the
restricted securities provisions by Finance Act 2003. Unfortunately
the conversion took place after the rules changed but there was little
doubt that it amounted to a conversion under the new rules. The
main issue was whether HMRC should have applied its concession,
but the FTT confirmed (as has happened in previous cases) that the
appropriate way to challenge HMRC’s exercise of its powers is by
way of judicial review and not in the Tribunal.
Mr Bruce-Mitford argued that no charge to income tax arose under
Chapter 3 of Part 7, ITEPA because the deferred shares were not
‘convertible securities’ within the ‘new’ definition in section 436(2)
ITEPA because although the deferred shares could be (and were)
re-designated as ordinary shares, this did not amount to conversion of
securities into securities of a different description. In the alternative he
submitted that HMRC should apply the concessional practice outlined
in ERSM 40040 and not charge the gain to income tax.
Read the decision
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PM-Tax
PM-Tax
| Our| Our
Comment
Cases
Substance
Trigg v HMRC [2014] UKFTT 967 (TC)
Bonds which according to their terms would be redeemed in euros if the UK joined the euro were
qualifying corporate bonds
Mr Trigg was a member of an investment partnership which had
purchased a number of bonds and then disposed of them at a profit.
Mr Trigg claimed that the bonds constituted qualifying corporate
bonds (QCBs) and therefore were not subject to capital gains tax. The
bonds each contained one of two types of clauses. The first type of
clause provided that if there was a change in the currency of the UK
such that the Bank of England recognised a different currency as the
lawful currency of the UK, references in, and obligations arising under,
the bonds would be converted into and any amount becoming
payable under the bonds would be paid in that currency. The exchange
rate used would be the official rate of exchange designated by the
Bank of England for that purpose. The second type of clause came into
effect if the UK joined the euro and allowed the holder to require the
note to be redenominated in euros. The rate of exchange used would
be the one established by the Council of the EU.
intended the reference to sterling to be read as a reference to the
euro as this would bring many more bonds within the scope of the
CGT exemption.
Mr Trigg also argued that “currency other than sterling” needed to
be read as meaning that sterling had to exist as the UK’s lawful
currency at the time of conversion or redemption in another
currency. Sterling would not exist if it was replaced with the euro.
The FTT agreed that “currency other than sterling” means that
sterling has to continue to exist as a separate currency to the
currency into which the bonds were converted. The FTT said that
Parliament’s purpose in enacting s.117(2)(b) should be used to
influence the interpretation of “currency other than sterling” in
s.117(1)(b). The FTT said that the purpose of s.117(2)(b) was to allow
the QCB exemption for sterling bonds that did not have foreign
currency conversion clauses but where in effect there were no
forex gains or losses because all that happened was that the sterling
value of the bond at the date of redemption was paid in another
currency. In the case of the UK joining the euro there would be only
one rate of conversion of the sterling to the euro so the rate of
conversion would be the rate prevailing at the date of redemption.
S.117(1)(b) TCGA 1992 provides that a corporate bond is a security
“which is expressed in sterling and in respect of which no provision is
made for conversion into, or redemption in, a currency other than
sterling”. S.117(2)(b) provides that a provision for redemption in a
currency other than sterling but at a rate of exchange prevailing at
redemption is disregarded.
Judge Mosedale therefore decided that the bonds were QCBs as
neither clause amounted to a provision within s.117(1)(b) so there
was no provision for conversion or redemption in a currency other
than sterling and, in any event, the exception in s.117(2)(b) applied as
any conversion would in effect be at the rate of exchange prevailing
at redemption. She said “HMRC hint that a ruling that bonds
containing euro conversion clauses are nevertheless QCBs is
contrary to the general understanding and might affect existing
bonds, giving them quite different, and undesired, tax treatment.
HMRC may or may not be right about people’s general
understanding, but there is no rule of construction that legislation
should be interpreted to be consistent with how HMRC and/or tax
advisers and/or the general public have interpreted the law after it
was enacted. Taxpayers will no doubt be protected if they have relied
on HMRC’s published position”.
HMRC argued that the clauses meant that the bonds were not QCBs
so that the gains were subject to CGT. Mr Trigg argued that “currency
other than sterling” should be given a purposive interpretation so
that sterling meant “the lawful currency of the UK from time to
time” so that if the UK joined the euro it would be interpreted as
meaning the euro. He argued that the clauses did not prevent the
bonds being QCBs so that the gains were exempt from CGT.
Judge Barbara Mosedale said that “sterling” could not be interpreted
as meaning British currency from time to time. She said that when
enacting s.117 there is no evidence that Parliament contemplated the
possibility that sterling may cease to be British currency and that if
they had thought about it, it is not obvious that they would have
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PM-Tax | Our Cases
Substance (continued)
Comment
There has always been some doubt about HMRC’s view that this
type of clause made a loan note into a non-QCB. Although, an FTT
decision is not binding on another court, this decision casts doubt on
the tax treatment of other similar loan notes and HMRC will need to
say something about the position for those who have relied on their
previous guidance. Note however that the clauses considered in this
case were only triggered if the UK joined the euro. The position
should be different for clauses which allow an option to redeem in
euros (where during the term of the loan note, the UK has not joined
the euro). The doubts surrounding clauses using the euro mean that
it is more normal to see a provision allowing redemption in US
dollars, where non-QCB treatment is required.
Read the decision
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PM-Tax | Cases
European Commission v UK (Case C-172/13 – AG Opinion)
Advocate General says UK rules on cross-border group relief go even further than required by EU law
The European Commission brought treaty infringement proceedings
against the UK claiming that the UK’s cross border group relief rules
make it “virtually impossible” for companies to claim tax relief on
losses made by non-resident subsidiaries.
She said that a member state is in principle required to take into
account a loss from foreign activity only if it also taxes that activity.
She said that this meant that the UK could be “justified in principle” if
it excluded foreign subsidiaries from the group relief regime entirely.
“As the contested UK rules on group relief go even further than is
required by EU law in that they provide for cross-border relief in
certain cases, they are not contrary to the freedom of establishment,”
she said. However, she added that a review of the “appropriateness” of
the M&S decision was “both possible and necessary”.
In the Marks and Spencer (M&S) case in 2005, the CJEU found that
certain aspects of the UK rules on group loss relief were
incompatible with the EU principle of freedom of establishment. It
ruled that if a member state allows a resident parent company to
transfer losses suffered to a member of the group established within
that member state in order to reduce its tax liability, it must offer
the same possibility with respect to losses incurred by a subsidiary
established in another member state where all other possibilities for
relief had been exhausted. The UK updated its corporate tax rules to
reflect the decision in 2006. However, the Commission claimed that
these amendments relied on a particularly restrictive interpretation
of the 2005 decision. It said that the UK’s definition of ‘exhausted’ is
particularly restrictive.
“[The regime] has… proved to be impracticable,” she said. “It
therefore does not protect the interests of the internal market and,
as such, is also not a less onerous means of guaranteeing the fiscal
sovereignty of member states as it does not facilitate the activity of
cross-border groups but rather constitutes a virtually inexhaustible
source of legal disputes between taxpayers and the member states’
tax administrations.”
Comment
The Advocate General’s arguments are well-reasoned but it is
surprising that the opinion comes to the UK’s defence. When you bear
in mind the forthcoming financial transactions tax and the ongoing
argument over the common consolidated corporate tax base, we are
getting used to the idea that the EU will always be in favour of
breaking down borders. However, the opinion is not the end of the
matter as the CJEU does not have to follow her decision. She seems to
be inviting the CJEU to revisit the M&S decision. The CJEU can reverse
its previous decisions but does not do so lightly. There is a good chance
therefore that the CJEU will simply reject the Advocate General’s
invitation to overturn the M&S decision.
In her opinion, Advocate General Kokott said that the conditions set
out by the CJEU in its 2005 decision were “anything but clear”.
Recent CJEU case law had, however, clarified that non-resident and
resident permanent establishments were not “objectively
comparable” for the purposes of EU law, in relation to measures laid
down by member states in order to prevent double taxation.
She said that the aim of group taxation regimes is to allow the
companies in a group to be taxed as if they constituted one and the
same taxpayer. She said that in the light of that aim “it seems
inappropriate to treat a resident parent company and a non-resident
subsidiary as one and the same taxpayer in so far as the non-resident
subsidiary is not subject to domestic taxation at all and, as such, is
not a taxpayer itself”.
Read the decision
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PM-Tax | Our Cases
Isle of Wight Council and Others v HMRC [2014] UKUT 0446 (TCC)
The provision of off-street parking by local authorities would lead to a significant distortion of
competition if it were not subject to VAT
Claims had been made to HMRC by the Isle of Wight and many
other local authorities under s. 80 VATA 1994 for repayment of the
VAT included in charges made by them to members of the public for
off-street car parking. The issue was whether each local authority
had been correct to charge VAT, which depended upon whether it
was entitled to be treated as a non-taxable person in respect of its
supplies of off-street parking. The answer to that question
depended upon whether non-taxation would lead to significant
distortions of competition within the meaning of article 4.5. The
case was first heard in the VAT Tribunal in 2006, was referred to the
CJEU and most recently was heard in the FTT in 2012 for the
competition issues determined by the original VAT Tribunal to be
reheard and determined in accordance with the judgment of the
CJEU. In the FTT the judges had found for HMRC.
designated for re-investment in off-street car parking, and it would
not be lawful for any local authority to allocate even part of the
revenue for that purpose. It said that the result of non-taxation
would be an augmentation in the authority’s general fund and it
would be extremely unlikely that a local authority would reduce its
parking charges as a result of not having to charge VAT to members
of the public.
HMRC said that the absence of VAT was a factor that a local
authority would take into account in its charges. It argued that if
there was an increase in the rate of VAT, a commercial provider
would have to raise its charges if it could not absorb the increase
but a local authority would not be subject to any such pressure.
Mrs Justice Proudman and Judge Colin Bishopp dismissed the Isle of
Wight’s appeal. They did not consider that the FTT had made an error
in law. It had not misunderstood the legal framework and had given
appropriate consideration to the evidence submitted by the
authorities. The UT agreed with HMRC’s argument concerning the
impact of an increase in the rate of VAT. It said “A local authority
might, of course, take the opportunity to increase its prices in order to
generate a greater surplus, but the absence of any compulsion to do
so amply supports the FTT’s finding that in the absence of taxation the
upward pressures on local authority charges would be reduced”.
Article 4.5 provides that local authorities will not normally be
treated as taxable bodies for VAT purposes where they engage as
public bodies, even if they charge fees. “However, when they
engage in such activities or transactions, they shall be considered
taxable persons in respect of those activities or transactions where
treatment as non-taxable persons would lead to significant
distortions of competition”.
Isle of Wight said that the FTT was wrong in considering that the
non-taxation of local authorities was an important factor in
determining whether competition would be distorted. The local
authority also argued that the FTT was guilty of a significant error
of law, in that it misunderstood the legal framework which governs
the setting of local authority car parking charges. The Isle of Wight
argued that any increase in the surplus generated from off-street
parking charges as a result of non-taxation could not be specifically
Comment
It is unclear whether this will be the end of this long-running saga or
whether the local authorities will be able to appeal the decision to
the Court of Appeal.
Read the decision
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PM-Tax | Cases
Welmory sp. z o.o. v Dyrektor Izby Skarbowej w Gdańsku (C-605/12)
For VAT purposes a fixed establishment must have a sufficient degree of permanence and a suitable
structure in terms of human and technical resources
Welmory was a Cypriot company that ran online auctions. To take
part in an auction a customer had to first purchase from Welmory
the right to place bids. Welmory entered into an agreement with a
Polish company to provide a site for the Polish company to sell
items on.
if that establishment is characterised by a sufficient degree of
permanence and a suitable structure in terms of human and
technical resources to enable it to receive the services supplied to
it and use them for its business”. It said that this was for the Polish
court to ascertain on the particular facts of the case.
The Polish company invoiced Welmory for certain services in
relation to their agreement. It did not invoice for Polish VAT
because it took the view that the services were supplied in Cyprus
and that the VAT would be paid there by Welmory. The Polish tax
authority said that the services were supplied by a Polish fixed
establishment of the Cypriot company and should therefore be
subject to the standard rate of Polish VAT of 22%.
Article 44 of the PVD states that the place of supply of services to
a taxable person is determined by reference to the taxable person
receiving them. Its precursor, Article 9 of the Sixth VAT Directive
(6VD) determined the place of supply of services by reference to
the taxable person supplying the services. However, the Court said
that the case law under Article 9 of the 6VD would still be of
relevance when considering its application to Article 44 of the
PVD. It also said that case law on the implementing regulation
(which set out, in broad terms, the purpose of the changes) would
be relevant, even though that was not in force at the relevant time.
The Polish Court dismissed Welmory’s claim that an independent
operator conducting an independent activity as a taxable person
for VAT purposes cannot constitute a fixed establishment of
another taxable person. The Polish court decided that the two
companies’ activities formed an economically indivisible whole, as
the object of their entire business could be achieved in Poland only
through cooperation between them.
The CJEU said that under Article 9 6VD it was settled case law that
the most appropriate point of reference for determining the place
of supply is where the taxable person had established his business.
It said that it was “only if that place of business does not lead to a
rational result or creates a conflict with another Member State
that another establishment may come into consideration.”
The CJEU was asked whether a fixed establishment could be
established in Poland by the Cypriot company using the Polish
company’s infrastructure for the purposes of Article 44 of the
Principal VAT Directive (PVD).
The Court found that for the Cypriot company to have a permanent
establishment in Poland, “the Cypriot company must have in Poland
at the very least a structure characterised by a sufficient degree of
permanence, suitable in terms of human and technical resources to
enable it to receive in Poland the services supplied to it by the Polish
company and to use them for its business, namely running the
electronic auction system in question and issuing and selling ‘bids’.”
The CJEU said that “a taxable person who has established his
business in one Member State, and receives services supplied by a
second taxable person established in another Member State, must
be regarded as having a ‘fixed establishment’ within the meaning
of Article 44 of the VAT Directive in that other Member State, for
the purpose of determining the place of taxation of those services,
It said that the fact that the economic activities of the two
companies formed an economic whole and that their results were
of benefit essentially to consumers in Poland was not material for
determining whether the Cypriot company possessed a fixed
establishment in Poland.
The case was referred back to the national Polish courts for it to determine
if Welmory had a “sufficient degree of permanence” in Poland.
Comment
Companies working in partnership across EU borders should bear
this decision in mind to ensure that they do not end up with a fixed
establishment in another company that may lead to unexpected
VAT liabilities.
Read the decision
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PM-Tax | Cases
Westinsure Group Ltd v HMRC [2014] UKUT 00452 (TCC)
Membership fees paid to an alliance of insurance brokers were not sufficiently closely connected
with the supply of insurance for the VAT exemption to apply.
Westinsure was an alliance of insurance brokers through which
brokers who joined gained access to preferential rates with insurers
and access to standard policy documents. Westinsure did deals
with insurance companies to get preferential deals on commission
for its members. However, it was not party to any insurance
contracts, which were made direct by clients of member firms with
the insurance companies.
However the UT rejected Westinsure’s argument that the phrase
“insurance agent and insurance broker” was a composite phrase,
akin to “intermediary” used in the other language versions. The UT
said that the case law had kept the definitions of “agent” and
“broker” clearly and separately defined and said that in order to be
a broker or agent, an entity must be an intermediary, but not every
intermediary will be a broker or agent. The UT therefore upheld the
FTT’s decision on this point.
The member brokers paid a joining fee in addition to commission
on each insurance deal to Westinsure. This appeal was only
concerned with the membership fees and whether they were
charged for a supply of services that was standard rated or exempt
for VAT purposes.
Westinsure claimed that there was no judicial authority for the
restriction on the type of services which qualified for the
exemption. The UT said that the FTT was entitled to find that the
exemption did not apply to Westinsure because Westinsure was
not an “insurance agent” as it was not contracting on behalf of an
insurance party and it was not an “insurance broker” because it did
not negotiate any part of the insurance contract. The UT noted
that because of the ECJ decision in CSC, the Court of Appeal case
of CSMA can no longer stand as authority that no distinct act of
introduction or mediation is required for services to be exempt as
negotiation. The decisions of the ECJ establish that the
characteristic services of a broker require the broker to have a
direct or indirect relationship, with the insured. The UT said there
was therefore no error in law in the FTT’s decision that the UT
could interfere with.
The FTT had decided that membership fees should be standard
rated as they did not fall within the exemption under Article 135.1
of the Principal VAT Directive (PVD). That Article exempts
“insurance and reinsurance transactions” and expressly includes
“related services performed by insurance brokers and insurance
agents” within the exemption. Westinsure claimed that the
services it provided to its broker members were exempt as related
services and appealed to the UT against the FTT decision.
Westinsure argued that it was an insurance intermediary, and that
insurance intermediaries fell within the exemption. As the PVD
contains no definition of “insurance broker” or “insurance agent”
the UT looked to Insurance Directive 77/92/EEC for assistance. The
UT noted that non-English language versions of the Directive had
used words more akin to “intermediary” rather than “broker” or
“agent” but also noted that in some languages the words used in
the PVD did not match the words used in the Insurance Directive.
Whilst these findings had already settled the appeal in favour of
HMRC, the UT dealt briefly with the other arguments raised by
Westinsure. It found that for the exemption to apply, in accordance
with Century Life, there “must be a close nexus between the
service and the insurance transaction concerned”. It went on to say
that the fact that Westinsure’s activities as “member support
services” were not sufficiently close was a reasonable finding of
fact for the FTT to make which should not be tampered with. The
appeal was therefore dismissed.
Comment
The decision shows that the insurance exemption is not as wide as
may be thought and that intermediary activities may not qualify
unless the activities are closely linked to the insurance activity and
form part of the chain of supply of insurance. The UT noted that “it
is inevitable that wherever the boundaries of an exemption (strictly
construed) are drawn there will be activities which fall outside the
boundary, but may not be very different in commercial or
economic terms to those inside it.”
Read the decision
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PM-Tax | Cases
Thomas & Another v HMRC [2014] UKFTT 980 (TC)
Share loss relief claim rejected because the company was reinstated on the register and there was
insufficient evidence that shares had actually been issued.
Roderick and Stuart Thomas owned the entire share capital of a
company, SS&S. They purported to issue further shares in exchange
for a reduction in their loan accounts with the company, and then
transferred these newly issued shares to their wives, Rebecca and
Sarah Thomas, who brought this appeal. A few years later, SS&S
was struck off the register, creating a right to a claim for share loss
relief, to be set off against other income. However, SS&S was later
reinstated to the register and it was in light of this that HMRC
refused the loss claim. Rebecca and Sarah Thomas also made loans
to two separate companies and claimed a tax credit for those loans
which HMRC rejected and was also appealed.
court for restoration to the register is that the company is deemed
to have continued in existence as if it had not been dissolved or
struck off the register. HMRC argued that the Joddrell case [2012]
EWCA Civ 1035 supported the application of s. 1032 so as to prevent
the loss relief claim. The FTT agreed with HMRC’s argument.
For share loss relief to apply, s. 135 ITA requires that the shares
initially be issued for money or money’s worth. HMRC said that
there was no evidence that this had happened. The FTT decided to
give “issue” its ordinary company law meaning as discussed in the
leading authority of National Westminster [1994] STC 580.
However, the FTT found that the taxpayers had failed to prove that
the shares were issued in 2007. No evidence other than a ‘duplicate’
share certificate produced in 2011 was produced, with no share
register produced and no return provided to Companies House
within the one month required of a share ownership. As no shares
were initially issued, the FTT found that there was no transfer, and
noted again that Companies House was not notified of any transfer.
Rebecca and Sarah Thomas first claimed that HMRC’s discovery
assessment against the loss claim was not valid. S. 29 of the Taxes
Management Act (TMA) requires a new “discovery” to be made. The
white space on the tax returns informed HMRC that the loss
claimed was made on a disposal by way of a dissolution of SS&S but
did not set out any information about the issue of new shares, their
transfer on the day following their issuance or the dates on which
these transactions were said to have occurred and it did not explain
the basis of valuation. The FTT said that a “hypothetical inspector
could not have been reasonably be expected, on the basis of the
information provided, or inferences he could make from that
information, that the loss claims were excessive, or that the
assessments were insufficient” and so the conditions of section
29(5) were satisfied.
In dealing with the penalties charged by HMRC, the FTT decided
that the taxpayers were negligent because they failed to make
simple checks that any reasonable person would have made. The
appeal was dismissed in full, with the penalty assessments upheld in
respect of Rebecca Thomas and increased for Sarah Thomas.
Comment
Although in this case the husband of one of the taxpayers, who was
representing them both was not regarded by the FTT as a credible
witness and the transactions were therefore seen as part of a
‘scheme’, the case illustrates the importance in genuine
transactions of properly and contemporaneously evidencing the
issue of shares and complying with the company law formalities.
The taxpayers claimed that when SS&S was struck off the register,
this was an “occasion” which amounted to the “destruction,
dissipation or extinction of an asset” within the meaning of s. 24(1)
TCGA. However HMRC said that the claim failed as s. 1032(1)
Companies Act 2006 provides that the effect of an order by the
Read the decision
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20
PM-Tax | Cases
Stuart Tranter t/a Dynamic Yoga [2014] UKFTT 959 (TC)
Yoga tuition not exempt from VAT
Mr Tranter, a full-time yoga teacher, contested HMRC’s decision
that his yoga tuition was not exempt from VAT (under item 2 Group
6 Schedule 9 VATA) as it was not the supply of private tuition “in a
subject ordinarily taught in schools or universities”. He argued that
his yoga sessions were not purely recreational but corresponded
with the classes taught in a large number of schools and universities
and also provided an educational opportunity for others to become
yoga teachers. Mr. Tranter claimed that the benefits of yoga
encompassed not only physical but also mental and spiritual
development and that this meant that it amounted to more than a
leisure activity and should therefore not be subject to the same VAT
requirements as other recreational classes.
rather than focus. As well as this, it was noted that Mr Tranter’s
classes did not explicitly cover the teaching of yoga to others and
that there were no formal qualifications required to become a yoga
teacher; HMRC stressed that this served to identify the yoga
sessions as a recreational activity.
In a recent case of a similar nature, the FTT had found that the Fleur
Estelle Belly Dance School was not exempt from VAT due to factors
such as the degree of formality, the structure of teaching and the
environment of classes. The FTT said these considerations were also
relevant in the case of Mr Tranter. It agreed with HMRC and
concluded that the yoga classes were recreational and therefore not
entitled to the same VAT exemption as other supplies of tuition.
HMRC disagreed, instead asserting that the aims and objectives of
the yoga sessions, as taught by Mr Tranter, differed to those of
educational establishments. HMRC highlighted that the informal
nature of yoga tuition at Dynamic Yoga and lack of any published
syllabus was not consistent with the structure of an educational
course. The setting in which the classes took place was one of
leisure not learning and promoted an atmosphere of relaxation
Comment
This is another case illustrating that the VAT exemption for private
tuition is limited to more academic tuition.
Read the decision
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21
PM-Tax | Events
Events
Autumn Statement Breakfast Seminar
The Chancellor’s Autumn Statement will take place this year on 3 December. To discuss some of the key themes of the speech and to
provide crucial insight into the tax implications of measures announced, Pinsent Masons is hosting a breakfast seminar on the morning of
4 December 2014. We are delighted that Mike Truman, Editor of Taxation magazine will be chairing the event.
Join us to digest the speech and to discuss what the Autumn Statement really means for business and the wider economy.
Thursday, 4 December 2014
Pinsent Masons LLP, 30 Crown Place, London EC2A 4ES
8.00am Registration and Breakfast
8.30am – 10.00am Seminar
To attend please contact Marina Dell by clicking here.
Perspectives in Tax – London Client Dinners
We are kicking off our “Perspectives in Tax” London client dinner series with a discussion on “EU Perspectives” on 2 December with guest
speaker David Scorey of Essex Court Chambers. If you are a tax director and would like to be invited please contact Marina Dell by
clicking here.
Festive Drinks Reception
We will be holding a festive drinks reception on 10 December in our London office to celebrate the arrival of Fiona Fernie, our new head of
tax investigations.
If you would like to be invited please contact Marina Dell by clicking here.
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22
PM-Tax | People
People
Indirect Tax Firm of the Year – UK
We are delighted that Pinsent Masons has been named UK Indirect
Tax firm of the year in Finance Monthly’s M&A Awards 2014.
This award is a great credit to our VAT and indirect taxes team. Our
indirect tax team combines the expertise and experience of lawyers,
tax advisers, accountants, a former in-house head of indirect tax and
ex HMRC officers. From such a broad pool we are able to offer advice
which is bespoke, accurate and commercially aware.
knowledge and wisdom”, Stuart Walsh “combines vast experience
of litigating with technical brilliance and strong tax knowledge”,
Darren Mellor-Clark” is recommended on the advisory side” and
Ian Hyde “‘makes even complex tax issues accessible”.
We are also recent winners of Taxation’s Best VAT team award.
Our indirect tax team was historically focused mainly on tax
disputes – where we have had some recent major successes such as
acting for Secret Hotels2 Limited (formerly Med Hotels Limited) a
subsidiary of lastminute.com, in their win in the Supreme Court in
a VAT dispute with HMRC, providing much needed clarity for the
travel industry as a whole on the application of principles of VAT
and agency law to online travel businesses. We also recently acted
for Avon Cosmetics Limited in the First Tier Tribunal in a case
concerning the VAT regime for direct selling companies which has
been referred to the CJEU.
However, with the arrival last year of Darren Mellor-Clark, a former
head of Indirect Tax at UBS, and other recruitment, we have
expanded our indirect tax advisory practice. Darren’s financial
services experience has enabled us to expand beyond providing
indirect tax advice and structuring on corporate and property
transactions to advising on the indirect tax implications of key
business issues especially within the financial services,
commodities and telecoms sectors.
Our team has been highly ranked in the legal directories with the
latest edition of Legal 500 saying Jason Collins “displays great
Darren Mellor-Clark
Partner (Non-Lawyer)
T: +44 (0)20 7054 2743
Stuart Walsh
Partner
T: +44 (0)20 7054 2797
Jason Collins
Partner
T: +44 (0)20 7054 2727
Ian Hyde
Partner
T: +44 (0)20 7490 6340
Tell us what you think
We 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
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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.
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