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PM-Tax
Wednesday 17 December 2014
News and Views from the Pinsent Masons Tax team
In this Issue
Our Comment
•Initial thoughts on diverted profits tax by Heather Self
•Autumn Statement: Compliance, enforcement and appeals – Examining the conspicuous absentees by James Bullock
2
•New capital gains tax charge for non-resident homeowners by Ray McCann
•Tax take from big business disputes up by 25% last year by Eloise Walker
Recent Articles
•When should tax legislation be interpreted literally? by Jake Landman
Our perspective on recent cases
Procedure
Clavis Liberty Fund 1 LP (acting through Mr D J Cowen) v HMRC [2014] UKFTT 1077 (TC)
9
11
Substance
Central Sussex College v HMRC [2014] UKFTT 1058 (TC)
Rio Tinto London LTD v HMRC [2014] UKFTT 1059 (TC)
Events
14
People
This is the last edition of PM-Tax for 2014. Our next edition will be published on 14 January 2015.
Season’s Greetings and best wishes for the New Year to all our readers
@PM_Tax
© Pinsent Masons LLP 2014
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PM-Tax | Our Comment
Initial thoughts on diverted profits tax
by Heather Self
Heather Self gives her initial thoughts on the new ‘diverted profits tax’ on multinationals now the
draft Finance Bill 2015 legislation has been published.
In his autumn statement on 3 December, the Chancellor of the
Exchequer announced a new tax on multinationals, to be called
‘diverted profits tax’. At that stage we had very little information
about how it would operate. We only knew that it would be
applied at a rate of 25% from 1 April 2015 and that it would be
aimed at multinationals which “use artificial arrangements to
divert profits overseas in order to avoid UK tax”. The draft Finance
Bill 2015 legislation now gives us the detail – 30 pages worth – as
well as a 50 page guidance note.
Diverted profits tax will apply to diverted profits arising on or after
1 April 2015 and the legislation will be included in the pre-election
Finance Bill in 2015. Affected companies must notify HMRC within
3 months of the end of an accounting period in which it is
reasonable to assume that diverted profits might arise.
My initial reaction is that the tax is probably not needed, will be
hard to apply and will raise little money. I am also concerned that
the taking of unilateral action by the UK may be counterproductive and could harm UK businesses in the long run if other
jurisdictions decide to follow suit.
The new 25% tax will apply in two circumstances: where a foreign
company “exploits the permanent establishment rules”; or where a
UK company or a foreign company with a UK-taxable presence
creates a tax advantage by using transactions or entities that “lack
economic substance”.
It is probably not needed because the UK’s existing general anti
abuse rule (GAAR) could be used to counteract artificial tax
avoidance by multinationals. The UK also has a vast amount of
other anti avoidance legislation, such as the transfer pricing rules
which could be used if excessive payments are being made to
overseas associated companies.
Where a non-UK resident company is carrying on activity in the UK
in connection with supplies of goods and services to UK customers
it will be subject to the new tax if it is reasonable to assume that
any of the activity is designed to ensure that the foreign company
is not carrying on a trade in the UK through a permanent
establishment and a tax avoidance condition or a ‘tax mismatch’
condition is satisfied.
The tax will be hard to calculate. It depends on an assessment of
what it would be just and reasonable to assume would be the
chargeable profits if there had been a UK permanent establishment
or in the second scenario, what would be the arm’s length price if
there had not been a ‘tax mismatch outcome’. So if the UK company
pays a royalty to an associated company located in a tax haven
which does not pay tax on the royalty, the calculation of the diverted
profits tax would depend upon an assessment of what would have
happened if the IP rights had not been held in the tax haven.
This is aimed at overseas companies which, although they may
perhaps have some presence in the UK, artificially organise their
affairs so that their UK presence does not constitute a permanent
establishment, which would bring their profits within the UK tax
net. Typically the activities which would bring a permanent
establishment into existence will be carried out by employees
based in a low tax jurisdiction, such as Ireland.
However, the worst aspect, in my view, is that by seeking to act
unilaterally the UK risks destroying the fragile balance of
international consensus which the Organisation for Economic
Co-operation and Development (OECD) has held together for so
long, and is continuing to try to do within its base erosion and
profit shifting (BEPS) project.
Small or medium-sized enterprises will not be subject to the tax
and there will be an exemption where total sales revenues from all
supplies of goods and services to UK customers do not exceed £10
million for a twelve month accounting period.
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. Last month the OECD published a
The second circumstance where the tax will apply is to
arrangements which “lack economic substance” involving entities
with an existing UK taxable presence. This is aimed at overseas
companies operating in the UK which divert profits to low tax
jurisdictions, typically by way of payments such as royalties.
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PM-Tax | Wednesday 17 December 2014
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PM-Tax | Our Comment
Initial thoughts on diverted profits tax (continued)
discussion draft considering the need to update the double tax
treaty definition of permanent establishment (PE) in order to
prevent artificial profit shifting. It is intended that the BEPS project
will conclude its work by the end of 2015 – so why rush in
unilateral rules?
We have already seen Australia comment that it might go for a
diverted profits tax itself – so we are already encouraging others to
act. How long before India comes up with its own definition of a
permanent establishment and applies it notwithstanding its Treaty
obligations?
Ironically the country which appears to be taking a more measured
approach is China, which has announced that it will
“comprehensively monitor the profit levels of foreign companies to
make sure there is no base erosion and profit shifting”.
Although this new tax sounded like George Osborne pulling a
rabbit out of a hat in the autumn statement, it has clearly been
thought about for a while. In particular, it seems to have been
carefully crafted so as not to fall foul of the UK’s treaties – though
there is bound to be a challenge from someone on this point.
What is less clear is why it has to be rushed in by 1 April 2015 –
unless it is because there is a General Election coming up in May.
Heather Self is a Partner (non-lawyer) 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 renewables.
E: [email protected]
T: +44 (0)161 662 8066
Heather Self has recorded a webinar for MBL on Base Erosion &
Profit Shifting in Cross-Border Tax. It is due to be streamed on
20 January 2015 but you can see a preview at
http://www.mblseminars.com/Home/outline?progid=5130.
We have some free subscriptions to the webinar for our clients so
please contact Catherine Robins if you would like one of these.
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PM-Tax | Wednesday 17 December 2014
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PM-Tax | Our Comment
Autumn Statement: Compliance, enforcement and
appeals – Examining the conspicuous absentees
by James Bullock
This comment appeared in Tax Journal on 6 December 2014
In an Autumn Statement which in general contained a lot more than had been expected, there was
probably less than had been expected in relation to compliance and enforcement. In fact, it was the
matters that were ‘conspicuous by their absence’ that are perhaps most worthy of comment.
The main items that had been anticipated were the postconsultation proposals in relation to the direct recovery of debt
(DRD), the principles of which had been announced in the Budget
in March and consulted on over the spring and early summer.
However, HMRC ‘jumped the gun’ by making an announcement on
24 November 2014 which ‘watered down’ the original proposals
significantly. In particular, new safeguards were announced,
including one which provides HMRC with a requirement (described
as an ‘opportunity’!) to meet and personally identify the debtor,
confirm it is their debt, explain to the debtor what they owe and
why they are being pursued – and discuss their proposals for
payment. Other provisions include options to resolve the debt,
including offering a ‘time to pay’ arrangement to the debtor and
identifying ‘vulnerable debtors’.
There was, however, something in relation to offshore evasion. The
HMRC consultation entitled Tackling offshore tax evasion:
Strengthening civil deterrents, which closed on 31 October 2014
was followed up with an announcement that, in advance of the
implementation of a new global standard for the automatic
exchange of financial information for tax purposes, the
government will increase the amount and scope of civil penalties
for offshore tax evasion. The existing offshore penalties regime will
be extended to include inheritance tax and will apply to domestic
offences where the proceeds are hidden offshore (these measures
will be introduced with effect from 1 April 2015). There will also be
a new aggravated penalty of up to a further 50% for moving
hidden funds to circumvent international tax transparency
agreements (with effect from royal assent of the next Finance Bill,
presumably on the dissolution of Parliament in March 2015). There
was also a reference to a review of ‘incentives’ for obtaining
information on offshore tax evaders – possibly further ‘amnesties’
or even (shock, horror!) financial incentives for ‘whistleblowers’?
However, it is difficult to see how this might work in practice when
the common reporting standard will lead to the release of the
identity of defaulters in any event.
In addition, the window for debtors to object to DRD has been
extended from 14 to 30 days, with funds being ‘frozen’ during this
period but not transferred to HMRC – and a right to appeal against
DRD to the County Court on specified grounds.
Given the level of objections to the original proposals (although
surprisingly the consultation elicited only 124 responses), it can at
least be said of HMRC that it ‘listened’ in relation to DRD – and the
revised proposals should be given a cautious welcome.
We were also promised (yet) more consultations next year on the
introduction of further deterrents for serial tax avoiders; penalties
for tax avoidance cases where the GAAR applies; and the
reinforcement of DOTAS by updating hallmarks, removing
‘grandfathering’ provisions for existing schemes. This is along with a
new ‘task force’ for policing the DOTAS regime – presumably in part
to address concerns that the accelerated payment rules applicable
to DOTAS arrangements might encourage nondisclosure.
The second conspicuous absentee was any further word on the
proposals for a strict liability offence in relation to tax evasion,
which were announced by the chancellor in a speech a few weeks
after the Budget and then the subject of a consultation which
closed on 31 October 2014. Revised proposals had been widely
expected in the Autumn Statement. It is entirely possible that
these may emerge over the next couple of weeks – or even in
January 2015. One might divine from the absence of this measure
that the results of the consultation were ‘negative’, particularly
with regard to safeguards – as one assumes they were in relation to
DRD. It is also fair to say that it is now unlikely that the new
offence will be enacted in the course of the current parliament,
given that revised proposals (probably with further limited
consultation) followed by draft legislation will need to be
published first.
A figure of £5bn was mentioned in the chancellor’s speech as being
recoverable from ‘measures tacking avoidance and evasion’ – and
one assumes that a portion of this is what the proposed measures
will be expected to bring in. Again, we can expect them ahead of
the Budget in March 2015 – having regard to the fact that
Parliament will be dissolved shortly afterwards. Any ‘firm’
proposals and draft legislation will not be expected until after the
next Parliament convenes in May 2015.
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PM-Tax | Wednesday 17 December 2014
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PM-Tax | Our Comment
Autumn Statement: Compliance, enforcement and appeals (continued)
Finally, a rare very positive move which will be welcomed both by
HMRC and (sensible) taxpayers. It has long been a bugbear of
those trying to resolve disputes that it is extraordinarily difficult to
litigate a disputed aspect of a self-assessment return whilst other
aspects remain ‘open’ and under enquiry. It can lead to delays
running on for years. The current cumbersome process (requiring
both parties’ consent) for the referral of a single issue to the
tribunal has never worked in practice. Buried in the small print is a
proposal to consult on giving HMRC the power to close one aspect
of an enquiry whilst leaving others open. Provided that this is
backed by a commensurate provision enabling taxpayers to apply
to the tribunal for a direction that HMRC should issue a closure
notice in relation to a single aspect, this is a very welcome measure
which will speed up the resolution of disputes. One hopes it will
help to clear the current unacceptable backlog of open enquiries. It
might, however, mean that the tribunals become even busier than
is currently envisaged as a result of accelerated payment notices
etc. and the impact of HMRC’s litigation and settlement strategy.
James Bullock is Head of our Litigation and
Compliance Group. He is one of the UK’s
leading tax practitioners and has been
recognised as such in the leading legal
directories for many years. James has over
twenty years of experience advising in relation
to large and complex disputes with HMRC for
large corporates and high net worth
individuals, including in particular leading
negotiations and handling tax litigation at all
levels from the Tax Tribunal to the Supreme
Court and Court of Justice of the European
Union.
E: [email protected]
T: +44 (0)20 7054 2726
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PM-Tax | Our Comment
New capital gains tax charge for
non-resident homeowners
by Ray McCann
Non-resident UK homeowners who have spent less than 90 days in their UK property in the previous
tax year will be liable to pay capital gains tax (CGT) on any gains when they sell that property from
next year, the government has confirmed.
The new regime is intended to address the “significant unfairness”
within the existing regime under which UK residents are charged
CGT on the sale of a residential property that is not their main
home but non-residents are not, said financial secretary David
Gauke in the government’s response to its consultation on the
plans. The change, which is due to take effect in April 2015, will
bring the UK into line with many other countries around the world
that charge CGT on the basis of where a property is located.
high-value residential properties held by companies and other
non-natural persons. Dwellings purchased as part of a genuine
property rental business, held for charitable purposes or run as a
commercial business are exempt from the ATED.
None of these exemptions will apply to the new CGT charge, which
will affect disposals of UK residential property by a non-resident
individual or trustee, personal representatives of a non-resident
deceased person and some non-resident companies. It will
generally not apply to “communal residential property”, such as
boarding schools and nursing homes. Originally, the government
had proposed including residential accommodation for students
within the charge, unless it was part of a hall of residence.
However, following responses received during the consultation, the
government has decided to exclude all purpose built student
accommodation.
However, many will consider that what is proposed puts seeming
fairness ahead of practical application of tax rules and will add
greater complexity to the Tax Code whilst not materially increasing
tax yield. All in all, there is a distinct feel of change for change’s
sake in what is proposed.
Of particular concern is the inevitable need to introduce new
reporting and payment requirements, although the full details of
the new procedures are still to be provided. These changes will
make the taxation of UK real property even more complex than it
is at present with a patchwork of different rules applying for CGT,
SDLT, income tax and ATED, all of which will be potentially payable
by taxpayers who are unfamiliar with UK tax rules and so likely to
incur greater costs of compliance or fail to comply with the rules in
many cases through ignorance.
CGT for non-UK residents will be charged in line with existing UK
CGT rates and the annual exempt amount will also be available for
individuals. Those taxpayers with an “existing relationship” with
HMRC will be able to pay the charge as part of their existing
self-assessment process. The tax will only apply to gains made
above market values from 5 April 2015, when the new charge
comes into force.
The government announced its intention to include gains made by
non-UK residents disposing of UK residential properties within the
scope of CGT as part of the 2013 Autumn Statement. UK resident
individuals are currently subject to CGT on gains made on
residential property provided that the property is not their
principal private residence (PPR) or, if they own more than one
property, the one nominated as their main residence. CGT is
payable at 18% for basic rate taxpayers and 28% for higher and
additional rate taxpayers.
One significant change that the government has made to the
proposed regime since the initial proposal was published is
designed to ensure that “diversely held institutional investors” are
not subject to the charge. A “narrowly controlled company test”,
alongside a genuine diversity of ownership test, will ensure that
disposals made by non-resident individuals and “closely connected
parties” will be subject to CGT but that most disposals made by
institutional investors will not be.
The exemption from the charge for fund investors is welcome and
is in line with statements made by the government earlier in the
year. However, although the intention of the fund exemption is to
bring only family investment vehicles into the charge, there look to
be situations where certain corporate joint ventures could also be
caught by the charge.
In April 2013, the government introduced a CGT charge on
residential properties held through companies. Under the charge,
CGT is payable at 28% in respect of gains accruing on the disposal
of interests in high value residential property that is subject to the
annual tax on enveloped dwellings (ATED). ATED was also
introduced in April 2013, and is currently payable in respect of
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PM-Tax | Our Comment
New capital gains tax charge for non-resident homeowners (continued)
The government had also suggested abolishing the ability of UK
residents with an additional home outside the UK to elect for their
UK property to be treated as their PPR for the purposes of the CGT
exemption. Following the consultation, the government is now
proposing that both UK resident and non-UK resident taxpayers
will be prevented from designating a UK property as a PPR “unless
they have resided in the property for at least 90 midnights in the
property in that year”. Access to PPR will also be available for
trusts if the beneficiary is non-UK resident on the same basis.
Ray McCann is a Partner (non-lawyer) leading
our private wealth tax practice and also
advises corporate clients on a range of
advisory and HMRC related issues, especially
in relation to tax planning disputes. Until
2006, Ray was a senior HMRC Inspector where
he held a number of high profile investigation
and policy roles including, work on cross
border tax avoidance issues with tax
authorities in the US, Australia and Canada. In
2004, Ray was responsible for the
introduction of the “DOTAS” rules.
E: [email protected]
T: +44 (0)20 7054 2715
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PM-Tax | Our Comment
Tax take from big business disputes
up by 25% last year
by Eloise Walker
The amount of additional tax collected from the UK’s largest businesses as a result of investigations
and compliance work by HM Revenue and Customs (HMRC) increased by 25% last year, according to
figures obtained by Pinsent Masons.
The Large Business Service (LBS), which looks after the tax affairs
of the UK’s largest and most complex businesses, collected £4
billion that would otherwise have gone unpaid in the tax year
ending 31 March 2014, up from £3.2bn in the previous year. The
increase came despite the steady reduction in corporation tax since
2010 to its current rate of 21%, ahead of a final cut to 20% from
April 2015.
Additional corporation tax take from HMRC’s tax enquiries
into large businesses*
4.5
4
£billion
The increased level of activity by the LBS was part of HMRC’s
on-going efforts to block tax avoidance and increase tax yields
through more intensive site visits and investigations.
Controversy has raged over whether some UK-based subsidiaries of
large US corporations have underpaid their corporation tax by
carefully arranging where their revenues and costs are assigned
across their businesses.
£4bn
3.5
£3.4bn
£3.2bn
3
2.5
2
HMRC is very conscious of the public perception, however
misguided that might be, that big companies get away with
underpaying corporation tax and HMRC is keen to disprove that
and show that it is doing its job.
2011-12
2012-13
2013-14
* Figures in graph have been rounded up.
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
funds. Her areas of expertise also include
structured leasing transactions, where she
enjoys finding commercial solutions to the
challenges facing the players in today’s market
The relationship between HMRC and large businesses is changing
as a result of HMRC’s more aggressive approach. Instead of a good
working relationship between the two with regular meetings
between an HMRC customer relationship manager and the
company’s head of tax, HMRC is now sending out larger teams of
inspectors to interview the chief financial officer and directors.
Corporation tax rates have been reduced each year since 2010,
when they stood at 28%, to 21% this year. They will be cut to 20%
next year. However, this reduction in the corporation tax rate
appears not to have led to any decline in the take from enquiries
into large businesses.
E: [email protected]
T: +44 (0)20 7490 6169
HMRC is also beginning to target smaller firms for more intensive
enquiries following the impressive results of its investigations into
large businesses. Mid-tier firms need to take note and ensure they
have their houses in order.
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PM-Tax | Recent Articles
When should tax legislation be
interpreted literally?
by Jake Landman
This article was first published on Lexis®PSL Tax on 21 November 2014
How will the courts approach tax planning arrangements? Jake Landman says a recent ruling is an
example of how the courts will treat arrangements that rely on a literal interpretation of, and/or
deeming provisions in, the relevant legislation.
Original news
Vocalspruce Ltd v Revenue and Customs Commissioners [2014]
EWCA Civ 1302, [2014] All ER (D) 34 (Nov)
The Court of Appeal found in favour of the taxpayer on issue one
by a 2:1 majority. This was not sufficient for the taxpayer to
succeed, however, as the Court of Appeal found unanimously in
HMRC’s favour on issue two.
The Revenue and Customs Commissioners issued a notice of
amendment in relation to the taxpayer’s corporation tax return, the
effect of which was to increase the taxpayer’s taxable profits. Both
the First-tier Tribunal (FTT) and Upper Tribunal (Tax and Chancery
Chamber) (UT) dismissed the taxpayer’s appeal on the issue of
construction of the Finance Act 1996, s 84(2)(a) (FA 1996). The
Court of Appeal, Civil Division, held that, on a straightforward
reading of FA 1996, s 84(2)(a), the amount required to be transferred
to the share premium account was not within the expression ‘profits
or gains’ arising from either the loan relationship or the related
transaction. The tribunals had erred in their construction of FA 1996,
s 84(2)(a). However, the appeal was dismissed as, pursuant to FA
1996, Sch 9, para 12 as it applied to the present case, there had been
nothing for s 84(2)(a) to have bitten on.
How did the Court of Appeal’s decision differ from the UT and
FTT decisions which also dismissed Vocalspruce’s argument?
The result was the same – HMRC succeeded. However, the
reasoning of the Court of Appeal differed. The FTT and UT had
found in HMRC’s favour on issue one but in the taxpayer’s favour
on issue two.
Given this decision relates to certain loan relationship rules that
have since been amended, is this decision still relevant now?
Other corporates are said to have implemented similar
arrangements prior to the amendment of the legislation. HMRC
has deferred progressing challenges of those arrangements
pending this decision. It will therefore be of relevance to those
challenges unless successfully appealed.
What did the Court of Appeal decide in the Vocalspruce case?
The dispute arose from a marketed tax avoidance scheme. The
taxpayer implemented an arrangement which attempted to
remove accrued profit on loan notes from a tax charge on the basis
the loan notes in question were assigned for shares, and the
assignee transferred the profit on the loan notes to a share
premium account.
Beyond this, the decision is a further example as to how the courts
will approach tax planning arrangements which rely on a literal
interpretation of, and/or deeming provisions in, the legislation.
What does this decision tell us about interpreting tax law and
deeming rules?
The majority of the Court of Appeal applied a literal interpretation
of the legislation in the taxpayers’ favour (ie there was clearly a
transfer to a share premium account). Although HMRC has been
successful in arguing for a purposive approach, it should be
remembered that there remain pieces of legislation which must be
applied literally where the situation clearly engages them.
HMRC had two grounds of challenge:
•that the taxpayer (Vocalspruce) could not, in the circumstances
of the case, rely on (what was at the relevant time) FA 1996,
s 84(2) which normally excludes from charge profits which are
transferred to the share premium account (issue one), or, in the
alternative
•the related transaction provisions under FA 1996, Sch 9, para 12
applied with the effect that it was necessary to disregard the
relevant share issue (and therefore the subsequent transfer to the
share premium account) – once disregarded in this way, the profit
was taxable(issue two).
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PM-Tax | Recent Articles
When should tax legislation be interpreted literally? (continued)
Regarding the application of deeming provisions, the court
employed the same approach as has been seen in other cases –
such as DCC Holdings Ltd v HMRC [2010] UKSC 58, [2011] 1 All ER
537 – namely that ‘one must treat as real the inevitable
consequences flowing from the deemed state of affairs’. So, if one
applies deeming provisions so as to disregard an acquisition, one
must also follow this to its logical conclusion and also disregard
transactions which would not have occurred but for that
acquisition (ie in this case, the issue of shares as consideration).
Do you think Vocalspruce is likely to apply for permission to
appeal to the Supreme Court?
The taxpayer may apply for permission to appeal for the Supreme
Court. However, it may be difficult to secure permission on the
basis that:
•the Supreme Court is often reluctant to consider tax cases
•the legislation in question has since been amended
•the Supreme Court may consider it has given sufficient guidance
on the taxing of loan relationships and the proper application of
deeming provisions in the DCC Holdings case.
Jake Landman is an associate in our tax team.
He advises individuals and corporates on
resolving disputes with HMRC in all aspects of
direct and indirect tax. His cases often have an
EU law basis.
E: jake.landman@ pinsentmasons.com
T: +44 (0)20 7054 2572
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PM-Tax |PM-Tax
Our Comment
| Cases
Procedure
Clavis Liberty Fund 1 LP (acting through Mr D J Cowen) v HMRC [2014] UKFTT 1077 (TC)
Witness summons set aside for failure of duty of full disclosure to the Tribunal.
This case concerned witness summonses for two directors of Clavis
Liberty 1 GP Ltd which was the general partner of Clavis Liberty
Fund 1 LP. The directors were both Jersey residents. The FTT refused
the application for witness summonses on the grounds that it had
no jurisdiction to summons persons from outside the UK.
However, Judge Mosedale did accept the directors’ argument that
the appellants had misled the FTT in stating that the directors had
refused to give evidence. At the first hearing no documents had
been produced but letters were now produced to the FTT showing
that the directors were still corresponding with the appellants and
had raised questions that the appellants had not answered. The
judge was satisfied that she would not have granted the
summonses if she had seen the letters and she set aside the
summonses on the grounds of failure of duty of full disclosure.
The application for the witness summonses was then renewed on
the grounds that it could be served on the two potential witnesses
at the London business address of a company of which they were
both directors and which Clavis said they attended on a regular
basis. The FTT was told that the directors would not give evidence
unless they were compelled to do so. Judge Barbara Mosedale
agreed to the summonses on this basis and they were issued
addressed to the directors at the London address. The directors then
applied for the witness summonses to be set aside, arguing that the
FTT did not have the power to summons them and claiming that
they were only occasionally in the UK.
Judge Mosedale said “The Tribunal is not here to punish parties for
their failure to abide by the rules of tribunal; it is here to do justice.
Nevertheless, in order to do justice, the Tribunal may need to
impose sanction on parties who have failed to respect the Tribunal’s
rules and directions, even to the extent on occasion of actually
striking out or barring a party. An applicant in this tribunal in a
without notice hearing who fails to give full and frank disclosure to
the Tribunal must expect that there is a real risk that any order
obtained by that means will be discharged; that sanction is
necessary to prevent a failure of justice.”
Judge Mosedale said that the FTT had power to summons a person
who is not resident in the UK, but present here temporarily. She
dismissed the directors’ claims that the witness summonses would
encroach upon the sovereignty of Jersey by requiring the directors
to give evidence about what they did in Jersey. Judge Mosedale said
the individuals were the directors of the general partner of a
partnership which submitted a UK tax return and claimed losses in
it – and even if events occurred in Jersey they related to the
availability of UK tax reliefs. Judge Mosedale said that it was not
necessary to show exceptional circumstances to justify the issue of
a witness summons to a visitor to the UK in this case.
Comment
The case is interesting for its observations on the FTT’s powers in
relation to witness statements. It also emphasises the importance
of full disclosure of the facts to the FTT and shows that the FTT will
not hesitate to set aside an order which is improperly obtained.
Read the decision
Judge Mosedale also dismissed the directors’ claim that the
appropriate way to request evidence from a non-resident is by
Letter of Request. Letters of Request require a foreign court to take
a deposition from a person within its jurisdiction for use in
proceedings in front of the requesting court. However, Judge
Mosedale said that the FTT did not have power to issue Letters of
Request. She said that the only courts with power to do so are the
High Court, and any court or tribunal which has been given the
same powers as those of the High Court.
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PM-Tax
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| Our| Our
Comment
Cases
Substance
Central Sussex College v HMRC [2014] UKFTT 1058 (TC)
A replacement building constructed in phases and temporarily linked to the original building via a
covered walkway did not qualify for VAT zero rating.
A college redeveloped its campus in three phases. It wished
retrospectively to issue a zero-rating certificate for the
construction work. HMRC refused to allow it to do so on the basis
that the construction services were not supplied “in the course of
construction of a building” within the meaning of item 2, Group 5,
Schedule 8, VATA. The construction of an enlargement or extension
to an existing building does not qualify for zero rating.
HMRC argued that the college had constructed a new academic
wing immediately adjacent to, and physically connected via the
enclosed walkway with, the original main building and that this was
an extension to the original main college building, meaning that the
construction services were outside the scope of zero-rating.
The FTT found that zero rating was not available for the phase 1
and 2 works as when they were completed it could not be said with
certainty that the phase 3 works would go ahead and that neither
the functioning of the original main college building, nor the
function of the new buildings constructed in phases 1 and 2 was
contingent on the phase 3 works being carried out. It decided that
the phase 3 works did not qualify either as they were an extension
to the phase 2 and 3 works. The FTT said that whilst the Hoylake
case may be correct on its facts, it was not persuaded that the
reasoning in that case should mean that in this case zero rating
should be available.
Phases 1 and 2 were completed at similar times but there was a
delay between those phases and phase 3, because of funding
difficulties. The college still operated while the construction works
were undertaken and the original college buildings remained and
were due to be demolished after the completion of phase 3. A
covered walkway was constructed linking phases 1 and 2 to the
original buildings, as it was realised just before construction work
began on phase 3, that otherwise students would have to walk all
the way round the site whilst the construction was taking place.
The college argued that the works involved the construction of a
new building in three phases. It argued that there was nothing
significant in the fact that the original existing building remained in
place, and was used during the period of construction or that a
temporary walkway was constructed.
Comment
This is a harsh decision for the college but it shows the difficulties
of getting zero rating when a replacement building is constructed
in phases and when the site continues to be used throughout the
building works. It emphasises the importance of thinking about
VAT early on and whenever circumstances alter (eg when the
covered walkway was first mooted).
The college cited the FTT decision in Hoylake Cottage Hospital
Charitable Trust v HMRC where the construction of the main body
of a hospital was completed over two years before commencement
of work on construction of a new kitchen and laundry block. The
FTT found that the delay was not unreasonable in all the
circumstances and that there was a sufficient temporal connection
between the construction of the main body of the hospital and the
services of construction of the new kitchen and laundry block to
permit the services to be zero rated.
Read the decision
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PM-Tax | Our Cases
Substance (continued)
Rio Tinto London LTD v HMRC [2014] UKFTT 1059 (TC)
A change of opinion on correct VAT treatment was not a “decrease in consideration” enabling a
regulation 38 VAT reclaim.
Rio Tinto London (RTL) supplied investment management services
and administration and general fund management services to the
Trustees of Rio Tinto pension funds established for the benefit of
Rio Tinto employees. RTL had charged VAT to the funds in respect
of pension investment costs. However it claimed that about 30%
of these costs were administration costs incurred by RTL which
should not carry VAT when recharged to the fund – in accordance
with HMRC guidance in Notice 700/17. RTL made a price
adjustment of £7.15 million and issued a credit note to the pension
fund. RTL said that the adjustment was a “decrease in
consideration” for the purposes of regulation 38 Value Added Tax
Regulations 1995. A Fleming claim under regulation 38 enabled an
adjustment to go back to 1973.
In this case the FTT found that there had been no change in
circumstance and there had been no event which led the parties to
think that the original (net of VAT) consideration was either
wrongly calculated or should be reduced. The FTT pointed out that
over a period of approximately 37 years no queries had been raised
and no dissatisfaction with the level of charges was expressed by
the fund. The FTT described the “price adjustment” as “simply an
artificial mechanism used by the Appellant effectively to procure a
VAT credit of £1,064,893 and resulted in the Fund receiving a
“windfall” benefit of £6,085,107 for no apparent reason other than
to procure this credit”. The FTT said that the price adjustment in
this case was not a decrease in consideration for the purposes of
regulation 38. It said that the appropriate mechanism for
reclaiming overpaid VAT is a claim under section 80 VATA, not
under regulation 38.
HMRC said that the commercial and economic reality of the price
adjustment was that it was not a decrease in consideration. It said
that the only element of over-charge related to VAT – the correct
services had been supplied for the correct consideration but it was
now considered that VAT should have been accounted for differently.
Comment
This attempt to get round the four year section 80 time limit
failed. Note that HMRC published Briefs 43 and 44 of 2014, last
month, setting out its revised policy on VAT and pension fund
management services. See the article by Darren Mellor-Clark in the
last PM-Tax for details of the briefs and his previous article on VAT
treatment of price adjustments.
The FTT said that a valid regulation 38 decrease in consideration
could occur where a price adjustment took place after the supply
had been made, was not provided for in, or arose from a breach of
the terms of, the original agreement for the supply, and was
voluntary or agreed between the parties. However, it said that
there had to be some change in circumstance or the occurrence of
an event (other than a mere change in view of the correct VAT
treatment of the supply) after the supply had been made which led
or obliged the supplier to consider that the original invoiced
consideration should be altered.
Read the decision
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PM-Tax | Wednesday 17 December 2014
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PM-Tax | Events
Events
West Midlands Tax Dinner
We are holding a dinner on 15 January for West Midlands based tax directors. Our guest speaker will be Shabana Mahmood, Shadow
Exchequer Secretary and MP for Birmingham Ladywood. Shabana will give an insider’s perspective on the Labour party’s tax policies for
business, just six months before the General Election.
If you are a West Midlands based tax director and would like to be invited to future West Midlands based events please contact Linda
Doyle by clicking here.
Share Plans Studies Group
Our share plans studies group provides companies that operate share plans with an opportunity to swap experiences on recent
developments. Pinsent Masons hosts the meetings and provides attendees with information in the form of updates and /or practical
experience as the basis for a wider discussion. It is not a “selling” meeting. It is a discussion group intended to facilitate an exchange of
views and the dissemination of information and best practice.
Our next sessions will be taking place in January. Topics that we anticipate including on the January 2015 agenda are:
•Directors’ remuneration in AGM season 2015: GC100, IMA, BIS and NAPF views and revised Corporate Governance Code
•Hot topic: malus and clawback in long-term incentive and annual bonus plans
•Hot topic: post-vesting holding periods and share ownership guidelines
•HMRC Update: to include developments following the Autumn Statement
•International Update: latest developments from around the world and forthcoming changes
Dates:
London - Wednesday 14 January 2015
Leeds - Thursday 15 January 2015
Manchester - Wednesday 21 January 2015
Edinburgh - Thursday 22 January 2015
Birmingham - Tuesday 27 January 2015
If you are responsible for share plans in your company and are interested in attending please contact Lisa Brook.
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PM-Tax | Wednesday 17 December 2014
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PM-Tax | People
People
Autumn statement breakfast event
The morning after the Chancellor’s Autumn statement we held a
breakfast seminar to discuss the key developments. The event was
chaired by Mike Truman, editor of Taxation magazine. As usual at
our post Autumn Statement or Budget events, our panel of Pinsent
Masons tax partners highlighted the key announcements in their
specialist areas.
James Bullock then discussed the announcements relating to tax
disputes and HMRC powers. He highlighted an important change
the government is considering relating to closure notices. Whilst
billed as a measure to help HMRC resolve disputes more easily by
allowing them to close down an enquiry on one issue, whilst
leaving the remainder of the enquiry open, it should also be of
assistance to taxpayers.
After an introduction by Mike Truman, Ray McCann outlined the
changes affecting individuals – in particular the changes to stamp
duty land tax and the changes to the remittance basis. Fiona Fernie
discussed the changes affecting investigations and enquiries,
pointing out that we have not heard about the outcome to the
strict liability offence for offshore evasion. There was some
discussion amongst the panel members as to how likely it will be
that the offence will ever reach the statute book – with Ray taking
the view that it will not do so, but other panel members not being
quite so bullish!
Fresh from her appearance that morning on BBC Radio 4’s ‘Today’
programme, Heather Self discussed the newly announced ‘diverted
profits’ tax. Heather pointed out that the tax was estimated to
raise around £1 billion and suggested that it would probably turn
out to apply to very few. She pointed out that the UK already has a
considerable amount of anti avoidance legislation. Heather
suggested that one of the risks of the UK taking unilateral action,
rather than waiting for an OECD brokered solution was that UK
businesses could be harmed if other jurisdictions took retaliatory
action and introduced their own provisions. She also discussed the
big revenue raiser of the autumn statement – the restriction on the
use by the banks of past losses – pointing out that the definition of
‘bank’ is wider than might be expected.
After some questions and contributions to the discussion from the
attendees, James Bullock finished by making a few observations
about parliamentary procedure. Since the election will take place
on 7 May, Parliament will be dissolved on 30 March 2014. This
means that a pre-election budget will have to take place in early
March or, perhaps, late February, in order to allow time for a
truncated pre-election finance bill to be rushed through before
parliament is dissolved. Whoever wins the next election, there is
then likely to be an emergency budget and a further finance bill.
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 17 December 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.
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