1. law, govt and politics

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PM-Tax | Our Comment
PM-Tax
Wednesday 22 October 2014
News and Views from the Pinsent Masons Tax team
In this Issue
Our Comment
•New Scottish SDLT replacement less beneficial for institutional investors by Karen Davidson
•Increase in tax take from wealthy foreigners by Ray McCann
2
•Growth in SAYE share schemes by Matthew Findley
Recent Articles
•Update on European Commission investigations into national tax rulings by Heather Self and Caroline Ramsay
•Tax and Africa – lessons from the Tullow Uganda Case
6
•Using the UK as a holding company jurisdiction – opportunities and challenges by Tom Cartwright
13
Our perspective on recent cases
Procedure
Daniel v HMRC [2014] UKFTT 916 (TC)
Dock & Let Ltd v HMRC [2014] UKFTT 943 (TC)
Substance
HMRC v University of Huddersfield [2014] UKUT 0438 (TCC)
Société Fonderie 2A v Ministre de l’Économie et des Finances (C-446/13)
Hirst v HMRC [2014] UKFTT 924 (TC)
PSC Photography Ltd v HMRC [2014] UKFTT 926 (TC)
Forsyth v HMRC [2014] UKFTT 915
ING Intermediate Holdings Ltd v HMRC [2014] UKFTT 938 (TC)
Events
22
People
23
NEXT
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© Pinsent Masons LLP 2014
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PM-Tax | Our Comment
New Scottish SDLT replacement less
beneficial for institutional investors
by Karen Davidson
The first rates set for the Scottish government’s new tax on the sale or lease of Scottish property will
result in institutional commercial property investors being significant losers, while buyers of
averagely-priced homes in Scotland will benefit.
Land and Buildings Transaction Tax (LBTT) will replace Stamp Duty
Land Tax (SDLT) for transactions in land situated in Scotland from 1
April 2015. The basic framework of the tax was created by the Land
and Buildings Transaction Tax (Scotland) Act 2013, but until now
the rates at which the tax would be charged have not been known.
In its draft Budget, the Scottish government has now announced
the proposed rates, which are subject to approval by the
Scottish Parliament.
Under the rates and bands which have been announced, LBTT for
residential purchases will be more than SDLT would have been for
homes over approximately £325,000. This means that purchasers
of larger family homes, in particular those in the larger cities such
as Edinburgh, Glasgow and Aberdeen, will pay more and in some
cases, substantially more.
LBTT will be charged on a progressive basis, similar to the current
UK income tax system, under which slices of the transaction price
will be subject to LBTT at increasing percentages. UK SDLT is
charged on a ‘slab’ basis, where the amount of the consideration
determines a single rate of tax which is applied to the whole
amount – so that, for example, a purchase of property for
£250,001 – which is £1 above the threshold for the 3% band would
result in the 3% rate being applied to the whole price, whereas the
purchase of a property for £250,000 would result in a 1% charge
on the entire price.
Commercial property
The first £150,000 of the sale or lease of non-residential property
would be free of LBTT, according to the draft Budget. The
proportion of a non-residential sale between £150,001 and
£350,000 would be taxed at 3%; while any amount over £350,000
would be taxed at 4.5%. By contrast the top rate of SDLT is 4%,
charged on the whole price for properties costing more than
£500,000. LBTT would be higher than the corresponding SDLT
charge on purchases just over the £2 million mark.
Residential leases are only subject to LBTT if they exceed 175 years.
This means that pension funds and other institutional investors
buying commercial property in Scotland, which will invariably be
above this level, will face higher transaction costs than on the
purchase of a comparable property elsewhere in the UK. For
example £240,250 more LBTT would be payable on the purchase of
a £50 million commercial investment property in Scotland
compared with the SDLT for a similar property in the rest of the UK.
The Scottish government has said that LBTT will be ‘revenue
neutral’, meaning that it should generate the same amount of tax
as SDLT would have generated over the same period. However, it
will “redistribute the burden of taxation”, according to the draft
Budget document. According to Scottish government figures, 90%
of residential taxpayers and 95% of non-residential taxpayers will
be “no worse off” under the new system than they would have
been had SDLT continued at the same rates. The Scottish
government has produced LBTT calculators which show how much
tax would be payable under the proposals.
There are concerns that this will mean that institutional investors
will opt to invest their funds in the lower tax environment
elsewhere in the UK, which could have a significant negative
impact on commercial development of new offices, retail and
industrial properties in Scotland which rely on this institutional
investment for the funding to make the developments viable in the
first place. This in turn could impact the construction industry and
the wider economy and make Scotland a less attractive place for
inward investment.
Residential property
The draft Budget proposes that the first £135,000 of a residential
property transaction would be free of LBTT; while a 2% rate would
apply to the amount between £135,001 and £250,000 and 10% to
the amount between £250,001 and £1,000,000. Any amount
above £1 million would be taxed at 12%.
Non-residential leases will be taxed to LBTT at 1% of the amount
by which the net present value exceeds £150,000. The net present
value is calculated by reference to the rent payable and the term of
the lease.
By contrast, the highest rate of SDLT for properties not purchased
through a company is 7% for properties costing more than £2 million.
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PM-Tax | Wednesday 22 October 2014
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PM-Tax | Our Comment
New Scottish SDLT replacement less beneficial for institutional investors (continued)
This makes LBTT rates on non-residential leases the same as for
SDLT. However the big difference between the LBTT and SDLT
treatment of leases is that for SDLT you calculate the NPV just
looking at the rent for the first five years of the lease – so rent
increases after that time do not affect the tax paid. For LBTT it will
be necessary for a tenant to revisit the position by submitting a
return every three years and paying additional duty as a result of
rent increases. This will be an added administrative burden which
will increase the tenant’s costs.
Revenue Scotland
A new tax authority, Revenue Scotland, has been established to
collect and administer the new taxes, in conjunction with Registers
of Scotland and the Scottish Environmental Protection Agency
(SEPA). The Scottish Parliament has also legislated for a tough new
general anti-avoidance rule (GAAR) to apply to the devolved taxes.
It will be stronger than the UK GAAR which only targets ‘abusive’
arrangements.
When does it apply?
LBTT will apply to transactions where the effective date is on or
after 1 April 2015. As with SDLT, the effective date will be
completion, or if earlier substantial performance of the contract.
This means that the new tax could apply to transactions being
negotiated now so those in the process of buying land in Scotland
may need to factor in the effect of the new tax. For larger value
commercial transactions this may include trying to get the deal
done before LBTT comes into force.
Subsale relief
Under SDLT, subsale relief prevents a double SDLT charge when
someone contracts to buy property and then sells the property on
before they have acquired it from the original seller, so that the
property is transferred directly from the original seller to the
third-party buyer.
There is currently no equivalent of subsale relief for LBTT. However,
in a consultation that closed on 29 August, the Scottish
government proposed that “significant” developments or
redevelopments of land where that development or redevelopment
completes within five years of the effective date of the subsale, be
entitled to subsale relief. By “significant”, the proposal refers to
developments which require planning permission. The first buyer
would still have to pay the tax up front, but could then apply for it
to be refunded if a completion certificate was issued for the
development within five years of the subsale.
Karen Davidson is a Legal Director in our tax
team based in our Glasgow office. Karen
specialises in corporate and business tax as well
as advising in relation to employee share
incentive arrangements. Her experience
includes advising on the tax aspects of
corporate mergers, acquisition disposals, joint
venture arrangements and reorganisations. In
addition she advises on the design,
establishment and operation of share incentive
arrangements and the implications of corporate
transactions on such arrangements.
Landfill tax
Scotland will also introduce a new landfill tax from 1 April 2015. It
was announced in the draft Budget that it is proposed that Scottish
landfill tax will be charged at £82.60 per tonne of taxable waste
with a lower rate of £2.60 per tonne of taxable waste; the same
rates as planned elsewhere in the UK for 2015/16. The proposed
credit rate for the Scottish Landfill Communities Fund would be set
at 5.6% and funds would be distributed to projects within 10 miles
of a landfill site or waste transfer station.
E: [email protected]
T: +44 (0)141 567 8535
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7364
PM-Tax | Wednesday 22 October 2014
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PM-Tax | Our Comment
Increase in tax take from
wealthy foreigners
by Ray McCann
The amount of additional tax collected by a specialist HM Revenue and Customs (HMRC) team
targeting wealthy foreigners living in the UK increased by 27% to reach a new record last year, according
to figures obtained by Pinsent Masons under a Freedom of Information request.
The figures show that investigations and other compliance work by
HMRC’s Personal Tax International team yielded £153.6 million in
additional revenue in 2013/14, up from £120.8m in 2012/13. The
team’s annual tax take from individuals including highly-paid
foreign workers, such as overseas staff working in investment
banking and hedge funds, is now 62% higher than it was just five
years ago, according to the figures.
HMRC’s reach is continuing to grow given recent heavy investment
into new sophisticated data systems, making it more important
than ever for these individuals to ensure that their tax affairs are
up to date otherwise they risk an aggressive investigation into their
tax affairs.
Additional tax take from compliance work obtained by HMRC’s
team targeting wealthy foreign expats
The figures show that HMRC is investing heavily in those tax
investigations that focus on potentially high-yielding areas.
Highly-paid foreign workers are also at risk of tax compliance
failures due to the complexity of rules in this area.
160
£153.6m
150
140
Investment bankers and other well-paid City staff have always
been a prime target for HMRC because they tend to bring in
significant compliance yield. HMRC knows it is an area where
businesses and individuals often make mistakes: the rules are
complicated, and businesses need to understand both the law and
HMRC practice to avoid making costly mistakes.
130
£117.1m
120
£110.8m
110
100
£120.8m
£94.9m
90
With the increased pressure to try to boost its revenue, it comes as
no surprise that HMRC is continuing to target wealthy expats and
the better off generally, many of whom work in investment
banking and hedge funds with generous pay and bonuses. The fact
that HMRC’s increase in yield is against the tide of overall falls in
remuneration for investment bankers shows how successful they
are being in this area.
2009/10
2010/11
2011/12
2012/13
2013/14
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.
HMRC’s Personal Tax International, or ‘expat’, team deals with the
tax affairs of international assignees and their UK resident
employers. These cases tend to require specialist attention because
they may involve complex and substantial remuneration packages,
while the individual’s personal tax liability may depend on whether
the employer meets some or all of their tax liability and on the
interpretation of tax treaties between different countries.
It is easy for expats to make mistakes on their tax returns because
they have not fully understood the tax rules in the UK. They may
also have income from investments in other countries, or even
overseas tax liabilities that all need to be properly documented and
accounted for to HMRC. Often it is the employer that makes a
mistake, and in many cases it is possible that the employer has to
pick up the bill.
E: [email protected]
T: +44 (0)20 7054 2715
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PM-Tax | Wednesday 22 October 2014
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PM-Tax | Our Comment
Growth in SAYE share schemes
by Matthew Findley
Profits made by employees participating in save as you earn (SAYE) employee share option schemes
more than doubled in the past year, allowing employees to benefit from the strong stock market
performance of the companies that they work for.
Figures obtained by Pinsent Masons show that employee profits from
SAYE schemes rose by 141% last year, up from £360 million in 2011/12
to £870m in 2012/13. At the same time, participating employees
saved a combined £430m in income tax and national insurance by
participating in the tax-advantaged scheme.
As businesses get better at communicating the benefits of schemes
like SAYE, more and more staff from companies offering them are
looking to sign up. The popularity of SAYE should also increase as
companies start to look more seriously at the role share schemes can
play in long-term wealth creation, particularly given the shortfall in
pension savings and the dramatic recent reform of the pensions
market.
SAYE is one of two types of ‘all employee’ tax-advantaged share
schemes which allow employees to build up and ultimately benefit
from a financial stake in their employing company. Employees who
join a SAYE scheme have money deducted from their pay after income
tax and national insurance each month over the life of the scheme,
which is usually three or five years. This money is put aside to buy
shares in their company at a discounted price.
Since 6 April 2014, employees have been able to contribute up to
£500 each month to a SAYE scheme if the scheme allows, up from the
previous £250 per month limit. This recent doubling of the amount of
money that employees can contribute to a SAYE scheme each month
should encourage even more interest in the scheme.
At the end of the option period, the employee can choose to take up
their option and then keep or sell the shares. If the share price of the
company has fallen since the employee began to save, they can
instead get their money back. In most, but not all, circumstances, no
income tax will be charged on any profit made when the share option
is exercised. The employee will instead be liable for capital gains tax
arising when the shares are sold.
Matthew Findley is 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.
The figures show that company share options are not the preserve of
senior directors. SAYE is a highly tax efficient and risk-free route for
employees to invest in the stock market, and to take a financial stake
in the company they work for. Employees who have joined a SAYE
scheme and then opted to sell their shares this year have really reaped
the benefits of an improving stock market.
E: [email protected]
T: +44 (0)20 7490 6554
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7364
PM-Tax | Wednesday 22 October 2014
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PM-Tax | Recent Articles
Update on European Commission
investigations into national tax rulings
by Heather Self and Caroline Ramsay
We previously reported in PM-Tax that multinationals Apple, Starbucks and Fiat Finance and Trade
could face retrospective tax bills of millions of Euros if the European Commission finds that their
taxation breached European Union state aid rules. In this updated article we discuss the additional
information that has been released about the Apple and Fiat investigations and a new announcement
of an investigation into Amazon. Any other company that has secured a favourable tax ruling could
be at risk.
In June 2014 the European Commission launched three in-depth
investigations into the tax affairs of Apple in Ireland, Starbucks in the
Netherlands and Fiat Finance and Trade in Luxembourg. In October
2014 it announced the opening of an in-depth investigation into the
corporate tax affairs of Amazon in Luxembourg.
The Fiat investigation relates to a decision in 2012 by Luxembourg
to approve a transfer pricing arrangement by Fiat Finance and
Trade, which lends money to other Fiat companies. The
Luxembourg authorities signed a five-year agreement with Fiat,
which resulted in it paying a 10% tax rate on around €2,542 million
compared with the standard rate of 28.8%. The Commission’s
preliminary view was that the arrangements constituted state aid.
In parallel to these formal investigations the Commission is
continuing a wider inquiry into tax rulings, which covers more
member states. It has also announced recently that it is broadening
the scope of an ongoing in-depth investigation opened in October
2013 into Gibraltar’s corporate tax regime to cover tax rulings.
In relation to Starbucks, the Commission is examining the
individual ruling issued by the Dutch tax authorities on the
calculation of the taxable basis in the Netherlands for
manufacturing activities of Starbucks Manufacturing. Further
details have not yet been released.
Since the June announcements, the Commission has published a
letter to Ireland setting out its preliminary findings in relation to
the arrangements with Apple and a letter to Luxembourg in
connection with its arrangements with Fiat. These letters give
further details of the Commission’s reasons for kicking off the
investigations and give its preliminary views – in each case that
there has been illegal state aid. It is not clear how long it will be
before the Commission reaches a final decision.
The Amazon investigation relates to a tax ruling dating back to
2003 which is still in force. It applies to Amazon’s Luxembourg
subsidiary Amazon EU Sàrl, which records most of Amazon’s
European profits. The Commission says the tax ruling means that
Amazon EU Sàrl pays a tax deductible royalty to a limited liability
partnership established in Luxembourg but which is not subject to
corporate taxation in Luxembourg. As a result, the Commission
says that most European profits of Amazon are recorded in
Luxembourg but are not taxed in Luxembourg. It says that the
amount of this royalty, which lowers the taxable profits of Amazon
EU Sàrl each year, might not be in line with market conditions and
may therefore constitute state aid.
The Commission said that there were “several inconsistencies” in
the way in which transfer pricing rules were applied to Apple that
did not appear to comply with the arm’s length principle. It cited
tax talks between Ireland and Apple in 1990 which it said indicated
that quoted tax margins had been “reverse engineered” without
economic basis and tied to concerns about local jobs. It said that
there was “no indication” that the arrangements could be
“considered compatible with the internal market”; particularly
given the fact that the agreement lasted 16 years, compared to
arrangements in other European countries that typically last for no
more than five years.
These developments could have implications for any company
which has secured a ‘favourable’ tax ruling from national tax
authorities. Any company which has a favourable tax ruling will
need to assess the risk that the Commission may decide that this is
state aid. A deal which seemed ‘too good to be true’ may now turn
out to be just that – and could lead to significant costs.
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PM-Tax | Wednesday 22 October 2014
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PM-Tax | Recent Articles
Update on European Commission investigations into national tax rulings (continued)
Some state aid is illegal under EU rules because it distorts
competition. If the Commission rules that these member states have
given unlawful state aid, any company found to have benefited
would find itself obliged to pay taxes it previously understood it was
not required to pay. There would therefore be a claw-back of any tax
relief which has been unlawfully given. The claw-back will apply
regardless of any time limits for repayment of tax in the national
legislation and will usually go back up to ten years.
What should companies do now?
Companies whose effective tax rate in any EU country has been
reduced by a ruling should consider the potential impact of the
state aid challenge. It is likely to be particularly relevant to US
multinationals, but also to any other group that has intellectual
property in the Netherlands, or financing operations or group debt
in Luxembourg. As two of the investigations relate to Luxembourg,
it appears that Luxembourg may be a particular focus of their
investigations.
The Commission’s investigations follow widespread public debate in
some EU member states about tax avoidance by some multinational
companies. Fighting tax evasion has also been made a priority for
Margrethe Vestager, the Danish politician appointed to succeed
Joaquin Almunia as competition commissioner from November.
Working with colleagues in our strong state aid practice Pinsent
Masons can help clients understand the EU process as well as the
potential tax issues.
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.
Although the European Commission does not have direct authority
over national direct tax systems it can investigate whether certain
advantageous fiscal regimes would constitute “unjustifiable state
aid” to companies. It has been investigating certain tax practices in
several member states following media reports alleging that some
companies have received what it described as “significant tax
reductions” by way of “tax rulings” issued by national tax
authorities. Tax rulings are used in particular to confirm transfer
pricing arrangements.
The Commission said: “Tax rulings as such are not problematic.
They are comfort letters by tax authorities giving specific company
clarity on how its corporate tax will be calculated or on the use of
special tax provisions. However, tax rulings may involve state aid
within the meaning of EU rules if they are used to provide selective
advantages to a specific company or group of companies.”
E: [email protected]
T: +44 (0)161 662 8066
Caroline Ramsay is a Senior Associate in our
EU & Competition team who advises in
relation to all aspects of European and public
law. She has particular expertise in European
State aid and public procurement. Caroline
advises clients ranging across a variety of
sectors, including local authorities,
educational establishments, energy utilities
and charitable foundations.
The Commission confirmed that it was not calling into question the
general tax regimes of the three member states concerned, just the
selective rulings it believes have been issued. Interested third
parties are able to submit comments in relation to the investigation.
The companies involved and the member states concerned have
denied that there has been unlawful state aid.
E: [email protected]
T: +44 (0)141 567 8653
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7364
PM-Tax | Wednesday 22 October 2014
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PM-Tax | Recent Articles
Tax and Africa – lessons from the
Tullow Uganda Case
On 13 October we held an interesting client event to discuss the Tullow Uganda case (Heritage Oil and
Gas Ltd and another v Tullow Uganda Ltd [2014] EWCA Civ 1048). David Wolfson QC of One Essex
Court, who acted for Tullow outlined the lessons he thought could be learned from the case and there
followed a discussion led by Heather Self of Pinsent Masons. We were very pleased to be also joined by
barrister Richard Mott of One Essex Court who also represented Tullow in the litigation.
The case concerned a joint venture in Uganda for petroleum
exploration between Tullow and Heritage. Heritage wanted to sell
their interest in the joint venture and entered into negotiations with
a third party. One of the terms of the joint venture was that if one
of the parties wanted to sell their interest, the other party had a
right of pre-emption to buy the interest on the same terms as had
been agreed by the third party. Tullow exercised the pre emption
right and bought the interest on the sale and purchase agreement
that had been negotiated by the third party. Tullow therefore had
little opportunity to influence the drafting of the agreement.
contractual claim against another party for the tax, it is important
to demonstrate that you believed that the tax was properly
chargeable. On a practical note, David Wolfson stressed the
importance of securing the best local tax expert to give evidence in
your favour. In some jurisdictions there may not be many experts
and you need to secure one who practises locally, as such a person
will be seen as much more persuasive by an English court in
commenting on a matter of overseas tax law than a UK based
expert. It may even be appropriate to retain more than one local
expert to prevent your opponent being able to use them.
The Ugandan tax authority assessed the capital gain that Heritage
had made on the sale of the interest to Ugandan tax. As Heritage
no longer had any assets in Uganda, the Ugandan authorities
claimed the tax liability against Tullow. Tullow paid the tax and
claimed it back from Heritage under the terms of the sale and
purchase agreement. Heritage’s arguments included that the tax
was not properly chargeable by the Ugandan authorities and
therefore could not be covered by the indemnity and that a notice
clause requiring Tullow to give Heritage notice of the claim (that
Tullow had not complied with), was a condition precedent to
Heritage claiming under the sale and purchase agreement. As the
contract was governed by English law, the dispute came before the
UK Courts. The Court of Appeal found for Tullow, substantially
upholding the decision of the Commercial Court, deciding that the
tax was properly chargeable, but even if it had not been Tullow
believed it was. It also held that the notice provision was not a
condition precedent.
David Wolfson said that any company faced with a demand from a
foreign tax authority needs to make sure that it pays on the
strongest possible basis – this may involve negotiating with the
overseas government to ensure that they comply with the correct
procedure – even if the only way to continue to do business in the
country is to pay the tax demanded. However, there is a balance
to be drawn, as in negotiating you could be seen to be colluding
with the authorities and paying the tax voluntarily which would
probably invalidate the indemnity.
David Wolfson stressed that in situations where tax is being
demanded by a government outside the UK, it is crucial to get local
advice concerning the validity of the tax demand at the earliest
opportunity. Having got the advice it is important to ensure that
the advice is properly documented as whenever there is a
The indemnity was litigated in London. Whilst this has advantages
in terms of certainty of the process and reliability of the system,
there are drawbacks. One big drawback is that the process is public
and can involve wide disclosure and extensive cross examination.
An arbitration process would be private.
Heritage had challenged the liability with the Ugandan tax
authorities. However, David Wolfson said that in many cases, where
you have no further business in the State concerned, this may not be
the best course of action as a local court is unlikely to find against its
own tax authority in favour of a foreign claimant and a decision from
the local court that the tax claim is valid can undermine your
arguments on whether you have to pay under the indemnity.
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PM-Tax | Wednesday 22 October 2014
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PM-Tax | Recent Articles
Tax and Africa – lessons from the Tullow Uganda Case (continued)
The Court of Appeal found for Tullow on the question of whether
the notice provision was a condition precedent, holding that it was
not. Although the court’s decision on this point was consistent
with the position usually adopted by English courts that a
condition is only a condition precedent if it clearly states that it is,
David Wolfson suggested that it would be better to avoid your
whole case depending upon such a point. He suggested that when
drafting a contract you could include a clause stating that in the
contract terms would only be conditions precedent if they stated
that they were.
In the discussion that followed, the consensus was that we are
likely to see many more examples of authorities charging tax on
indirect sales of assets located in their jurisdictions. In the Tullow
case the figures were so great that the tax liability would amount
to a substantial proportion of Uganda’s total tax revenue. The
public nature of the Tullow litigation could result in other states
seeing what Uganda had done and deciding to follow suit. Anyone
investing in Africa and countries such as India and China therefore
needs to look closely at their contractual position and factor in the
risk of such a tax demand.
For more thoughts on practical points on tax deeds see Tax Journal
article written by Eloise Walker.
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7364
PM-Tax | Wednesday 22 October 2014
9
PM-Tax | Recent Articles
Using the UK as a holding company
jurisdiction – opportunities and challenges
by Tom Cartwright
The “holy grail” of the international tax practitioner is to find the perfect international holding
company jurisdiction. To what extent is the UK a viable holding company location?
A holding company jurisdiction needs certain characteristics:
Dividend Taxation
A fundamental advantage which the UK holds over many other
typical holding company jurisdictions (such as the Netherlands and
Luxembourg) is that it does not levy withholding tax on dividends
paid by UK companies. This means that the UK is extremely tax
efficient for the repatriation of dividends to shareholders,
regardless of where those shareholders are based and whether a
double tax treaty may also apply to provide relief.
•the possibility of returning profits to shareholders with minimal
tax leakage
•the ability to receive profits from underlying subsidiaries without
taxation at home
•the ability to dispose of investments in the underlying
subsidiaries without triggering a tax charge on any profit or gain
•a good treaty network to ensure that profits can be repatriated to
the holding company from underlying subsidiaries, whilst
minimising local withholding taxes
Dividends received by a UK company from overseas subsidiaries are
generally exempt from tax. It is possible to qualify for the
exemption in a number of different ways. If the holding company is
not a “small” company, the most straightforward basis for
exemption is where the holding company controls more than 50
per cent of the voting rights in the subsidiary through its
shareholdings. Most subsidiaries will satisfy this requirement.
•low risk from anti-avoidance measures that profits of subsidiaries
will otherwise be taxed in the holding company jurisdiction.
The UK has emerged over the last decade as an increasingly viable
holding company jurisdiction, particularly for investments in
countries within the European Union. This emergence has been
based on the following aspects of the UK’s tax regime:
If the holding company is small (which means broadly that, when
aggregated with all companies under common control, it has fewer
than fifty employees and either its annual turnover or net asset
value from its balance sheet do not exceed €10 million), it will be
exempt from tax on dividends received from subsidiaries received
in qualifying territories. Qualifying territories include any territory
with which the UK has a double tax treaty containing a nondiscrimination provision.
•the fact that the UK does not levy withholding tax on dividends
paid by its companies to any jurisdiction
•the introduction of a dividend exemption, ensuring that dividends
received by a UK company from overseas subsidiaries are exempt
from tax in the UK
•an extensive network of double tax treaties
Where neither of these criteria is met (where the company is not
small but does not hold a controlling interest in the subsidiaries),
there are other ways in which dividends can qualify for exemption.
These include where the dividend is paid in respect of nonredeemable ordinary shares, where there is a portfolio holding of
less than 10% of the issued share capital and economic rights, or
where the dividend does not reflect profits derived from
transactions which are designed to avoid or reduce UK tax.
•the reform of some of the UK’s more draconian anti-avoidance
rules, including its Controlled Foreign Company (CFC) rules in
2013
•the introduction of an exemption from UK taxation on the
disposal of “substantial shareholdings” in subsidiaries by
UK companies.
However, some of the UK’s rules in this area remain less
straightforward than might be desirable and this can create
uncertainty, particularly in more complex group structures. This
article looks at the requirements of the regime, the issues which
can arise when the UK is used as a holding company and how they
can be resolved.
The result of the dividend exemption, coupled with the lack of
withholding tax on dividends paid on by the UK holding company
should ensure there is no tax leakage in the UK on the repatriation
of dividend profits to the ultimate shareholders. Further, the UK’s
extensive network of double tax treaties and its access to the
benefits of the EU Parent-Subsidiary Directive should ensure that
dividends can generally be received by the UK holding company
without local withholding taxes.
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Using the UK as a Holding Company Jurisdiction – Opportunities and Challenges (continued)
Anti-avoidance Rules – CFCs
A development, which took effect on 1 January 2013 and which has
enhanced the UK as a holding company jurisdiction was a change
to the UK’s Controlled Foreign Companies (CFC) Regime. The
fundamental change is an attempt to make the rules more
targeted to scenarios where profits have actually been diverted
from the UK, rather than a more blanket provision which
potentially caused overseas profits with a limited UK nexus to be
subject to UK taxation.
There are also other exemptions from these rules which will often
apply. For example, if the asset which is disposed of is used for the
purposes of a trade carried on outside the United Kingdom or is
used for the purposes of “economically significant activities”
carried on by the subsidiary wholly or mainly outside the United
Kingdom, no charge will be imposed on the UK holding company.
Thus, a subsidiary carrying on a typical business activity should not
find that it causes the UK holding company to fall foul of these
rules. Further, if the arrangements under which the gain arises do
not form part of a scheme or arrangement with a main purpose of
avoiding a liability to UK capital gains tax or corporation tax, no
charge will apply.
In essence, a CFC is a foreign company which:
•is resident outside the UK
•is controlled by UK persons
•is subject to a level of tax which is less than 75% of the UK
corporate tax on such profits (currently 21%, reducing to 20%
from April 2015).
The Substantial Shareholdings Exemption – a mixed blessing?
The vagueness of the scope of the UK’s version of a participation
exemption, the “Substantial Shareholdings Exemption” (SSE) can
deter some from using the UK as a holding company jurisdiction.
The CFC rules only bite on UK companies which have a minimum
25% participation in the CFC (or are entitled to 25% of the CFC’s
profits). Where they apply, such UK companies will be taxed as if
the profits were made by that company in the UK.
In order to qualify for the exemption from tax on a gain made on
the sale of shares in a subsidiary, the rules impose a number of
different requirements on both the company which is sold and the
selling entity. The company which is sold must:
•have been a trading company or the holding company of a trading
group or sub-group throughout the 12 month period ending with
the disposal; and
In the case of a UK holding company, the CFC rules are therefore
only likely to be of relevance where profits are made in a
jurisdiction with tax rates below 15%. Further, due to the broad UK
exemption on dividends, any dividends received by overseas
subsidiaries or any capital gains would not cause the CFC’s profits
to be subject to UK tax.
•be a trading company or the holding company of a trading group
immediately after the time of the disposal.
There is some latitude with the second requirement, where that
requirement would have been satisfied at some point in the
previous two years (in other words the fact that the purchaser of
the subsidiary decides immediately to change its business such that
it no longer qualifies will not of itself prevent SSE from applying).
The CFC rules are unlikely to bite where all the significant functions
of the overseas company are carried on outside of the UK – as will
often be the case for an intermediate holding company within an
international group.
For these purposes, a “trading company” means a company whose
activities do not to a substantial extent include any activities other
than trading activities. The key concepts here are “trading” and
“substantial” and, unhelpfully, neither is defined in the statute.
Anti-avoidance rules – Attribution of Capital Gains
Where a company which is not resident in the UK, and would be
closely controlled if it were, makes a chargeable gain on the
disposal of an asset, those gains can be attributed to the UK
“participators” (broadly the shareholders) of that company for UK
tax purposes. This can also apply to gains made by indirect
subsidiaries. A company is closely controlled if it is under the
ultimate control of five or fewer participators. However, no gain
would be attributed to a UK shareholder which holds an economic
interest of less than 25% in the gain made by the underlying
company - although this is likely to be satisfied in most cases
where a UK holding company is used.
“Trading” is a concept derived from English case law. Broadly, it
requires a company to be carrying on activities which amount to a
trade, rather than a holding of investments. HMRC generally takes
the view that “substantial” for these purposes means more than
20%. This 20% test is applied both to the net assets of the
business and the income derived by the business as well as
expenditure and time spent by employees on trading or investment
activity. However, HMRC may apply some latitude. For example,
they will typically accept that a cash balance does not amount to
an investment if it is reasonably expected to be required for the
purposes of a trade.
However, the attribution of gains rules are often overridden by
double tax treaties, so that the gain can only be taxed in the
jurisdiction in which the subsidiary is located. There is also a
specific exemption for companies which are (or which have an
ultimate parent which is) listed on a recognised stock exchange.
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Using the UK as a Holding Company Jurisdiction – Opportunities and Challenges (continued)
In addition, there are certain requirements in respect of the selling
entity. Throughout at least a 12 month period prior to disposal it
must hold a “substantial shareholding” in the subsidiary concerned
and be a trading company or the holding company of a trading
group. It must also be a trading company or the holding company
of a trading group immediately after the disposal.
HMRC will generally accept that where a limited partnership is
inserted within a group and does not have legal personality, then it
is entitled to look through it for the purposes of determining
whether its subsidiaries should be treated as the 51% subsidiaries
of its parent company. However, where the partnership which is
inserted has legal personality (such as a Scottish limited
partnership or a UK limited liability partnership which are both
treated as transparent for tax purposes), HMRC’s view is that the
group is broken and it is not possible to look through from the
parent companies to the underlying subsidiaries. This can cause
unexpected problems and where any group includes companies or
entities without share capital, serious care needs to be taken to
determine firstly what the “group” is and, secondly, whether it is a
trading group.
A company holds a substantial shareholding in another company if
it holds at least 10% of the company’s ordinary share capital. This
interest must also amount to a beneficial entitlement to at least
10% of the profits available for distribution to equity holders and
at least 10% of the assets of the company available for distribution
to equity holders on a winding up.
Care must therefore be taken with share classes which have a
variable return if and when certain hurdles are met. “Equity
holders” in this context includes not just shareholders but the
holders of certain types of debt deemed not to be “normal
commercial loans”, such as convertible debt. Care therefore needs
to be taken with smaller holdings in companies with a variety of
different share classes and debt instruments.
Similar problems arise in determining whether the rules governing
qualifying shareholdings in joint venture companies apply.
Conclusion
The UK has many advantages as a holding company jurisdiction
and significant improvements have been made in recent years.
However, the substantial shareholding exemption is the most
problematic of the UK rules in this area. In most basic corporate
structures it works well, provided that the trading status of the
group is reasonably clear. However, where more complex
structures, including fund structures, are involved, the rules are not
as user-friendly as they might be.
Remaining a trading company
The requirement for the selling company to remain a trading
company or the holding company of a trading group after the sale
can also cause problems if all the trading entities have been sold.
Essentially, if the selling company would no longer form part of a
trading group following a sale, HMRC should accept that SSE will
still apply if either it is planned to liquidate the company in the
near future, to distribute the cash from the sale or there is a plan to
acquire a new trade or trading group within a reasonable time.
Tom Cartwright is a Partner in our tax team.
His practice focuses on all areas of corporate
tax, including the tax aspects of corporate
acquisitions and reconstructions, involving the
financing and structuring of UK and crossborder buy-outs, mergers and acquisitions.
Tom has considerable expertise in tax
structuring for debt restructuring and
corporate recovery for distressed businesses.
He has advised extensively in the energy
sector for oil and gas companies. Tom has
worked on private equity transactions and
refinancing, on opco-propco structures and
specialises in all direct taxes, as well as VAT.
If instead, it is hoped that any cash proceeds from a disposal can be
warehoused in the UK holding company for the foreseeable future
until further opportunities to acquire a trading group or to make an
investment present themselves, it is unlikely that SSE would be
applicable. In those circumstances, it may be advisable to consider
adding a further layer of holding company to the structure in a
jurisdiction with a more robust participation exemption, such as
Luxembourg.
Transparent entities and joint ventures
Further issues can arise when non-corporate entities form part of a
group. The general meaning of “group” for the purposes of SSE is a
company together with its “51% subsidiaries”. A 51% subsidiary is
a company in which the other company owns more than 50% of its
ordinary share capital. This can create a problem, since an entity
without share capital can break the group above and below it. In
particular, this can affect a Delaware LLC, which may or may not
be set up with a share capital (based on HMRC’s current
interpretation).
E: [email protected]
T: +44 (0)20 7054 2630
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Our Comment
| Cases
Procedure
Daniel v HMRC [2014] UKFTT 916 (TC)
Procedural irregularity must cause injustice for a rule 38 application to be successful.
This was an application under rule 38 of the First-tier Tribunal
procedural rules by Mr Daniel against a previous decision of the
FTT which had found him to be resident in the UK and thereby not
in continuous overseas employment. It also found HMRC’s
discovery assessment to have been validly made. Mr Daniel’s
application was on the grounds that the FTT failed to take into
account, or after the hearing admit, material evidence and “an
unexplained and unjustified expansion of the issues in dispute.”
Whilst the Tribunal did not believe that the evidence could be
construed in the way Mr Daniel submitted, it did find that the
earlier constituted FTT’s failure to consider the evidence was a
procedural irregularity. The Tribunal therefore considered the
relevance of the irregularity to see whether an injustice was
suffered and found that the FTT’s decision was not reached by
reference to the number of days in the UK, but to the fact that Mr
Daniel’s work could not have been ‘full-time.’ As such, the fact that
the evidence was not considered by the FTT was not an injustice as
the result would not have turned upon it.
The FTT noted that there are two means of appealing a decision,
the normal manner to the UT or where there is a procedural
irregularity, via rule 38. The FTT disagreed with Mr Daniel’s
argument (based on Criminal CPR rather than Tribunal rules) that
an application under rule 38 had a lower threshold test to
overcome. Instead, it found that the test was just different.
The Tribunal then turned to consider the second ground of Mr
Daniel’s application, which dealt with the FTT’s expansion of the
issues in dispute. Mr Daniel argued that the FTT had made a
procedural irregularity by couching part of its decision with
reference to the negligence of Mr Daniel’s advisors. This was a
matter that HMRC brought out in their skeleton argument but not
their statement of case and so was challenged by counsel for Mr
Daniel, but the FTT considered the issue anyway.
Rule 38 requires there to not only be a procedural irregularity, but
also an injustice. The injustice must, however, have been caused by
the procedural irregularity and must be capable of being remedied
by being set aside. The Tribunal pointed out that the attack on the
judgment must be linked to the procedural irregularity and further,
that the FTT must have recourse to all of the circumstances.
This FTT found that this was an issue for appeal and not an
application under rule 38. The Tribunal also held that even if it had
been a procedural irregularity, the FTT’s decision considered Mr
Daniel’s position on its own as well in any event. In doing so, there
was no injustice flowing from any irregularity.
Mr Daniel’s dispute with HMRC (which was covered in a previous
edition of PM Tax), centred on whether he was in full-time work
abroad so as to be non-resident in the UK, under the old residency
rules. The FTT had found that Mr Daniel was negligent in making a
claim that he was non-resident in the year he made a substantial
capital gain.
As a result of this FTT’s findings, Mr Daniel’s application to set
aside the judgment of the first FTT was dismissed.
Comment
This decision shows that there is a high threshold for setting aside
a decision of the FTT on the grounds of procedural irregularity and
the appropriate way to challenge a decision in the vast majority of
cases will be to appeal to the Upper Tribunal.
The FTT dealt first with Mr Daniel’s argument that material
evidence should have been considered. The material evidence,
which came into Mr Daniel’s possession after the hearing, was a
letter and a note of a telephone call. Mr Daniel argued that the
evidence showed that specialist advice had been received from a
residence specialist within the (then) Inland Revenue that it would
be possible to remain within the scope of “full-time work abroad”
and work in the UK.
Read the decision
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Procedure (continued)
Dock & Let Ltd v HMRC [2014] UKFTT 943 (TC)
The 12 month time period for HMRC enquiring into a corporation tax return commences on the day
after the return was filed.
On 31 January 2012 Dock and Let filed its self assessment return
for the accounting period ended 31 March 2011. On 31 January
2013, HMRC issued a notice (delivered by hand to the registered
office of Dock and Let) under para 24 of Sch 18 ICTA, to enquire
into the tax return of Dock and Let for the accounting period ended
on 31 March 2011.
specified day is excluded from the period; that is to say, that the
period commences on the day after the specified day”. He also said
“Where, however, the period within which the act is to be done is
expressed to be a period beginning with a specified day, then it has
been held, with equal consistency over the past forty years or
thereabouts, that the legislature (or the relevant rule making body,
as the case may be) has shown a clear intention that the specified
day must be included in the period.”
Dock and Let’s advisers claimed the notice was out of time as the
deadline for issuing the notice of enquiry had expired on 30
January 2013. HMRC said that the notice was in time as the twelve
month period for issuing the notice commenced on the day after
the return was filed, so that in the present case, the 12 month
period started at 00.00 on 1 February 2013 and ended at midnight
on 31 January 2013.
Judge John Clark said that applying Zoan v Rouamba, the time limit
should be construed as excluding the date on which the return was
filed so that the HMRC notice was served in time. He considered
whether there was anything to suggest that the time limit in
para 24 should be construed differently and decided that there was
not. He said that the proper construction of para 24(1) of Sch 18 is
that the twelve month period “from the day on which the return
was delivered” is to be calculated by excluding the day on which
the return was filed, so that, “from” is akin to “after”.
Para 24 stated that “notice of enquiry may be given at any time up
to twelve months from the day on which the return was delivered”.
FTT Judge John Clark said that it was clear that the word “from”
cannot be said to have a plain meaning and the issue of how the
time limit should be calculated did not appear ever to have been
considered by the tax tribunals.
He did comment that he found it “surprising that HMRC left it to
the very last minute to issue the enquiry notice, to the point where
it was necessary to deliver the notice and covering letter by hand
to the registered office of Dock and Let”. He also commented that
the background meant that Dock and Let must have been aware of
the possibility that an enquiry notice might be issued by HMRC
and so the notice cannot be described as having come altogether
“out of the blue”.
The FTT referred to Zoan v Rouamba, where the Court of Appeal
considered the case law on the question of the calculation of a
period. In that case Chadwick LJ said: “Where, under some
legislative provision, an act is required to be done within a fixed
period of time “beginning with” or “from” a specified day it is a
question of construction whether the specified day itself is to be
included in, or excluded from, that period. Where the period within
which the act is to be done is expressed to be a number of days,
months or years from or after a specified day, the courts have held,
consistently since Young v Higgon (1840) 6 M&W 49, that the
Comment
This case confirms the basis on which HMRC have applied time
limits and which was understood to be the accepted position.
What is surprising is that this appears to be the first time the issue
has been considered by the tax tribunals.
Read the decision
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PM-Tax
| Our| Our
Comment
Cases
Substance
HMRC v University of Huddersfield [2014] UKUT 0438 (TCC)
University’s tax avoidance scheme fails under abuse of rights principle.
The University of Huddersfield primarily made exempt supplies of
education. However, it also made a small proportion of VAT-able
supplies and so was able to recover a small proportion of the input
VAT on its general overheads. The University acquired a derelict
mill with the intention of refurbishing it. However, the University
knew that if it paid the refurbishing contractors in the ordinary
way, it would only be able to recover a small proportion of the
input VAT.
activity to find that the scheme, in essence, worked. It held that
the current case was indistinguishable from Weald Leasing and so
avoided being abusive under Halifax principles.
HMRC appealed to the UT, which found that the FTT decision
should be overturned. In finding for HMRC, the UT noted that the
facts relating to the University’s transactions were distinguishable
from Weald Leasing. The UT noted that Weald Leasing concerned
spreading irrecoverable VAT over the life of a lease, which is not an
abuse, whereas, the FTT should have looked to its earlier finding of
fact that the University intended to collapse the leasing
arrangements and thereby avoid paying the VAT under them.
The University entered a scheme to mitigate its VAT liability.
Through the scheme, the University set up a trust, with former
employees as trustees and the University as beneficiaries. The
University leased the property to the trust which in turn leased the
property back to the University. Both the University and the trust
opted to charge VAT on the property and the leases were drawn up
so that they could be terminated at any time. The University then
contracted with a subsidiary company that was not part of its VAT
group for it to carry out the refurbishment of the building. That
subsidiary in turn contracted with third party builders who carried
out the needed work. The University made a claim for the VAT it
paid to the underlying company which HMRC later questioned.
Next the UT noted that it was wrong for the FTT to consider only
the collapse of the leases separately. The FTT should have
considered the whole overall effect of the transaction. In this
regard, the FTT should have noted that the CJEU was not asked to
look at the abuse of rights position and had made clear that its
decision was subject to that issue.
The UT then turned to whether the scheme was abusive under the
Halifax principle. The second limb of the Halifax test was admitted
by the University. It had intended to obtain a tax advantage, and
that advantage - the ability to claim VAT which the University
would not normally be able to, was obtained.
In 2002 the FTT found that there was no commercial purpose to
the transaction other than obtaining a tax advantage. The FTT
found no basis in the University’s argument that the commercial
purpose of the transaction was to use the property expertise and
experience of the trustees. However, the FTT referred the case to
the CJEU, to determine whether the lease and leaseback were
economic activities and whether they constituted a taxable supply.
The UT had to deal with whether the scheme was contrary to the
purpose of the VAT Directive. The UT found that the first purpose
of the Directive was, per A-G Maduro, “that a taxable person must
not be entitled to deduct or recover the input VAT paid on supplies
received for its exempted transactions.’ Maduro’s opinion was
adopted by the court in Halifax and the UT found that the
University should not able to deduct input VAT where it would not
normally have been able to do so. Otherwise the UT said, quoting
Halifax, it “would be contrary to the principle of fiscal neutrality
and, therefore, contrary to the purpose of those rules.”
The CJEU said that there was an economic activity and a taxable
supply in the leases themselves. The decision relied on Weald
Leasing to find that the economic activity of entering into a lease is
not ignored just because it creates a tax advantage. The CJEU was
not asked to decide on whether the transaction was abusive. When
the case was referred back to the FTT in 2013, it found in the
University’s favour. It relied on the fact that there was an economic
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PM-Tax | Our Cases
Substance (continued)
HMRC had also argued that circumventing anti-avoidance
provisions amounted to an abuse. On this point the UT was not
sure. It pointed out that there is a strong argument that domestic
anti-avoidance provisions are only ancillary to the main purpose,
but not in themselves a purpose. It is possible to argue that the
abuse doctrine only applies to EU law provisions, and not domestic
law provisions. The UT said that it would have needed to make a
direction to the CJEU to decide this point. However, as it had
already found in HMRC’s favour that there was an abuse, it merely
reserved judgment on this issue.
University and the trust, or disregard the lease and underlease
instead, the UT opted for the latter. This enabled the University to
recover a small amount of input VAT because it was partially exempt,
rather than none at all if the options to tax had been disregarded.
Comment
The decision confirms that structuring with leases, where you intend
to obtain an absolute VAT saving is abusive, whereas using a lease to
spread irrecoverable VAT – as in the Weald Leasing case, is not.
Read the decision
Having found abuse, it redefined the transactions to remove the tax
advantage unfairly obtained by the scheme. Although there were two
options, to either disregard the options to charge VAT by the
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Substance (continued)
Société Fonderie 2A v Ministre de l’Économie et des Finances (C-446/13)
Goods sent by an Italian manufacturer to France to be finished and then sent on to a customer were
supplied for VAT purposes in France.
Fonderie 2A was an Italian metal manufacturer which supplied
goods to a French customer. Before the goods were dispatched to
the French customer, Fonderie 2A would send the goods to another
company in France called Saunier-Plumaz for them to be painted
and then sent directly from there to the French customer.
The CJEU had to decide whether the supply to the customer in
France was made in Italy, where Fonderie 2A was located or in
France, where the finishing paint work was carried out. The CJEU
noted that “the place of supply of goods is to be deemed to be ‘the
place where the goods are at the time when dispatch or transport to
the person to whom they are supplied begins’”.
Fonderie 2A invoiced the French customer for the full value of the
goods, as painted. Saunier-Plumaz invoiced Fonderie 2A for its
finishing work and both payments were subject to VAT. Fonderie 2A
applied to the French authorities for a VAT refund under the Eighth
Directive of the VAT charged by Saunier-Plumaz. Fonderie 2A’s claim
could only succeed if it had supplied no goods or services in France.
In Fonderie 2A’s situation, the CJEU said the dispatch to the French
customer only occurred when Saunier-Plumaz sent the items to the
customer, and not when Fonderie 2A sent them to Saunier-Plumaz.
Accordingly, the CJEU found that the place of supply by Fonderie 2A
was where Saunier-Plumaz was located (ie in France) as it was only
from Saunier-Plumaz’s location that the goods were supplied to the
French customer for VAT purposes.
The French tax authorities rejected the claim on the ground that
Fonderie 2A was deemed, under French law to have supplied the
goods in France (on account of Saunier-Plumaz’s involvement in the
arrangement). The French courts rejected Fonderie 2A’s claim and
the matter was referred to the CJEU.
Comment
Any businesses which arrange for goods to be dispatched to
customers from a subcontractor’s premises in another EU member
state need to be aware of the implications of this decision.
Read the decision
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Substance (continued)
Hirst v HMRC [2014] UKFTT 924 (TC)
An individual was an employee of a company for entrepreneurs’ relief purposes, even though not
formally appointed as such.
Mr Hirst was a shareholder and director of a company but ceased to
be a director in December 2007. He sold his shares in July 2009 and
claimed entrepreneurs’ relief in respect of the capital gain. HMRC
denied the claim on the basis that Mr Hirst was not an employee or
director of the company in the 12 months before the shares were
sold, as required by the entrepreneurs’ relief legislation.
However, the FTT decided that Mr Hirst was an employee. Mr Hirst
agreed to provide services to the company and there was
consideration in the form of an agreement to pay commission
(though none was actually paid) and non-cash remuneration as a
result of the provision of company assets to him. He was also
under the control of the company and the FTT considered that
there were no facts which were inconsistent with an employment
relationship. He was therefore able to claim entrepreneurs’ relief.
After his resignation as a director, Mr Hirst had continued to be
involved in sourcing new business for the company. He retained a
laptop and phone provided by the company and the company
continued to pay for his home internet access. He continued to
receive board packs and liaised with the CEO and contributed to
the strategy of the company. Mr Hirst claimed he was a de facto
director of the company and was an employee.
Comment
This case is a reminder of the importance of ensuring that an
employment relationship continues if a shareholder is to claim
entrepreneurs’ relief on a sale of shares. In this case, although there
was no formal employment relationship, Mr Hirst was lucky and
the FTT was prepared on the particular facts to treat him as an
employee. However, it will always be safer to rely on a formal
employment relationship.
The FTT decided that Mr Hirst was not a de facto director. In the
case of Smitherton Ltd & Naggar v Townsley and others [2014]
EWCA Civ 939, Arden LJ said of the test of whether an individual
was a de facto director; “The question is whether he was part of the
corporate governance system of the company and whether he
assumed the status and function of a director so as to make
himself responsible as if he were a director”. The FTT found that Mr
Hirst’s suggestions and proposals were considered by the board
and he was consulted on some issues but decisions were made by
the board. His influence was commensurate with, but limited to,
that of a significant shareholder and he was therefore not a de
facto director.
Read the decision
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Substance (continued)
PSC Photography Limited v HMRC [2014] UKFTT 926 (TC)
Company had a reasonable excuse for late payment of PAYE as a result of cash flow difficulties
caused by unforeseen business setbacks.
PSC Photography Limited (PSC) failed to make monthly payments
of PAYE on time in 2012/2013 (although the total was paid in full,
with each of the payments being made fairly soon after the due
dates) and, as a result, HMRC imposed a late payment penalty.
PSC appealed the penalty to the FTT, seeking to establish that it
had a reasonable excuse for the late payments.
The FTT found that the specified events above were the direct
cause of the problems that PSC encountered in 2012/2013 and
that it was not unreasonable for PSC to be taken by surprise by
these events. Although PSC took emergency steps to remedy its
financial situation, including selling its building, this did not
prevent the cash flow difficulties PSC suffered which resulted in
late monthly payments of PAYE.
PSC’s main business is providing photographic work for major high
street retailers and it secured a lucrative contract with a client, TR
Lewin, in November 2011. However, the project was delayed in
2012 and later terminated. This was a major setback for PSC which
had retained staff to work on the project, who were still being paid
despite the termination of the project. Although PSC went on to
secure a further lucrative contract, the termination of the TR Lewin
project had an adverse short term effect on PSC’s cash flow.
The FTT found that PSC did therefore have a reasonable excuse for
late payment and PSC’s appeal against the late payment penalty
was consequently upheld.
Comment
This case provides an example of when a business might have a
reasonable excuse for late payment of PAYE, such that a late
payment penalty may be successfully appealed. However, it should
be noted that, as the FTT suggested in its judgment, general and
unspecified cash flow difficulties are unlikely to amount to a
reasonable excuse. What was key here was that PSC pointed to
two specific unforeseen events which “severely affected” the
business and directly caused the cash flow difficulties leading to
late payment.
PSC’s financial position was then worsened by its bank abruptly
changing its banking arrangements in November 2012, cancelling
PSC’s overdraft facility and imposing a monthly repayment
requirement which was an unexpected financial strain on
the business.
Read the decision
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PM-Tax | Wednesday 22 October 2014
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>continued from previous page
PM-Tax | Cases
Substance (continued)
Forsyth v HMRC [2014] UKFTT 915
Compromise agreement payment on termination of ex-employee’s private health scheme
membership was “employment income”.
Mr Forsyth was employed by Nestlé until his retirement in 1995,
after which it was agreed that he would continue to enjoy the
benefits of the firm’s private health scheme for himself and his
family in return for a contribution. In 2009, Nestlé terminated Mr
Forsyth’s membership by compromise agreement, under which Mr
Forsyth received a payment of just under £30,000 in settlement of
his and his family’s entitlement to medical cover under the scheme.
The FTT found that it was chargeable under another provision
– namely it was chargeable as a “relevant benefit” under an
“employer-financed retirement benefits scheme”. The definition of
“scheme” includes an agreement and therefore included the
compromise agreement. The payment under the agreement fell
within the definition of a “relevant benefit” under such a scheme,
as a lump sum paid to Mr Forsyth after his retirement in
connection with his past service for Nestlé (as the payment would
not have arisen but for his employment with the company).
In his self-assessment tax return for that year, Mr Forsyth claimed
that the compromise agreement payment was compensation for
the surrender of his and his family’s rights under the scheme and
should be treated as a capital gain, split equally between himself
and his wife and liable to capital gains tax after the deduction of
the annual exemption. This was challenged by HMRC which found
that the amount should instead be liable to income tax.
As the payment fell within this income tax provision it could not be
treated as a capital gain or a termination payment and the FTT
held that the full payment was be treated as employment income
of Mr Forsyth for that year, liable to income tax.
Comment
This case demonstrates the scope of what might constitute a
benefit under an employer-financed retirement benefits scheme
– essentially any lump sum provided under any agreement or
scheme after the retirement of a former employee in connection
with past service. Where a payment is caught by these provisions,
the payment will not be taxable as a capital gain (with the annual
exemption available) or a termination payment (with the £30,000
threshold available); the whole payment will be liable to income
tax as earnings.
Mr Forsyth appealed to the FTT arguing that the amount should be
subject to capital gains tax but that, in the alternative, it should be
treated as a payment on termination of employment and only
subject to income tax in so far as it exceeded the £30,000 tax free
allowance in respect of such payments.
The FTT did not agree and dismissed Mr Forsyth’s appeal. It cited
the legislative position that payments will not be subject to capital
gains tax if they are otherwise liable to income tax. It then turned
to the relevant income tax legislation and noted that a payment
will only be treated as a payment on termination of employment
(such that the £30,000 threshold would be available) if it is not
chargeable to income tax under any other provision of the relevant
income tax legislation.
Read the decision
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PM-Tax | Wednesday 22 October 2014
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>continued from previous page
PM-Tax | Cases
Substance (continued)
ING Intermediate Holdings Ltd v HMRC [2014] UKFTT 938 (TC)
The provision by a bank of a ‘no frills’ deposit account is a supply of services.
ING Intermediate Holdings Ltd (ING) was the representative
member of ING bank’s UK VAT Group. It was a UK company but had
Dutch companies (referred to as IDUK) within the VAT group. ING
claimed a repayment of input VAT amounting to over £6 million in
the period from 10/02 to 03/11. HMRC rejected the claims.
The Tribunal found that despite the receipt of a loan not being a
taxable supply, the provision of banking services requires more than
just a loan being provided and is therefore a supply. However,
although the parties accepted that providing a current account was
a supply of services, ING argued that providing a deposit account
was not, because ING had no walk in branches and the ways in
which depositors could access their funds were limited.
IDUK carried on a retail banking trade in the UK taking cash deposits
from private individuals. It invested the money in long term bonds
and securities and made profits by receiving a higher rate of interest
on its investments than it was required to pay to its depositors.
However the FTT found that IDUK made supplies of services to
depositors. The lack of branches was not relevant as ING had an
extensive internet platform and offered telephone services. Judge
Barbara Mosedale said that “This was more than a mere receipt of
loaned money by IDUK. Fundamentally, while the account could
not be operated in exactly the same way as a deposit account with
a ‘high street’ bank, it was very similar in essentials”.
The cost of taking deposits (and therefore the VAT incurred) was
substantially greater than the costs associated with IDUK’s
investment activities.
ING claimed that IDUK was making supplies within the meaning of
article 3(a) of the VAT (Input Tax) (Specified Supplies) Order 1999
when its investment arm invested in non-EU financial instruments.
ING argued that the VAT on services purchased by IDUK to support
its deposit taking activity in the UK (such as the marketing,
administration, IT services and property costs) were business
overheads and therefore under s 26(2)(c) VATA were recoverable in
part because IDUK made some specified supplies.
The FTT said that even though IDUK did not charge its depositors
any fees, IDUK’s supplies of deposit account facilities were made for
a consideration, the consideration being the customer depositing
the money. Judge Mosedale said that this was a contract of barter:
“The bank provides the deposit account facilities because the
customer deposits money with it; the customer deposits his money
with the bank because the bank provides him with the deposit
account facilities”.
IDUK argued that in taking deposits it was acquiring the funds to
use in its business and not making supplies – on the basis that
taking a loan was not a supply.
The FTT further decided that the loan was provided ‘for’ the banking
services (as well as the interest) as customers would not have
provided the non-cash consideration (the loan) without the bank
having provided the banking services. The FTT said that the value of
the supply of the bank’s services should be calculated by what the
bank was prepared to expend on making those services.
HMRC argued that the VAT on the costs which were incurred to
support the deposit taking activity were attributable to exempt
supplies of banking services and therefore irrecoverable, irrespective
of the question whether IDUK actually made any specified supplies
with respect to its investments or whether making those
investments amounted to an economic activity.
Accordingly, ING’s appeal failed because IDUK’s input tax, “even
though incurred with an eye to IDUK’s overall business, had a direct
and immediate link to the exempt supply by it of banking services.”
As IDUK made supplies to retail banking customers in the form of
banking services, the input VAT paid on the expenses was
attributable to the provision of exempt banking services and was
therefore not recoverable.
Comment
This case clarifies that the VAT position for those operating deposit
accounts online or by phone is no different to the traditional bank
or building society account operated by an institution with a high
street presence.
Read the decision
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PM-Tax | Wednesday 22 October 2014
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PM-Tax | Events
Events
Autumn Statement Breakfast Seminar
The seminars will be held at the following locations:
London
Pinsent Masons LLP
30 Crown Place
London, EC2A 4ES
(Directions here)
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. 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
8.30 – 10.00am Seminar
To attend please contact Marina Dell by clicking here.
Business Network seminars in London, Surrey,
Middlesex & Kent
Pinsent Masons Tax Investigations and Disputes team are pleased
to announce a series of seminars on current tax investigation issues
and VAT aimed at tax professionals, including accountants, tax
practitioners, solicitors and other intermediaries and advisers.
Each seminar will provide an update on recent developments in the
areas of tax investigations and VAT, and will include the following:
•VAT – “Top Tips” for owner-managed businesses
•An update on tax avoidance – to settle or wait?
•FATCA (Foreign Account Tax Compliance Act) – the implications
for clients and their advisers given the impending exchange of
information with HMRC
Monday
3 November 2014
12.45pm
until
5.30pm
Surrey
Tuesday
Sandown Park Racecourse 4 November 2014
Sandown Park,
Portsmouth Road
Esher, Surrey KT10 9AJ
(Directions here)
8.15am until
1.00pm
Middlesex
Grim’s Dyke Hotel
Old Redding,
Harrow Weald
Middlesex, HA3 6SH
(Directions here)
Wednesday
5 November 2014
8.15am until
1.00pm
Kent
Thursday
Marriott Tudor Park Hotel 6 November 2014
Ashford Road, Bearsted
Maidstone
Kent, ME14 4NQ
(Directions here)
8.15am until
1.00pm
For membership details of our Business Network, please email
[email protected]
Please find a link to the Seminar programme here.
To register please contact Marina Dell.
•An overview and update of HMRC’s offshore tax compliance strategy
Public Accounts Committee conference
Heather Self of Pinsent Masons has been asked to speak at a conference that the Public Accounts Committee (PAC) is holding in
London on Thursday 30 October on the impact of globalisation on taxation. The conference is being held to increase the PAC’s
understanding of the complex issues involved and provide an opportunity for key stakeholders to contribute to the debate. The PAC
says that the conference will influence the work that it will do for the remainder of the Parliament and the PAC plans to produce a
conference report which it can use to feed back its views and ideas to key policy makers. Heather will be part of a panel for a discussion
on Tax and Morality.
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PM-Tax | Wednesday 22 October 2014
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PM-Tax | People
People
Fiona Fernie
We speak to Fiona Fernie, who joined us this month as a Partner
(non-lawyer) and our new Head of Tax Investigations.
What’s your background?
I’m a chartered accountant (hence the ‘non-lawyer’ bit in my job
title). I’ve joined from BDO where I was part of the leadership of the
Tax Investigations team. I’ve spent the last 10 years of my career
focusing on complex disclosures with a range of high-profile non
domicile clients and corporates. Prior to BDO, I worked for PwC.
Why Pinsent Masons?
Pinsent Masons has one of the largest multidisciplinary Tax
practices of any international law firm and I am delighted to have
joined this award-winning team. Unusually for a law firm, Pinsent
Masons has a strong and growing tax investigations team. Tax
Director Paul Noble joined the firm last month and I am looking
forward to working with Paul and the rest of the team to build the
practice further. The team already has an enviable reputation and
strong brand which will give us an ideal launch pad to move
onwards and upwards!
What are the current issues in tax investigations?
New disclosure arrangements (sometimes termed “UK FATCA”)
agreed between the UK and its Crown Dependencies and Overseas
Territories, which come on stream between 2014 and 2016, mean
that it is even more important than ever for UK residents with
offshore assets that have not been declared to HMRC to get their
affairs in order. “Coming clean” now and sorting out your affairs, if
done with the help of our experienced team, can lead to significantly
reduced penalties and avoid the risk of criminal proceedings.
However, it is not just individuals that we advise. HMRC is taking an
increasingly aggressive approach and we are able to help corporate
clients to deal with a whole range of HMRC interventions from
business compliance reviews to full blown investigations – including
the tax implications of fraud. We also help Trustees to ensure that
the Trusts they administer are fully tax compliant and we can advise
them on their obligations regarding FATCA.
Tax professionals who may have clients affected by these issues
can attend our forthcoming seminars for more information.
What do you do outside of work?
I have a keen interest in interior design and have spent the last
couple of years gutting and refurbishing our house including
making most of the soft furnishings myself. I also play tennis
(badly), and golf (also badly)!
Fiona Fernie
Partner (Non-Lawyer)
T: +44 (0)20 7418 9589
E: [email protected]
CBI Great Business Debate
The CBI’s Great Business Debate campaign has started a spotlight
period focused on business and tax. Opinion & analysis pieces from
businesses and NGOs will be coming out daily on their website
over the next few weeks that might be of interest to you. If you are
on Twitter you can find them @bizdebate. The content includes a
factsheet, ‘mythbusters’, analysis pieces and opinion piece articles
from businesses including RwE Npower, BP, PwC, KPMG and
Pinsent Masons, as well as Oxfam and Christian Aid.
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
PM-Tax | Wednesday 22 October 2014
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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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