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PM-Tax
Wednesday 11 March 2015
Special edition focusing on issues on the horizon for UK corporates
In this Issue
Our Comment
•Introduction and reflections on the Budget and General Election by James Bullock
•Increased HMRC powers by Jason Collins
2
•Where next for BEPS? by Heather Self
•Possible restrictions on interest relief by Eloise Walker
•State aid investigations into tax rulings by Stuart Walsh
•Real estate: the year ahead by John Christian
•VAT predictions for the budget? A dangerous game... by Darren Mellor-Clark
•Penalties: HMRC’s new tougher stance by Fiona Fernie
•Key issues for employee share plans and management incentives by Matthew Findley
•Devolved taxes by Karen Davidson
•UK oil and gas by Tom Cartwright
Our perspective on recent cases
Spritebeam Ltd and Prowting Ltd v HMRC; HMRC v Versteegh [2015] UKUT 75 (TCC)
Tower Radio Limited and another v HMRC [2015] UKUT 0060 (TCC)
16
Terrace Hill (Berkeley) Ltd v HMRC [2015] UKFTT 0075 (TC)
Scots Atlantic Management Ltd (in liquidation) & Another v HMRC [2015] UKUT 0066 (TCC)
Events
21
People
22
NEXT
@PM_Tax
© Pinsent Masons LLP 2015
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PM-Tax | Our Comment
Introduction and
reflections on the
Budget and General
Election
by James Bullock
Welcome to this special edition of PM-Tax focusing on the tax issues that are on the horizon for
UK corporates.
The last two months have seen perhaps unprecedented focus on
tax – even by the standards of the Parliament that is about to end.
The Public Accounts Committee hearing on 11 February was
undoubtedly the most gruelling ever faced by a Chief Executive of
HMRC, whilst revelations (effectively known about for many years)
about ‘secret’ Swiss bank accounts and the involvement of banks in
setting them up created a fresh wave of media frenzy demanding
little short of ‘blood’ from anyone suspected of tax evasion. It was
shortly followed by the now almost inevitable announcement of
(yet) another proposed criminal offence – this time aimed at
corporates and institutions that facilitate tax evasion. However, at
the time of writing it is not clear if this will emerge in some form as
a proposal for consultation in the Budget on 18 March – or in the
Liberal Democrats’ election manifesto.
there will have to be another negotiated ‘Coalition Agreement’
which would be likely to result in different priorities and policies
for the next five years – and this is likely to require an ‘Emergency
Budget’ and a further Finance Bill to be presented in June. A
straight Conservative government – ruling with or without a
majority – would doubtless want to present its own platform
unencumbered by the Liberal Democrats, particularly if it is ruling
as a minority government and in such circumstances will be
anticipating another General Election potentially within a year.
Any form of Labour-led government will lead to radical change for
businesses and individuals alike. A straight coalition between
Labour and the Liberal Democrats (which again seems somewhat
improbable on the basis of likely electoral numbers) would present
a very interesting scenario given how influential the Liberal
Democrats (and the Chief Secretary to the Treasury in particular)
have been on economic policy in the present Parliament. A
Labour-led coalition involving the Scottish Nationalists, potentially
Plaid Cymru, a ‘token’ Green – or all of the above plus the Liberal
Democrats – could present some very interesting scenarios indeed,
including a radically different taxation regime for Scotland – and
potentially Wales and Northern Ireland as well. We would expect
to see the effects of this starting to emerge in what would be a
very substantive and significant Emergency Budget in June. It is
almost impossible to predict, in such a scenario, how much of what
is currently ‘in the pipeline’ would remain.
Full marks to the Treasury ministers for creating a certain amount
of ‘suspense’ about what might emerge in the Budget. I – for one –
wrote it off a long time ago as a ‘non-event’. After all, Parliament
will only have just over a week to consider it (and pass the Finance
Bill) before it is prorogued on 30 March. The draft Finance Bill
legislation was published in December 2014 – but it is not clear
how much of this legislation will make it into the pre-election
Finance Bill. The Diverted Profits Tax will be the ‘signature’ feature
of this first bill which will by the end of this month become the
Finance Act 2015. A feature of the Coalition government has been
that proposals are first published, then consulted upon, then
re-published in more concrete format, sometimes consulted on
again – and then finally the draft legislation is published in draft
(again for consultation) before being included in the Finance Bill
and enacted. So any number of the measures announced over the
past eighteen months (including the ‘strict liability’ criminal
offence) might emerge at a different stage of their gestation. It will
be interesting to see how many genuinely ‘new’ ideas emerge
following the Budget at the first stage for consultation.
This will be the most unpredictable General Election since February
1974. And even then the only feasible Coalition partner for either of
the main parties was the then Liberal Party. (Historians will recall
that the Liberal Leader, Jeremy Thorpe declined the invitation of
Prime Minister Edward Heath to join a Conservative-led coalition,
resulting in Harold Wilson returning for a second term as Prime
Minister to head a Labour Minority government). Within eight
months there had been a second –slightly more predictable –
General Election which resulted in Labour winning an overall
majority of three seats. In the context of the time that was seen as
an unfeasibly narrow majority. 41 years on I suspect either of the
main parties would be ecstatic at such a clear result!
And of course we will be back here again, probably in early June.
Even in the event that the government that emerges is another
coalition between the Conservatives and Liberal Democrats (which
at the moment seems somewhat unlikely for a number of reasons)
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PM-Tax | Wednesday 11 March 2015
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PM-Tax | Our Comment
Introduction and reflections on the Budget and General Election (continued)
Perhaps only one thing is clear. Whatever the government looks
like on the morning of Friday, 8 May (or, more likely, what emerges
the following week), it will urgently need more money. And first in
line to ‘pay up’ will be ‘people engaging in tax avoidance and tax
evasion’ (which these days covers a multitude of sins). Whoever
wins, one thing is absolutely certain. In terms of the war on
compliance and enforcement, to quote President Ronald Reagan –
“You ain’t seen nothin’ yet!”
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
Increased HMRC powers
by Jason Collins
Jason Collins comments on recent increases in HMRC powers.
HMRC has been a victim of election fever in recent weeks –
receiving a lot of largely unfair criticism about how effectively it
has pursued tax avoidance and evasion, and is operating under the
threat of a formal review if Labour win power.
The danger with adding to what are already controversial powers is
that taxpayers are less inclined to enter into any kind of dispute
with HMRC because they fear becoming embroiled in a system
which is stacked against them. Large corporates are perhaps the
most sensitive to this. It cannot be good if the UK becomes seen as
a country where an assessment to tax made by HMRC is not seen
as worth challenging regardless of merit. HMRC should really
pause for breath to see how its new powers are working and not be
drawn into the electioneering.
But many taxpayers’ recent experience will be of an organisation
with its tail up and an incredibly aggressive stance. HMRC has
issued around £1 billion of accelerated payment notices so far
against users of DOTAS-registered schemes, about £185 million of
which have been settled to date. New legislation to monitor
promoters has come into force and the first pre-conduct notice
letters are being sent out to promoters.
Jason Collins is our Head of Tax. He is one of
the leading tax practitioners in the UK
specialising in handling any form of complex
dispute with HMRC in all aspects of direct tax
and VAT, resolving the dispute through
structured negotiation and formal mediation.
Where necessary, he also handles litigation
before the Tax Tribunal and all the way
through to the European Court – with a
particular expertise in class actions and Group
Litigation Orders.
We are also seeing a clear change in strategy by HMRC involving
greater direct engagement with users of schemes, rather than the
promoters, particularly through their wallet. Direct engagement
has made many taxpayers question for the first time what they
have been involved in, and HMRC will have seen a change in
attitude as many decide they want “out” or to settle.
Despite this, HMRC continues to seek new powers, including
targeting users of multiple schemes and having a unilateral power
to litigate issues without closing down an enquiry. The risk HMRC
now runs is that many taxpayers who may have been driven by
conscience to settle begin to feel they are being victimised and
treated unfairly. We have been surprised by how many people have
wanted to join the judicial review we launched against the first
payment notices issued by HMRC to Ingenious partners, often
saying they are driven to act for fear that the rule of law is being
whittled away.
E: [email protected]
T: +44 (0)20 7054 2727
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PM-Tax | Our Comment
Where next for BEPS?
by Heather Self
Heather Self considers where the OECD’s BEPS project has got to and the changes to the UK tax system
that are likely to be made as a result.
The OECD’s base erosion and profit shifting (BEPS) project is
proceeding rapidly towards its scheduled conclusion at the end of
2015. So far, the OECD project team have done a remarkable job of
keeping matters on track, and are to be particularly congratulated
for the quality of their communications (including some excellent
web-based updates). However, the closer we get to the deadline,
the more there is a risk that some key issues will be rushed in the
pressure to reach a “grand bargain” and announce the successful
completion of the project. The impending UK General Election adds
an extra complication, since much of the drafting of the report due
out in October 2015 is likely to take part during the pre-election
“purdah” period, when it will be difficult for UK officials to
participate fully in discussions.
tendency to recharacterise transactions, lead to increases in
compliance costs and risks of double taxation.
A number of the actions have now progressed to the status of clear
recommendations. For example, a detailed paper has been
produced on measures to combat the use of hybrid instruments
and entities, and the UK has already held a consultation period to
inform the design of UK legislation in this area. The policy
recommendation is clear (countries should act together to restrict
the tax advantages of hybrids) and has broadly been accepted,
although the detailed mechanics still need to be worked out.
Similarly, the introduction of country-by-country reporting is now
a certainty, and the broad format has now been agreed, with data
being gathered from 2016 and reports exchanged from 2017.
Meanwhile, the UK’s proposals for a Diverted Profits Tax appear to
pre-empt some key aspects of the BEPS process. Although the
intention is that the new tax will apply only to “abusive” structures,
which aim to divert profits from the UK by “avoiding PE status” or
entering into arrangements which lack economic substance, the
draft legislation can be read more widely and there are fears it will
lead to unnecessary compliance burdens. The lack of time for any
meaningful Parliamentary debate is also disappointing.
The proposals on interest deductibility are at an early stage, but
are particularly worrying for UK businesses. The UK system for
interest relief is currently relatively generous, but is an important
part of the overall competitiveness of the UK corporate tax regime.
The OECD appears to be moving towards a single group-wide limit
(perhaps based on EBITDA or on asset ratios), and as Eloise Walker
comments in the next article this could be particularly damaging
for UK infrastructure projects. There is a real fear that the UK could
feel obliged to concede some ground in the late stages of the
overall negotiations.
Finally, the sheer scale and range of the likely changes as a result of
the BEPS process means that more disputes are inevitable. The
initial proposals from the OECD on dispute resolution were
disappointing, but pressure is now building for a more practical
approach, which may include a greater use of binding arbitration in
tax disputes. The principle that companies should pay tax on their
economic profits is a reasonable one, but it would be a backward
step if the BEPS project resulted in more companies facing double
taxation on their profits.
Some issues which are less well-advanced are unlikely to result in
major UK change. For example, the UK does not expect to have to
make significant changes to its CFC rules as a result of the work on
Action 3, which is due to be published in October 2015. However,
there are some key areas which are likely to have an impact on
businesses, in 2015 and beyond. The main issues are the definition
of Permanent Establishment (PE) status (Action 7); the proposals
on interest deductibility (Action 4) and the various issues around
transfer pricing (Actions 8 to 10). An over-riding area, where
progress so far has been limited, is the urgent need for better
dispute resolution procedures.
Heather Self is a Partner (non-lawyer) with
almost 30 years of experience in tax. She has
been Group Tax Director at Scottish Power and
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.
The concerns about PE status are twofold. Firstly, any lowering of
the PE threshold will increase compliance burdens. The whole point
of the PE definition is that it sets the bar below which local
activities are not taxable – so lowering the threshold inevitably
increases the number of returns that have to be filed. Second, this
is likely to lead to disputes and potential double taxation – which
in turn increases costs for business. The transfer pricing concerns
are similar: changes of approach, and particularly an increasing
E: [email protected]
T: +44 (0)161 662 8066
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PM-Tax | Our Comment
Possible restrictions on interest relief
by Eloise Walker
Eloise Walker discusses the implications of possible future restrictions on the deductibility of interest.
A restriction on the future availability of interest relief is a
potentially explosive issue for UK corporates.
Indeed, the current OECD proposals could have a disproportionate
and detrimental effect on the infrastructure and energy sectors.
The availability of debt financing and the tax deductibility of
interest are fundamental to the success of infrastructure and
energy projects. Equity financing is simply unobtainable for many
infrastructure and energy developments and such projects would
not proceed without a significant proportion of debt financing. The
OECD appears to have ignored the fact that the high-gearing of
infrastructure projects is not driven by a BEPS motivation, but
rather constitutes a commercial cornerstone of any new
infrastructure project.
Currently, UK corporates can obtain tax relief for interest
payments. Generally, interest paid on debt financing is deductible
from a company’s UK corporation tax profits and therefore a
company’s liability to UK corporation tax is reduced. This form of
tax relief is often invaluable, particularly to those corporates
operating in the energy and infrastructure sectors, which are
heavily reliant on debt financing when embarking on new projects.
However, as mentioned in the previous article by Heather Self,
through its base erosion and profit shifting (BEPS) project, the
OECD is currently considering whether to introduce a general
interest limitation rule that will restrict the availability of tax relief
on interest payments.
The public consultation on the discussion draft closed on 6
February 2015. Since then the OECD has published the almost
1000 pages it received in response to the consultation. These
include Pinsent Masons’ response which sought to highlight the
detrimental effects of a general interest limitation rule that does
not contain appropriate exceptions and safeguards to ensure that
tax relief for interest remains available in genuine commercial
financing structures.
In July 2013, the OECD published an action plan, proposing 15
actions designed to combat BEPS at an international level. Action 4
focuses on BEPS using interest and is entitled “Limit Base Erosion
via Interest Deductions and Other Financial Payments”.
We are currently awaiting a response from the OECD as to how it
intends to progress its work on Action 4. It is expected that final
recommendations for a rule to prevent BEPS using interest will be
published in October 2015. Until this time, the future of tax relief
on interest is likely to remain uncertain.
On 18 December 2014, a public discussion draft on Action 4 was
issued, which outlines “different options for approaches that may
be included in a best practice recommendation” to combat BEPS
using interest. However, rather than making recommendations for
best practice, the OECD appears to be seeking to introduce a
general interest limitation rule that would limit an entity’s tax
deductible interest expense with reference to the actual position of
its worldwide group. Currently, two possible approaches to a
group-wide rule are being proposed: an interest allocation rule; or
fixed ratios for deductible interest costs.
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.
Using either approach, it is almost inevitable that a group-wide
interest limitation rule could prevent a business claiming tax relief
in genuine commercial structures where no BEPS risk using interest
exists. Consequently, there is currently widespread concern across
UK industry about the far-reaching effects of such a rule.
E: [email protected]
T: +44 (0)20 7490 6169
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PM-Tax | Our Comment
State aid investigations into tax rulings
by Stuart Walsh
Stuart Walsh considers the implications for groups with tax rulings in Luxembourg and other
EU member states.
In 2014 the European Commission (the Commission) began to look
in detail at favourable tax rulings received by specific
multinationals in various EU member states and also to look
generally at tax rulings given by all member states.
The Commission is not just looking at rulings. In February it
announced it had begun an in-depth investigation into a Belgian
tax provision that allows companies to reduce their tax liability on
the basis of the ‘excess profits’ that are said to result from being
part of a multinational group. The Commission said the scheme
could constitute state aid as it appears to only benefit
multinational groups, whilst Belgian companies only active in
Belgium cannot claim similar benefits.
In 2015 we are likely to see the outcome of some of these
investigations – which could potentially lead to some eye-watering
tax repayment demands. More groups are also likely to see their
arrangements falling under the spotlight.
In addition the European Parliament has said that it will set up a
special committee to look at tax ruling practices in EU member
states, going back to 1 January 1991.
So far the Commission has launched in-depth investigations into
the tax rulings received by Apple in Ireland, Starbucks in the
Netherlands and both Fiat Finance and Trade and Amazon in
Luxembourg. The revelation in leaked documents (nicknamed the
‘Lux Leaks’ documents) that accountants PwC had advised over
340 multinational companies on rulings in Luxembourg has
brought further attention onto Luxembourg. The Lux Leaks
documents show some companies paying an effective 1% rate of
tax on profits moved from higher tax jurisdictions to Luxembourg.
Companies advised by other ‘Big 4’ accounting firms are also
known to have benefitted from favourable rulings in Luxembourg.
Companies whose effective tax rate in any EU country has been
reduced by a ruling, or which have benefited from the Belgian
provision, should cast a critical eye over their group structure (both
existing and historic, to the extent there remains a risk of
repayment) in order to assess their vulnerability to a state aid
challenge and to determine what, if any, steps should be taken at
this stage to limit any continuing risk. To date, the Commission has
largely focussed its gaze on US multinationals, but the issue is
relevant to any group that has intellectual property, financing
operations or group debt in the EU. The Commission has committed
to investigate all 28 EU Member States. Finally, it will not be a
defence to a state aid enquiry that rulings reflect a common
arrangement (many major groups will inevitably have used a
Luxembourg finance ruling as part of their overall structures).
The Commission has undertaken to scrutinise the Lux Leaks
disclosures meaning that hundreds of companies risk joining Apple,
Starbucks, Fiat and Amazon under the microscope of a formal
investigation.
Although the 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.
Stuart Walsh is head of our tax disputes team.
He advises individuals and corporates on
resolving disputes with HMRC in all aspects of
direct tax and VAT and has extensive
experience of working with large FTSE 100
clients. Stuart specialises in managing large
scale litigation before the Tax Tribunal through
to the higher courts, as well as the
Administrative Court and the CJEU.
State aid can occur whenever state resources are used to provide
assistance that gives organisations an advantage over others. It can
distort competition which is harmful to consumers and companies
in the EU and is effectively illegal. A tax ruling can be seen to
constitute an advantage as it effectively means a tax authority is
waiving a right to collect taxes otherwise due. Companies with a
ruling that constitutes state aid may have to repay up to 10 years’
worth of tax benefits.
E: [email protected]
T: +44 (0)20 7054 2797
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PM-Tax | Our Comment
Real estate: the year ahead
by John Christian
John Christian considers the real estate tax issues that are on the horizon.
The outcome of the General Election should not result in
significant change for the property industry. Real estate has not
traditionally been a target for tax raising, other than stamp duty
land tax (SDLT), and a new government will not wish to reverse the
residential SDLT changes announced in the Autumn Statement. A
Labour led government has pledged to introduce the ‘mansion tax’
which will not directly affect property investors (other than
specialist investors in prime residential letting) though some have
predicted it will slow the London residential market.
•The capital gains tax (CGT) regime on residential property owned
by non-residents will come into effect in April. The consultation
process has been helpful in limiting the potential application for
institutional property investors and the legislation is largely
workable for fund investors, though with some unclear areas at
the margins. Residential property excludes purpose built student
accommodation – though not conversions – and care homes, but
an interesting area will be the private rented sector (PRS) which is
increasingly being seen as an institutional investment class but
does not enjoy the same exemption. The fund investor provisions
will therefore be important for PRS.
The wider tax picture is of limited change but with a couple of
clouds on the horizon:
•SDLT will continue to be a challenging area on more complex
transactions. Further cases are likely on historic avoidance
structures. The Project Blue Upper Tribunal decision is being
appealed and the outcome in relation to the analysis of section
75A Finance Act 2003 (the SDLT anti avoidance provision) will be
keenly awaited. The current position leaves some difficulty in the
light of the literal interpretation of section 75A adopted in the
case and the absence of meaningful guidance in the case on the
principles guiding the application of section 75A.
•The next stage of the OECD’s base erosion and profit shifting
(BEPS) Action 4 report on interest deductions is likely to emerge
in the Autumn (see Eloise Walker’s article for more details). There
has been widespread concern about the potential implications of
the current direction of travel towards a ratio based limit on
deductions, rather than an arm’s length model. This would have
the effect of restricting deductions in relation to property
investment structures, and particularly infrastructure investment,
and is compounded by the difficulties in applying an EBITDA
metric – apparently the current preferred approach – to property
investment activities. The BEPS proposals in this area are
particularly difficult for a number of countries so this debate has
much further to go.
John Christian is head of our corporate tax
team. He specialises in corporate and business
tax, and advises on the tax aspects of UK and
international mergers and acquisitions, joint
ventures and partnering arrangements, private
equity transactions, treasury and funding
issues, property taxation, transactions under
the Private Finance Initiative and VAT.
•The Diverted Profits Tax (DPT) will come into effect from 1 April
2015. Given the political imperatives and the General Election
climate, it is unlikely that there will be material changes in the
complex and unclear draft legislation with issues being left in the
unsatisfactory position of being addressed by HMRC guidance.
For the property industry, the application of DPT to offshore
structures is uncertain, with structures involving development
being most at risk of potentially being caught. (As an aside the
recent FTT decision in Terrace Hill (Berkeley) Limited v HMRC,
summarised in the cases section in this edition of PM-Tax, is a
reminder, if any is needed, of the unclear line between
development and investment). There is no grandfathering of DPT
transactions so existing structures will need to be reviewed.
Legislative change, or at least guidance, that the regime does not
apply to property transactions would remove the uncertainty.
E: [email protected]
T: +44 (0)113 294 5296
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PM-Tax | Our Comment
VAT predictions for the Budget? A
dangerous game...
by Darren Mellor Clark
Darren Mellor-Clark considers what is on the horizon in relation to VAT.
The Chancellor gives his final Budget of the current Parliament on
18th March, ahead of the UK General Election on 7th May.
Speculation as to what may be in this Budget, as ever, ranges
widely among pundits. From a VAT perspective it is difficult to pin
point any particular measure which the Chancellor may wish to
bring forward. Indeed, one may question the breadth of his ability
to unilaterally effect meaningful change in the VAT arena. The
frequent tensions, at a political level, between the EU and the UK
are often repeated in the VAT space where UK law and the
operation of HMRC is constrained by the legal supremacy of EU
legislation and jurisprudence.
In a similar vein, the new place of supply rules for digital products
offered in a business to consumer (B2C) context came into effect
on 1st January 2015. Essentially this has shifted the place of
taxation for such services to the location of consumption. The
compliance requirements upon businesses to identify the location
of their consumers when purchasing the digitised products have
proved onerous for many large firms. However, the same
obligations for small and micro businesses have simply proved too
great, with many choosing simply to stop offering their products to
non-UK consumers. Given the often quoted importance of small
business to the UK economy it would seem that this issue would be
a worthy area of effort for this or any future UK government.
A number of key VAT issues are expected to continue to cause
concern across businesses and their advisers.
However, nowhere is the potential tension more apparent then in
the UK implementation of the Skandia judgment. The CJEU ruled
that overseas branches of entities which join a VAT group are no
longer the same taxable person as their head office or other
branches. The judgment picked up on the previous ruling in FCE
Bank which had held that ‘transactions’ between head offices and
branches occurred within the same legal entity or taxable person
and thus are not subject to VAT. However, the judgment did not
involve consideration of the position where the branch had joined a
VAT group. The implementation of the Skandia judgment was the
source of considerable concern for many UK businesses as it,
potentially, exposed inbound infrastructure costs such as IT to a
VAT charge. HMRC’s implementation of the decision takes note
that the UK law regarding VAT groups is different to that in Sweden
(the subject of the reference to the CJEU). As such the UK is not
required to implement the judgment in its entirety, but it will
effectively do so where the inbound charges originate from a
location where the VAT group rules mirror those at point in
Sweden. This appears to be a sensible, pragmatic middle road but it
remains to be seen whether the Commission will be satisfied with
this apparent half way house.
Businesses operating employee pension schemes will be concerned
to ensure that they react appropriately to changes following the
CJEU’s judgment in PPG. The judgment increased the ability for
employers to recover VAT incurred on key costs such as investment
management services. Negotiations between HMRC and industry
bodies are on-going as an attempt is made to agree a contractual
and commercial framework which will support VAT recovery on a
prospective basis. HMRC is allowing a transitional period until 31st
December 2015 during which businesses may continue to operate
the old arrangements. In a further twist, HMRC must also have an
eye to the numerous claims being made for retrospective VAT
recovery based upon the PPG principles.
The evolution of the digital economy appears to be a perennial
cause of headaches for tax administrators and businesses alike.
Fundamental questions such as the nature of products sold as
digital or traditional media are left unanswered to anybody’s
satisfaction. In its 5th March judgment the CJEU confirmed that
the reduced rates offered by France and Luxembourg on digital
e-books were unlawful. However, it has left taxpayers wondering
why reading on traditional print media is zero-rated, whereas
reading digital content is taxed. It is perhaps ironic that the
judgment was released on World Book Day. Many would argue that
the encouragement of reading is a desirable social aim which
should not be stifled by taxation.
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PM-Tax | Our Comment
VAT predictions for the Budget? A dangerous game... (continued)
On a more UK theme, it has not gone unnoticed that HMRC
appears to be conducting dedicated ‘risk assessment’ exercises
across the large business sector. One of the key focus points of
these exercises appears to be cross-border transactions and
recharges within the corporate structure. The teams conducting
these are raising many issues, including the application of Skandia.
The potential cost to the business of such exercises in terms of
resourcing HMRC’s information demands but also any VAT
assessments could be extremely significant. Businesses should
approach any such exercise with caution and their eyes fully open
as to the potential ramifications.
In short as we move through 2015 the burden of VAT remains, and
will continue to remain, considerable. Anthony Barber’s (in)famous
statement in parliament to the effect that “VAT is a simple tax on
the provision of goods and services” seems an increasingly
distant echo.
Darren Mellor-Clark is a Partner (non-lawyer) in
our indirect tax advisory practice and advises
clients with regard to key business issues
especially within the financial services,
commodities and telecoms sectors. In
particular he has advised extensively on the
indirect tax implications arising from regulatory
and commercial change within the FS sector,
for example: Recovery and Resolution Planning;
Independent Commission on Banking; UCITS IV;
and the Retail Distribution Review.
E: [email protected]
T: +44 (0)20 7054 2743
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PM-Tax | Our Comment
Penalties: HMRC’s
new tougher
stance
by Fiona Fernie
Fiona Fernie considers HMRC’s increasingly tough attitude to errors in tax returns.
It also has particularly obvious repercussions when it comes to
penalties – as demonstrated by the recent consultation document
issued by HMRC in relation to a specific penalty for schemes in
respect of which the GAAR is deemed to apply. That document, in
explaining why HMRC is seeking to introduce such a penalty, states
“….there is an arguable case that a taxpayer becoming involved in
an abusive scheme demonstrates ‘deliberate’ behaviour in making
their return in this basis” [and thus gives rise to a penalty].
“However, each case is judged on its own merits and in practice it
may sometimes be difficult to levy a penalty where the avoider
obtained professional advice, even where this advice is found to
have been incorrect.”
The chances of your business being inspected by HMRC have risen
considerably. When the coalition government came to power in
2010 it allocated £900 million to target tax evasion and fraud.
With a General Election looming once again, evasion, avoidance
and indeed any kind of tax planning which is seen to be aggressive
is very much in the firing line.
New powers introduced in recent years to allow HMRC easier
access to information from both taxpayers and third parties,
together with increased powers to search premises and tighter
penalty regulations, all mean that businesses are under more
scrutiny than ever from HMRC.
To my mind this demonstrates how completely garbled and
illogical the thinking on tax offences has become; there is clearly a
need to tackle abusive tax arrangements, but to suggest that
taxpayers, whether businesses or individuals, should seek
professional tax advice but then not be allowed to rely on it
without risking a penalty for ‘deliberate’ behaviour if the advice is
later found to be wrong seems to fly in the face of the ‘fairness’
that the government has professed itself to be keen to promote.
Since all businesses are now required to file returns online, HMRC
is able to use its CONNECT software to analyse returns, compare
them to sector averages, and make connections between tax
records and information from other sources to identify areas where
tax collection is at risk.
Whilst it should be possible to expect that if enough care is taken,
a business cannot possibly ‘fall foul’ of HMRC, in recent years the
political and media pressure on HMRC to collect ever increasing
amounts of tax appears to have resulted in the blurring of the
definitions of tax mitigation, tax avoidance and tax evasion.
Certainly experience is showing that HMRC is increasingly
unwilling to believe that any error can be the result of an ‘innocent
error’, even where businesses have filed their returns after
considerable thought, or indeed where they have decided that no
return is necessary, again after careful consideration. It appears
that HMRC will still seek to make discovery assessments, and
impose a penalty, even in cases where the directors of a business
have chosen their course of action having researched their
obligations and complied to the best of their ability and
judgement. Indeed, even the largest companies, which do not
undertake ‘aggressive’ planning, may find HMRC seeking penalties
after settlement of a complicated technical dispute.
Fiona Fernie leads our tax investigations team.
She has over 25 years’ experience in assisting
clients subject to investigations/enquiries by
HMRC with particular focus on COP8 and COP9
(Contractual Disclosure Facility) cases and large
complex investigations. She also assists clients
who want to make a voluntary disclosure of tax
irregularities to HMRC. Fiona also advises in
relation to HMRC’s information and inspection
powers, time limits for assessment, determining
penalty loadings and all other tax
administration and enforcement provisions.
E: [email protected]
T: +44 (0)20 7418 9589
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PM-Tax | Our Comment
Key issues for employee share plans
and management incentives
by Matthew Findley
Matthew Findley looks at the challenges ahead for companies operating share and other
incentive plans.
enough power after the election. This legislation offers very
generous CGT relief on shares acquired by employees on giving up
certain employment protections. We understand that there has
been a recent surge in requests to HMRC to value shares for
employee shareholder purposes. This poses the question of whether
companies fear likely withdrawal soon after May, albeit with some
transitional protections for shares already acquired.
Employee share plans and incentives, in particular tax-advantaged
plans, have been affected by two successive years of very substantial
legislative change by way of Finance Acts 2013 and 2014.
Much of this remains to be implemented in full. For example,
HMRC still has to update some important aspects of its key
guidance on tax-advantaged plans following sweeping
simplification of the governing legislation, and is still debating
points of interpretation with practitioners. This leaves some
uncertainty when drafting or amending plan rules, which may
seem a surprising result of tax ‘simplification’, especially given that
these plans are well understood and generally not very diverse. It is
also rather disappointing, as the reforms initiated by the Office for
Tax Simplification (OTS) in principle were (and remain) welcome.
More generally, it is clear that tax avoidance and the targeting of
tax breaks will remain politically topical after the election, as the
new government emerges from campaigning and tries to get to
grips with the fiscal tightening that experts predict. In that climate,
the generous and popular extensions of entrepreneurs’ relief, and
perhaps also other targeted reliefs for employees’ or executives’
securities, may well be reviewed. In a similar vein, the Labour Party
has announced that, if elected, it will enact a one-off revival of its
2009-10 Bank Payroll Tax (which was levied on the employer in
respect of bonuses paid), with its proceeds applied to fund
guaranteed jobs for the young, long-term unemployed.”
HMRC also has to finalise and launch the online annual returns
process which all companies with employee share plans or other
management equity arrangements will need to use by 6 July 2015.
Although HMRC has made a lot of progress in clarifying and
developing the data it wants to collect, there seems to have been
less progress in making sure that the technology will work and be
easy for companies to use.
Matthew Findley is our Head of Share Plans &
Incentives. 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. Matthew has been picked as one of
Tax Journal’s ‘40 under 40’ pick of the best
young professionals working in tax in 2015.
One final aspect of the Finance Act 2013 reforms still has to come
into force, as significant changes to the tax treatment of
internationally mobile employees’ share awards will take effect
from 6 April 2015. Again, the implementation of these changes has
created uncertainty given the lack of guidance in relation to the
new rules but at least the accompanying National Insurance
legislation has now been published.
With this background, it is perhaps a relief that not much has been
said so far about employee share plans by any of the political
parties, although of course they are not a natural subject for
general election rhetoric. The OTS reforms discussed above, and
also the employee ownership amendments proposed by the Nuttall
Review, seem to be uncontroversial coalition achievements, and so
rather unlikely to be soon revisited by a new government. On the
other hand, the politically divisive “employee shareholder” status
will be quickly repealed if Labour and/or the Liberal Democrats hold
E: [email protected]
T: +44 (0)20 7490 6554
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PM-Tax | Our Comment
Devolved taxes
by Karen Davidson
Karen Davidson considers the tax powers that are being devolved to Scotland, Wales and
Northern Ireland.
tax resident. Whilst this is not for their employers to determine,
businesses with employees in Scotland may have to deal with an
increased level of queries from their employees and may in the
future consider whether they should offer tax equalisation terms
to employees required to relocate between the two jurisdictions.
At the very least, employers need to ensure that payroll systems
are able to deal with the Scottish rates. Whilst the income tax take
will affect the block grant paid to the Scottish government, the
wider anti-avoidance provisions which apply to the Scottish
devolved taxes will not apply to the Scottish rate of income tax.
There is no going back. As Nick Clegg put it “the devolution genie is
out of the bottle”. Whilst tax devolution of some description has
been on the cards in Scotland since the Scotland Act 2012, it is only
since the Scottish Independence Referendum and the subsequent
promises made that it has generated such intense debate across the
whole of the UK. The result so far is a patchwork quilt of varying
degrees of tax devolution which businesses operating in the UK, and
particularly those operating in more than one country within the
UK, will need to keep abreast of over the coming months.
Scotland
From April 2015 Scottish Land and Buildings Transaction Tax (LBTT)
and Scottish Landfill Tax will replace their UK equivalents in
Scotland. Aggregates levy will follow subject to resolution of the
current state aid issues. Designed, eye-catchingly at the time, as a
progressive tax (rather than the old SDLT ‘slab system’) the rates
for LBTT which were originally announced had to be hurriedly
amended following George Osborne’s surprise Autumn Statement
announcement that SDLT would move to a progressive rate at
lower levels. We can expect the design of devolved taxes to
continue to have an impact on the structure of their UK
equivalents and vice versa over time.
Wales
Following in the footsteps of the Scottish government, the Wales
Act 2014 gives the Welsh government full devolution of SDLT,
Landfill Tax and Aggregates Levy from April 2018. The Welsh
government are currently consulting on their new Land Transaction
Tax and Landfill Disposals Tax and over the next year we should get
a sense of whether these Welsh taxes will differ significantly from
their UK predecessors or their Scottish equivalents. Some power
over income tax may be devolved, subject to a Welsh referendum.
The timetable for such a referendum will depend upon funding
issues being resolved between the Welsh and UK governments.
Northern Ireland
Whilst the Calman, Smith and Silk commissions felt that devolution
of corporation tax for Scotland and Wales was a step too far, a bill
has now been published for the devolution of corporation tax in
Northern Ireland for some trades and activities, expected from April
2017. The intention is for the bill to be enacted before the general
election. Under the bill, SMEs with at least 75% of staff cost and
time and those larger companies with Northern Ireland regional
establishments will qualify for the Northern Ireland rate. Certain
activities such as property income, non trading activities and
financial activities will not qualify. This is a seismic shift in the UK
tax system and whilst it may afford opportunity for some, it will
come with additional complexity for businesses to grapple with. We
are already seeing renewed pressure from those in Scotland who are
keen to see devolution of corporation tax there.
A new tax authority, Revenue Scotland, will be responsible for the
administration of the devolved taxes in Scotland. This authority
will have wider anti-avoidance powers than HMRC and it will take
some bedding in before taxpayers have a true feel for the new
authority’s approach. Guidance has been issued but it is so far
sparse on details of the transactions which Revenue Scotland view
as acceptable. This will evolve over time.
Income tax will not be a devolved tax in Scotland, but the Scottish
government will have power to set thresholds and rates from April
2016. In the period up until then, HMRC will be informing those
persons it believes to be Scottish taxpayers. There will be some,
and it has been suggested most likely the higher earners, who are
mobile and can ensure that they are taxed in the most beneficial
jurisdiction. Others may not be clear on whether they are Scottish
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PM-Tax | Our Comment
Devolved taxes (continued)
What next?
Who knows where devolution of tax will end up? – some English
cities have been calling for further control over business rates and
devolution of SDLT – which Danny Alexander said (at last month’s
‘Core Cities Summit’) should be considered. The political
uncertainty surrounding the general election makes it difficult to
predict what will happen next. One thing is certain: those hoping
for a simpler UK tax system will be sorely disappointed.
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.
E: [email protected]
T: +44 (0)141 567 8535
See the Events section for details of the discussion on Taxation in
Scotland on 25 March that we are co-hosting, with guest speaker
Deputy First Minister, John Swinney MSP. Karen Davidson will
also be speaking at this event together with Pinsent Masons
partner Heather Self.
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PM-Tax | Our Comment
UK oil and gas
by Tom Cartwright
2015 is set to be a vital year in the UK taxation of upstream oil and gas. The key questions are what
measures will we see and when.
Industry is also continuing to lobby for a much greater reduction in
the headline rate of supplementary charge, to no more than 20%.
Again, the prospects for such a headline-grabbing initiative prior to
the election may be slim, although this must be balanced against a
picture of widespread job losses in the North Sea.
Budget 2014 launched a fiscal review consultation on the upstream
oil and gas regime long before the collapse in the oil price made this
even more urgent and a question of survival for some participants.
The Treasury released its initial proposals in ‘Driving Investment: a
plan to reform the oil and gas fiscal regime’ the day after the Autumn
Statement on 4 December 2014. This followed the announcement in
the Autumn Statement of a 2% reduction in supplementary charge,
which effectively reduced the corporation tax rate for oil and gas
exploration and production from 62% to 60%.
The two other big targets for the fiscal review for the rest of 2015
will be the introduction of measures to incentivise the very low
levels of exploration activity and the prolongation of the expected
life of existing infrastructure. High up the agenda for industry
would be a measure to match the payable tax credit Norway gives
to early stage exploration companies who are not yet in a tax
paying position. It is also hoped that the tax regime for third party
tariffs could be removed from the upstream tax regime, thereby
encouraging much needed investment in existing infrastructure to
ensure it is not decommissioned earlier than necessary.
The main concrete measure adopted by the fiscal review so far is
the planned introduction of an ‘investment allowance’ and a further
specific consultation on this measure concluded on 23 February.
The purpose of the allowance is to encourage further investment in
the North Sea by removing a proportion of profits from the
supplementary charge based on an agreed proportion of ‘qualifying
expenditure’. The details of what will constitute qualifying
expenditure (in particular what types of non-capital expenditure)
and the level of this agreed proportion are yet to be determined.
Tom Cartwright is a Partner focusing on all
areas of corporate tax, including the tax
aspects of corporate acquisitions and
reconstructions, involving the financing and
structuring of UK and cross-border buy-outs,
mergers and acquisitions. He has considerable
expertise in tax structuring for debt
restructuring and corporate recovery for
distressed businesses. Tom has advised
extensively in the energy sector for oil and gas
companies. He is a member of the UK Oil
Industry Tax Committee.
The allowance is expected to be available to set against all the
supplementary charge payable by a participant, not just the
supplementary charge payable in respect of the licence interest to
which the expenditure generating the allowance relates. Industry
will be keen to see some ability to surrender excess allowance to
other group members.
The other big question is the effective date for the new allowance
and when it will be passed in legislation. Hopes to see it in the
pre-election Finance Act may prove to be ambitious unless there is
universal cross-party acceptance of the details.
E: [email protected]
T: +44 (0)20 7054 2630
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PM-Tax
PM-Tax
| Our| Our
Comment
Cases
Cases
Spritebeam Ltd and Prowting Ltd v HMRC; HMRC v Versteegh [2015] UKUT 75 (TCC)
Scheme where lender directed that instead of paying interest the borrower should issue preference
shares to another group company did not result in a tax charge for the lender but recipient of the
shares was taxed on the value of the shares received.
This case involved a scheme where a lender (the Lender) lent
money to a borrower (the Borrower) for the commercial purposes
of the Borrower, but directed that instead of paying interest, the
Borrower should issue preference shares to another group company
(the Share Recipient). The plan was that the Borrower would get a
deduction for interest, but neither party would be taxable on the
receipt of the interest. HMRC argued that the Lender or the Share
Recipient should be subject to tax on the interest.
Both HMRC and the Share Recipient appealed to the UT on
elements of the FTT’s decision. HMRC appealed the FTT’s finding
that the Lender was not taxable on the value of the shares under s.
786(5) whilst the Share Recipient appealed the FTT’s ruling that
the value of the Shares was income in its hands and therefore,
taxable under Schedule D Case VI.
With regard to the question of whether the Shares were the
income of the Lender under s. 786(5), the UT upheld the decision
of the FTT that s.786 could not apply to the issue of Shares by the
Borrower to the Share Recipient and therefore, a tax charge did not
arise to the Lender under Schedule D Case VI. However, the UT
differed from the FTT in the grounds for its decision, holding that
the scope of s.786 was wide enough to apply, but was over-ridden
by the exclusive scope of the loan relationship rules in s.80(5) FA
1996. As HMRC had not challenged the accounting treatment in
the Lender, the only amounts which could be taxed were the
amounts which “fairly represented” its profits under GAAP, and
this did not include the value of the shares.
HMRC said that the Lender should be taxable on the value of the
shares issued to the Share Recipient under s. 786(5) ICTA 1988. S.
786 applies to transactions “effected with reference to the lending
of money or the giving of credit, or the varying of the terms on
which money is lent or credit is given”. S. 786(5) provides for a tax
charge under Schedule D Case VI if under a transaction “a person
assigns, surrenders or otherwise agrees to waive or forgo income
arising from any property (without a sale or transfer of the
property)”. HMRC argued that as a lender would usually be
entitled to interest, in directing that the interest be paid to the
Share Recipient, the Lender was forgoing income and therefore a
tax charge under s. 786(5) arose. HMRC also argued that if the
Lender was not taxable, then the value of the shares should form
part of the profits of the Share Recipient under Schedule D Case VI.
On the issue of whether the Share Recipient was taxable on the
value of the shares issued under Schedule D Case VI, the UT upheld
the FTT’s decision that the value of the shares was taxable income
in the Share Recipient’s hands. The UT provided an interesting
evaluation as to when a receipt will be chargeable to tax. The UT
considered that for a receipt to be chargeable to tax there must be
four elements: (1) the receipt must have the character of income;
(2) it must be the recipient’s income; (3) it must have a source; and
(4) there must be a sufficient link between the source and the
recipient.
The FTT decided that for the purposes of s. 786, the “transaction”
was the issue of the shares to the Share Recipient and not the loan
itself. The fact that the Lender lent to the Borrower on terms that
shares would be issued to the Share Recipient could not therefore
be regarded as the “forgoing of income” under any relevant
transaction for s. 786 purposes. Therefore, the FTT held that s. 786
could not apply to the issue of shares by the Borrower to the Share
Recipient because there is no forgoing of anything by the Lender
and consequently a tax charge under Schedule Case VI did not arise
for the Lender. However, the FTT held that the Share Recipient was
taxable under Schedule D Case VI on the value of the shares issued.
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PM-Tax | Cases
Spritebeam Ltd and Prowting Ltd v HMRC; HMRC v Versteegh (continued)
With regard to the receipt being the recipient’s income, the UT
held that the shares constituted income in the hands of the Share
Recipient and determined that the recipient does not need to have
an enforceable legal right to receive a payment before it can form
part of his income; rather there needed to be an obligation on the
payer to make the payment. On this basis it was irrelevant that the
Share Recipient was not a party to the loan agreement which
provided for the Borrower to issue the shares to the Share
Recipient instead of paying interest. The UT held that there was a
sufficient link between the source of the income and the recipient.
It determined that the source of the income was the loan
agreement and that there was a sufficient link between the Share
Recipient and the loan agreement because the Share Recipient was
named as a beneficiary of the shares and the Borrower had a legal
obligation to issue the shares to the Share Recipient.
Comment
This case provides an interesting analysis of Schedule D Case VI,
where a tax charge arises to a company on the receipt of an issue
of shares, despite that company not being a party to the
agreement that created the obligation for the shares to be issued in
the first place. Additionally, the UT’s judgment includes an
interesting analysis of the characteristics of a receipt that are
necessary for a tax charge to arise. In relation to the Lender, the
confirmation that the loan relationship rules generally provide an
exclusive code is welcome.
Read the decision
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PM-Tax | Our Cases
Cases (continued)
Tower Radio Limited and another v HMRC [2015] UKUT 0060 (TCC)
Bonus scheme involving shares in an SPV survives Ramsay challenge.
A scheme used by a number of companies was designed to save
income tax and national insurance contributions (NICs) on bonuses
to employees. It involved employees being given shares in
specially-formed subsidiaries (SPVs). Tower and Total used the
scheme and were designated as lead cases.
Newey J and Judge Colin Bishopp said the Mayes case confirmed that
the fact that a transaction was undertaken with a view to tax
avoidance did not necessarily mean that the Ramsay principle applied.
The UT dismissed the cases HMRC had relied on such as PA
Holdings and Aberdeeen Asset Management saying that whilst they
illustrated the application of the Ramsay principle and dealt with
the meaning of the word payment, they did not provide substantial
guidance on whether the individuals received ‘shares’ or ‘money’
within the meaning of section 420 of ITEPA. It found the Court of
Appeal decisions in UBS and Deutsche Bank cases more persuasive
as they also involved schemes where employees received shares in
an SPV and were considering section 420.
Tower subscribed a million “A” shares of £1 each in a new SPV and
acquired the single “B” share. The A shares were transferred to
Tower’s managing director. Holders of A shares were required to
transfer them for 95% of their market value if they ceased to be an
employee or director. It was envisaged that the director would
retain the shares for at least two years and that the company
would invest the money it held. However, following concerns
about possible changes to the CGT regime, the SPV was liquidated
a few months later. The scheme was operated in a similar way by
Total in relation to two of its directors except the SPV was
liquidated the day after the shares were acquired by the directors.
In relation to Tower the UT said the director received shares as
there was no doubt that in company law terms shares were
acquired and the words “shares in any body corporate” are less
susceptible to a non-technical reading than, words such as
payment used in the cases on which HMRC relied. The UT said that
section 420 defined ‘securities’ in a very broad way and was
intended to extend to some ‘artificial’ schemes. It also said that
the four month period for which the shares were held could not be
regarded as a negligible period
The scheme was designed to exploit the fact that no tax is payable
when an employment-related security that is a restricted security
is acquired and the “chargeable events” in the legislation that
trigger tax liabilities do not include the liquidation of the company
in which the securities are held. An anti avoidance provision has
since been added to the legislation.
In the UBS case, Rimer LJ contemplated that an employee could be
treated as acquiring money rather than shares if the shares were
required to be redeemed immediately for a pre-ordained cash sum.
The UT pointed out that this was not the case with the Tower scheme.
The issue was whether in the light of the Ramsay principle, the
relevant employees should be regarded as having acquired
“money” rather than “shares in any body corporate” for the
purposes of section 420 of ITEPA. The FTT found in HMRC’s favour
that the employees were to be regarded as having acquired money
and the companies appealed.
In relation to the Total scheme the UT said that the case for
dismissing the transactions as “money in, money out”
arrangements was stronger because the SPV was liquidated
immediately and it never intended to make investments. However,
on balance, the UT decided that the Total directors had received
shares and not cash. The UT said “However unattractive the result
may be, it seems to us that the appeals before us must be allowed.”
Comment
This case follows the Court of Appeal decision in UBS and Deutsche
Bank – which both considered the application of the Ramsay
principle to schemes relying on the complex code in Part 7 of
ITEPA. These cases are due to be heard by the Supreme Court this
year and it will be interesting to get that Court’s perspective on the
line that has been taken by the Court of Appeal in those cases but
also in Mayes. Pinsent Masons acted for the taxpayers in Mayes and
is acting for UBS in its appeal.
Read the decision
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PM-Tax | Our Cases
Cases (continued)
Terrace Hill (Berkeley) Ltd v HMRC [2015] UKFTT 0075 (TC)
Property development held as investment rather than trading stock.
Terrace Hill was a joint venture company created to develop an
office property in Mayfair. Terrace Hill claimed that the property
was held as an investment and that it could eliminate the tax
liability through a capital loss scheme. HMRC admitted that the
scheme worked, but argued that the property was held as trading
stock so that the capital loss scheme did not relieve the tax liability.
The FTT decided also that it was a credible strategy for the
development to be held as an investment from the outset. It said
that it continued to be held as an investment, regardless of the
usual practice of holding such property developments as trading
stock, until the rental income and purchase offer resulted in a
change of circumstance. Terrace Hill’s claim was therefore allowed
and the property was held to be an investment. The capital loss
scheme (which could not otherwise be challenged by HMRC) was
therefore successful.
The FTT said that its starting point was that property developers
would normally hold property developments as trading stock.
However, the FTT decided that on the facts this was not the case
for this particular development, although Judge Nowlan said the
decision was “finely balanced”. The FTT found Terrace Hill’s
chairman to be a highly credible witness with accounting
knowledge and so was swayed by his evidence that he had always
considered the property to be an investment property. In addition,
the FTT noted the chairman’s contemporaneous records which
favourably supported the proposition that he had always thought
the property to be an investment. The property had also been
treated as a capital asset throughout for accounting and capital
allowance purposes.
Comment
This case shows that although the initial presumption is that a
developer is holding property as trading stock, this can be
overcome where contemporaneous evidence supports the
arguments that it is held as an investment. However, the fact that
the Judge admitted the decision was finely ballanced illustrates the
unclear line between trading and investment treatment.
Read the decision
The FTT accepted Terrace Hill’s explanation for selling the
development when it did as a result of the rental income being
much lower than had been previously forecasted and the company
receiving a very favourable offer from a purchaser.
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PM-Tax | Our Cases
Cases (continued)
Scots Atlantic Management Ltd (in liquidation) & Another v HMRC [2015] UKUT 0066 (TCC)
Upper Tribunal fails scheme attempting to create an employer tax deduction.
Where benefits are provided to employees wholly and exclusively
for the purpose of a trade, the employer can claim a tax deduction
for the cost of providing the benefit. However, under Schedule 24,
Finance Act 2003 that deduction can only be claimed if the
employee pays tax within nine months after the end of the tax year
in which they received that benefit.
The UT said that the FTT erred in law by concluding that Schedule
24 did not apply. This would have been sufficient to dismiss SAM’s
case but, the UT went on to consider the second issue of whether
s.74 ICTA applied to also preclude the deduction by SAM of its
contributions. S. 74 ICTA states that an employer can only make a
deduction for the cost of any benefit given to the employee if that
benefit was incurred wholly and exclusively for the purposes of a
trade, profession or vocation.
Scots Atlantic Management Ltd (SAM) tried to circumvent the
Schedule 24 requirement through a tax avoidance scheme. Under
the scheme, SAM subscribed for shares in a newly established
company at a high premium. The value of those shares was then
transferred to a newly established EBT through the grant of
options in the new company to the EBT. SAM then sold its shares
for the nominal value and the EBT liquidated the new company
allowing it to make distributions to the employees in the future.
The FTT had held that there was a dual purpose to the payments
made by SAM, firstly to provide an employment benefit to the
employee, but also to obtain a tax deduction. This had meant that
the scheme failed under s. 74.
As it was a finding of fact by the FTT, the UT could only interfere
with the finding if there was an error of law or a decision which was
unreasonably reached. However, the UT found that the FTT’s
decision that the purpose of the contribution did have a duality of
purpose was well founded. In doing so, the UT made a distinction
between the purpose of the scheme (which in contrast had the
sole purpose in the UT’s view of providing an employee benefit)
and the purpose of the contribution. However, the finding of a dual
purpose of the contribution was sufficient for the FTT’s decision to
be upheld, meaning that SAM’s appeal on this point also failed.
The UT considered whether Schedule 24 applied. It said that the
scheme was an employment benefit scheme under that Schedule
but the issue was whether a contribution was made, within the
Schedule 24 wording, “in respect of” that scheme. SAM had argued
that there was no such contribution because the cost to the
employer was only when it subscribed for the shares and not at the
moment when an option was granted to the employees which
amounted to conferring on them the benefit.
Comment
This case is largely of historic interest, with Schedule 24 of the
Finance Act 2003 having been since re-written.
The UT rejected this argument. Instead, the UT took the view that
looking at the whole of the scheme, there was a payment both “in
respect of” and for the employee benefit scheme. In reaching this
decision, it found that it was “wholly unrealistic” to consider only
the payment for the subscription of shares by SAM, and not the
later transferring of that value to the employees through the grant
of the options to the EBT. In its view, Schedule 24 had to be viewed
in light of the scheme as a whole and not just one step.
Read the decision
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PM-Tax | Wednesday 11 March 2015
20
PM-Tax | Events
Events
Taxation in Scotland
In conjunction with Terra Firma and Edinburgh Tax Network we are holding a discussion on the theme of ‘taxation in Scotland’ with guest
speaker Deputy First Minister, John Swinney MSP. Topics will include:
•Tax issues for Scottish businesses – an international perspective
•The Scottish GAAR – drawing the line on a clean sheet
•In place of discovery assessment
Additional speakers at the event will include:
•Heather Self, FCA, CTA (Fellow) Tax Partner, Pinsent Masons
•Karen Davidson, Tax Director, Pinsent Masons
•Derek Francis CTA (Fellow) Advocate & Barrister, Terra Firma Chambers & Temple Tax Chambers
Date:
Wednesday 25 March 2015
Time: Registration at 5.15pm, Seminar start 5.45pm, Drinks & Canapés from 7.15pm
Venue: The Laigh Hall, Parliament House, High Street, Edinburgh, EH1 1RF
If you would like to attend please contact Marina Dell.
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PM-Tax | Wednesday 11 March 2015
21
PM-Tax | People
People
Tax Journal’s 40 under 40
We are very pleased that Matthew Findley and Steven Porter have been picked for Tax Journal’s 40 under 40 for 2015.
This is Tax Journal’s pick of some of the best young professionals working in tax today.
Matthew Findley
Matthew is a partner and head of share plans and incentives in the tax team at Pinsent Masons. He advises companies in relation to the
design, implementation and operation of share plans and employee incentive arrangements, both in the UK and internationally.
Matthew has a genuine following and industry profile: quoted extensively in Hansard and in the national and trade press; sits on the
UK Chapter Committee of the Global Equity Organisation and is a regular speaker at industry events. Clients include Imperial Tobacco,
and IMI.
Key achievements:
•Advising an international insurance intermediary group on various tax efficient equity arrangements, having been instructed by the
company secretary who he worked with in his former role.
•Leads Pinsent Masons’ client fora – held three times a year – at which a continuing theme is the ongoing development of the tax
framework surrounding employee share plans. These events have to place tax in a commercial context given that many of the attendees
are non-tax professionals. Matthew’s ability to provide this kind of client care is informed by six years’ industry experience in a specialist
remuneration consulting firm.
Client quotes:
“Matthew is highly professional, practical and commercial. He explains and presents things in clear plain language rather than blinding you
with “legalese” which many others do.”
“He is a great guy to work with – clear and accurate advice.”
“His technical knowledge and advice is excellent and he has a very sensible and practical approach when applying his advice in the real
commercial world. He is very approachable, has excellent client management skills and always responds in a timely manner.”
Matthew Findley
Partner
T: +44 (0)20 7490 6554
M: +44 (0)7500 102039
E: [email protected]
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PM-Tax | Wednesday 11 March 2015
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PM-Tax | People
Tax Journal’s 40 under 40 (continued)
Steven Porter
Steven is a senior associate, known for his expertise in advising, litigating and resolving complex disputes with HMRC
on indirect taxes, property taxes and high net worth individuals’ UK residency status. He heads the firm’s highly
regarded contentious tax practice in Manchester; he also works as part of the firm’s market-leading national and
international tax team.
Steven has extensive experience of managing large pieces of litigation from the tax tribunal through to the higher courts including the
Court of Justice of the European Union. His clients include corporates (especially large FTSE 100 companies), high net worth individuals
and foreign royal families.
Key achievements:
•Acted in the First-tier Tribunal (tax) case of JIB Group Limited, one of the first of its kind using the Tribunal’s Lead Case Procedure.
•Conducted one of the first tax mediations with HMRC outside of the pilot project.
•Lead solicitor in the successful First-tier Tribunal decisions of James Glyn concerning the taxpayer’s UK residency status (currently under
appeal at the Upper Tribunal); and Avon Cosmetics Ltd, including the continuing reference to the CJEU concerning the UK’s VAT regime
affecting direct sellers.
Client quotes:
“Steven has an exceptional ability to fully understand and advise on the complexities of tax in particular VAT and then be able to explain this to
ourselves as the client in a way that makes a complex subject understandable.”
“His great skill is being able to marshal all of the litigation but also to manage it in such a way that we are always ahead of the opposition and
always being proactive rather than reactive.”
Steven Porter
Senior Associate
T: +44 (0)161 662 8050
M: +44 (0)7702 960016
E: [email protected]
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 11 March 2015
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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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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
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© Pinsent Masons LLP 2015.
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