PM-Tax Wednesday 25 March 2015 News and Views from the Pinsent Masons Tax team In this Issue Our Comment •Budget 2015: No real surprises….but compliance and enforcement remains at “centre-stage” for the foreseeable future by James Bullock 2 •Budget 2015: UK tax and offshore briefing by Jason Collins •Budget 2015: Corporate tax by Eloise Walker •Budget 2015: Diverted profits tax by Heather Self •Budget 2015: VAT and branches by Darren Mellor-Clark Recent Articles •The Ingenious Media judicial review case by James Bullock •French real estate holdings through Luxembourg vehicles may need to be revisited by Franck Lagorce 10 •Tax developments in insolvency proceedings by Eloise Walker and Penny Simmons Our perspective on recent cases Senex Investments Ltd v HMRC [2015] UKFTT 107 (TC) Ingenious Games LLP & Others v HMRC [2015] UKUT 0105 (TCC) HMRC v Colaingrove [2015] UKUT 0080 (TCC) Leekes Ltd v HMRC [2015] UKFTT 93 (TC) 16 Events 20 Due to the Easter break, the next edition of PM-tax will not be published until 15 April. @PM_Tax © Pinsent Masons LLP 2015 NEXT Budget 2015: No real surprises… but compliance and enforcement remains at “centre-stage” for the foreseeable future >continued from previous page PM-Tax | Our Comment by James Bullock This comment was published in Tax Journal on 21 March 2015. James Bullock comments on the compliance and enforcement provisions announced in the Budget. Almost certainly the biggest surprise was the announcement, (pre-released in Wednesday morning’s Daily Telegraph) of the intention to abolish Self-Assessment Returns for individuals and small businesses. This was duly confirmed as a centrepiece of the Budget speech – and in the Budget Overview document under the heading “Making taxes easier”. The outline proposal is to create a system of “digital tax accounts” whereby taxpayers can (somehow) return their taxable income and gains in real time – and pay more “flexibly”. Of course it rather begs the question whether the overriding intention is to “make taxes easier” for taxpayers – or for HMRC? “Both” would be the Chancellor’s likely answer. The main concern here is that a new regime of tax reporting makes it much easier for future governments to increase powers (particularly in relation to information gathering) – without appropriate or commensurate safeguards. Likewise, it creates a template for a gradual move to “equivalent” treatment for self-employed people to those on PAYE – i.e. a monthly payment on account of tax. This has the potential to remove the cashflow advantage which is such a significant benefit for small business. A “roadmap” setting out the proposals and a consultation on a new payment process (leading to legislation) is promised for the next Parliament. It is almost inconceivable that a Labour-led government would not wish to press ahead with this proposal, so we can await developments with great interest. Put some time aside to respond to any Consultation that leads to a “dumbing-down” of taxpayers’ rights’. Something of a surprise was a suite of announcements around disclosure facilities. The existing (and long-running) Liechtenstein Disclosure Facility will be closed three months prematurely – in December 2015, whilst the life of the Crown Dependencies Disclosure Facility will be shortened by nine months – and will end at the same time. In their place will come a “New Disclosure Facility” relating to Tax Evasion, but on much less generous terms (penalties in excess of 30 per cent and – most significantly – no guarantee of immunity from criminal investigation). In the first place this really does mean that there is a “”burning platform” in respect of disclosures that have not already been made. Taxpayers with offshore accounts – and particularly those who have moved money out of Switzerland – need to bear in mind that most jurisdictions have now signed up to the Common Reporting Standard – with the result that financial information from (inter alia) Singapore, Hong Kong, Israel, Turkey and the UAE will be fairly freely available to HMRC by 2018. The remainder of 2015 will go down in history as the “last chance saloon” for anyone with such irregularities to benefit from very generous terms – and in particular from immunity from prosecution. The “New Disclosure Facility” is clearly intended to present an opportunity for people still to come forward. The absence of a guarantee of immunity is perhaps a mistake if the NDF is genuinely intended to be effective. This aspect is likely to have been included as a result of the outrage of the Public Accounts Committee (volubly expressed to Lynn Homer, HMRC’s CEO) in February – at a perceived ineffectiveness on the part of HMRC to prosecute tax evaders. The real issue will be what the attitude of the next Government will be to Criminal investigations for Tax evasion. Will the 90-year-old policy of only prosecuting a tiny proportion of cases finally come to an end? The other big announcement – already much trailed – will not be made until Thursday 19 March, (after Tax Journal has gone to print). This is the proposal for new criminal offences relating to Tax Evasion and penalties, specifically aimed at those who “facilitate” or promote it (principally the banks in the wake of the Swiss banking “saga” that so dominated the news in February). The Chief Secretary to the Treasury was stated as being due to make this announcement, which was originally a Liberal Democrat proposal. The Conservatives seem to have endorsed it as well – and once again, it would be very odd if Labour did not press ahead with its introduction – or possibly something even stronger, so once again we can expect a Consultation and in due course (probably in the Autumn Statement) draft legislation. One “dog that did not bark” once again was the Chancellor’s own proposal from April last year of a Strict Liability Offence relating to Offshore Tax evasion – which was consulted on in the Autumn of 2014, but in respect of which no mention was made in the last Autumn Statement. This might be one of the offences announced by the Chief Secretary (See article by Jason Collins for what was actually announced.). The announcement of a material change to the closure rules relating to Enquiries (enabling HMRC to close an aspect of an enquiry unilaterally notwithstanding the overall return remaining open) was announced in principle in the Autumn Statement, with a Consultation Document being published just before Christmas. The Consultation closed on 12 March 2015. The principal mischief here was the lack of a commensurate right on the part of a taxpayer (perhaps safeguarded by a requirement to seek approval from the Tribunal) to close an aspect on their return with a view to proceeding to Litigation. We are told that the government are “currently considering” the responses and we can expect a revised proposal (or possibly the same proposal) perhaps in the postelection Budget, which is expected in June. CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 2 >continued from previous page PM-Tax | Our Comment Budget 2015: No real surprises… (continued) Legislation relating to the once highly controversial Direct Recovery of Debt proposals, which was published in draft form for consultation around the time of the Autumn Statement will be introduced “in a future Finance Bill”. In the event of a Conservativeled government we might expect this in the post-election Finance Bill. A Labour-led government may have more immediate priorities in its post-election Budget and Bill and in such circumstances this might be expected in the 2016 Bill. It is interesting, given the extent of previous consultation, that this provision was not included in the current Bill. That said, it is perhaps more surprising how much legislation will be included in the forthcoming Bill, given the minimal amount of parliamentary time available to consider it before Parliament is prorogued next week. Finally, two other provisions which have been announced previously and consulted upon will be legislated upon “in a future Finance Bill”. The first is the proposal for tougher measures against people who persistently enter into Tax avoidance schemes which fail – known as “serial avoiders” – and which comes in tandem with a widening of the current scope of the Promoters of Tax Avoidance Schemes regime. The second is a tax-geared penalty regime aimed specifically at the GAAR. This was another measure that the Public Accounts Committee has been calling for (with increasing volume) for quite some time. One wonders if a Labour-led government might want to introduce something more robust? In the event of a Conservative-led government we can expect these provisions in the post-election Finance Bill. So – the days of the Coalition of 2010-15 might be very nearly over. But its legacy of weapons of mass-enforcement very much lives on – and can only increase under the next Government, whatever that looks like… 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 CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 3 >continued from previous page PM-Tax | Our Comment Budget 2015: UK tax and offshore briefing by Jason Collins Jason Collins comments on the new criminal offences announced in relation to tax evasion and other measures. In the Budget 2015, the Chancellor of the Exchequer announced further plans to tackle tax evasion and avoidance. Whether they are enacted depends on who is in Government after the General Election – although the shadow Chancellor confirmed that there was nothing in this Budget he would reverse. professional services firms. Those employers, and their employees, might say that they already have to report suspicious activity by their clients under existing anti-money laundering rules. However, an anti-money laundering report has the effect of exonerating the person making it from criminal liability and some might say that this merely encourages systematic reporting so as to “pass the buck” to the law enforcement agencies. The corporate offence would mean that banks and other employers have to pay greater attention to their employees’ and customers’ activities. The coalition upped the ante on those that might use the financial and professional industry to hide assets – shortening current disclosure opportunities, increasing penalties for non-compliance, legislating to require financial intermediaries to promote the disclosure facilities – and introducing new criminal offences aimed at taxpayers, banks and professional advisers. But, notably, there were no new announcements about the push for registers of beneficial owners. The territoriality of this measure is not yet clear – in particular whether it would apply to activity taking place only in the name of UK employers. It is possible it may operate like the UK’s anti-bribery laws – which can criminalise the activity of foreign corporates in some circumstances. The new offence goes some way to explain why many banks are reviewing their offshore businesses. New criminal offences and tax penalties Last year, HMRC consulted on a new “strict liability” offence of failing to declare offshore income. Unlike other offences, a prosecutor would not need to prove intent to defraud. The day after the Budget, Chief Secretary to the Treasury announced plans to press ahead with introducing this new offence, saying that no longer will it be possible to argue ignorance of a liability to tax and to blame it on your tax adviser. Treasury documents say that changes from the initial proposal will be put out for fresh consultation shortly – and suggest that, whilst the initial proposal was for the offence to apply only to income connected with countries who have not adopted the “common reporting standard”, the proliferation of countries adopting the standard may lead this to change. Tax penalties on third parties who assist others in evasion will also be introduced, geared to the tax at stake. As the Chief Secretary put it, if you help someone to evade tax of £1m, you can expect to pay a penalty of £1m or more. Third parties will also be subject to “naming and shaming” provisions. Curtailing disclosure facilities A surprise announcement from the Budget was the bringing forward of the closing date of the Liechtenstein Disclosure Facility from 6 April 2016 to 31 December 2015. The Crown Dependency facility has also been brought forward from 30 September 2016 to the same date. Penalties are also being beefed up. The UK has traditionally applied penalties by reference to the tax at stake. Plans were announced to link the penalty to the size of the assets concerned – a system which may make penalties more like fines for criminal offences, which are in part geared to ability to pay. Significantly, this means that none of the present facilities will be open when the first set of bulk data under “UK FATCA” is sent to the UK on 30 September 2016 by the Crown Dependencies and Overseas Territories. By then, a new “last-chance” facility will be in place, running until mid-2017. The terms will be less generous: the fixed penalty will increase from 10% to 30% and the express guarantee of immunity from prosecution will no longer be available. It is not clear whether the shorter look back period under the LDF will also go. Banks and other third parties There will also be a new criminal offence of a “corporate failure to prevent tax evasion or the facilitation of tax evasion”. This measure is targeted at employers, principally banks, fiduciaries and CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 4 >continued from previous page PM-Tax | Our Comment Budget 2015: UK tax and offshore briefing (continued) By the time of the first exchange of data under the “Common Reporting Standard” (30 September 2017), no disclosure facilities will be available at all. The Government has also announced plans to legislate to require “financial intermediaries” and professional advisers to warn their clients about the information exchange and to promote the existence of disclosure facilities (presumably the legislation will be in place before the last chance facility comes to an end). Again the territoriality of this measure is unclear. Intermediaries should in any event be encouraging all their clients to undertake a tax “health check” well before information is exchanged. Offshore trustees and fiduciaries should take up the initiative themselves on this, not forgetting that in some cases they can incur personal liability for tax. By closing the LDF early, the “burning platform” just had petrol doused on it. If anyone is any doubt about whether they have fully paid past taxes they need to act quickly. But taking away the guarantee of immunity from prosecution for those who come forward after the LDF has closed could be counter-productive. How many people will think twice about disclosing if they could up end up just writing their own prosecution case? If anyone has any concerns about prosecution, the best advice is to register to use the LDF before it is taken away on 31 December this year. Avoidance The Chancellor of the Exchequer announced that more “accelerated payment notices” will be issued in relation to historic tax avoidance disputes … notwithstanding the current judicial review Pinsent Masons has brought of the legislation on behalf of members of film partnerships promoted by Ingenious Media. He also confirmed that the “diverted profits tax” aimed at multinational corporations will be legislated for before the end of Parliament and will be effective from 1 April 2015 – despite concerns that it has been rushed through and will be ineffective. And banks were plundered further through an increase to the bank levy and a consultation on removal of the right to claim a tax deduction for any compensation paid in relation to mis-selling scandals. Jason Collins is our Head of Tax. Jason is one of the leading tax practitioners in the UK. He specialises 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. E: [email protected] T: +44 (0)20 7054 2727 CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 5 >continued from previous page PM-Tax | Our Comment Budget 2015: Corporate tax by Eloise Walker Eloise Walker gives her initial reaction to the corporate tax announcements in the Budget. Most of the Budget was a bit of a non-event for corporate tax practitioners this time around, as you might expect from an election year. Of far more interest was watching the Chancellor cram as many voter-appealing measures into his speech as possible. That’s not to say there weren’t some nasty measures in there – hitting disguised fee income for investment managers, the latest round of capital allowance schemes, bank loss relief and enacting the Crédit Lyonnais VAT decision spring to mind – it’s just that most of them had already been well trailed ahead of time. What surprised me in relation to these measures was not so much that HMRC was putting measures in place, so much as the shoddiness of the drafting. I can’t see how HMRC are going to apply it – in particular, how on earth do you calculate the hypothetical “it will be reasonable to assume” test of the economic benefit versus the tax value? Why not make it objective? So off we go again with yet another TAAR that may or may not be any use against the actual scheme it is trying to hit but is likely to splatter innocent arrangements with the compliance burden of having to check it doesn’t apply no matter how much HMRC say “normal” group tax planning won’t be affected. Don’t we have a GAAR for this sort of thing? It wins my personal prize for “MostImpenetrable-Draft-Legislation-in-a-Budget” for this year.” In terms of surprises, everyone in private equity will be talking about the measures to restrict entrepreneurs’ relief and anyone who didn’t already suspect there was incoming and couldn’t get their business sold ahead of 18th March will be disappointed that their “Manco” structure (previously used by those with under 5% holdings who structure through a management vehicle to get them over the threshold) just died – some yesterday were still touting it as viable, which I doubt, but even if it does manage a miraculous zombie resurrection its days are definitely numbered now. In other measures, companies operating in the North Sea will be pleased at the confirmation of the investment allowance and cluster area allowance for ring fence trades, as well as the rate reduction in petroleum revenue tax (from 50% to 35%) and the supplementary charge (from 32% to 20%), with the latter being backdated to 1 January 2015. I can’t say I was actually surprised to see the insanity that is the diverted profits legislation going ahead, but I will admit to disappointment that HMRC hasn’t seen reason on this one (see comment by Heather Self). In a way, even more disappointing was the anti-avoidance measures directed at corporation tax loss refresh schemes. The rate of the Bank Levy is to be increased to 0.21%, and as expected the use of bank losses will be restricted – although there will be a carve out of up to £25 million of losses for building societies. A new announcement affecting banks was that customer compensation expenses are to be made non-deductible for corporation tax purposes, in an extension to the existing principle that fines are not generally tax-deductible. This measure will be the subject of consultation and will be introduced in a future Finance Bill. A technical note issued by HMRC explains that where companies find they have carried-forward losses that they cannot use imminently because they are loss making but other group companies are profit making, some companies will enter arrangements to access those losses by shifting profits around the group, or changing the timing of receipts. The note states that “this may involve as simple an arrangement as shifting a profitable trade or income producing asset into the company with carried-forward relief.” It states that this type of arrangement will not be affected by the new restriction but companies that “go further, and ensure that they also create a new in-year relief somewhere in the group where this would be of use, effectively turning the carried-forward loss into a new and more versatile in-year relief; ‘refreshing’ the loss” will be affected by the new measure but only when it is reasonable to assume that the value of the tax advantage will exceed any other economic benefits referable to the arrangements. 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. E: [email protected] T: +44 (0)20 7490 6169 CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 6 >continued from previous page PM-Tax | Our Comment Budget 2015: Diverted profits tax by Heather Self Changes to the diverted profits tax legislation include welcome changes to the notification requirements but there are still concerns about real estate transactions and a “nasty sting in the tail” for oil and gas companies. In the Budget, the Chancellor confirmed that the new diverted profits tax (DPT) will come into force on 1 April 2015, as originally planned. However, some changes will be made to the legislation, which was initially published in draft in December 2014. from 3 months to 6 months after the end of the relevant accounting period. This means that a company with a 31 December 2015 year end will not have to notify until 30 June 2016. The notification requirements look to be much improved and this will reassure many companies who were concerned about the administrative burden of having to make annual notifications in situations where no charge to DPT would arise. DPT is a new 25% tax is “aimed at large multinationals who artificially shift their profits offshore”. It will apply 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. Disappointingly HMRC says that the legislation will also be changed to “put beyond doubt that it may apply to sales of property in the same way as to other goods and services”. As John Christian and I mentioned in our article in 11 February’s PM-Tax there were concerns about the impact of DPT on real estate transactions. The revised draft legislation narrows the requirement for companies to notify that they are affected by the regime. In the original draft affected companies were obliged to notify HMRC within three months of the end of an accounting period in which it was “reasonable to assume” that diverted profits might arise. There were concerns that this was so wide it would lead to huge numbers of notifications in situations where a liability to DPT was extremely unlikely to arise. It appears that DPT could apply in some circumstances where a non UK resident company, such as an offshore special purpose vehicle (SPV), has been used in a transaction involving UK land or where there is a UK presence and profits are extracted to offshore owners based in low tax jurisdictions. Development projects involving offshore owned UK property should be reviewed in the light of DPT, as should investment structures involving an offshore company where the local tax rate is less than 16% and propco/ opco structures. The notification requirement will only now apply where there is a significant risk that a charge to DPT will arise and where HMRC does not know about the arrangements. The emphasis will be changed so that notification will not be required if it is reasonable for the company to assume that a charge to diverted profits tax will not arise. There will be no duty to notify for any accounting period if it is reasonable for the company to conclude that it has supplied sufficient information to enable HMRC to decide whether to give a preliminary notice for that period and that HMRC has examined that information (whether as part of an enquiry into a return or otherwise); or HMRC has confirmed that there is no duty to notify because the company or a connected company has supplied such information and HMRC has examined it. In a nasty sting in the tail for oil and gas companies, HMRC states that as a 25% rate of tax would not be a significant deterrent for oil and gas companies, which pay corporation tax at higher rates, DPT will be set at 55% for such companies. Other changes to be made to the draft legislation include provisions to exclude charities and tax exempt bodies from the “tax mismatch” provision and changes to the way DPT is calculated. In addition, to avoid the need for annual notifications, HMRC states that once a company has notified for one period then it does not have to notify for the next provided that there has been no material change in circumstance. The period allowed for initial notification when the tax comes into force has also been extended The DPT legislation is included in the pre-election Finance Bill which was published on 24 March, will be debated in Parliament on 25 March and enacted before Parliament is dissolved on 30 March. CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 7 >continued from previous page PM-Tax | Our Comment Budget 2015: Diverted profits tax (continued) Although there are some welcome changes to the DPT rules, I am extremely concerned that this highly complex legislation is being enacted in such a hurry with very little time available for proper scrutiny of the final provisions. With a projected yield in 2015/16 of only £25m, it is hard to see why this measure could not be properly debated as part of a second Finance Bill, later in the year. Heather Self is a Partner (non-Lawyer) at Pinsent Masons 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 CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 8 >continued from previous page PM-Tax | Our Comment Budget 2015: VAT and branches by Darren Mellor-Clark Darren Mellor -Clark discusses the Budget announcement regarding VAT recovery on costs relating to overseas branches. Hidden within the Chancellor’s words regarding the continuing intention to be tough on evasion and avoidance was mention of just such a measure to prevent recovery of UK VAT on costs relating to overseas branches. Tax managers for many banks, already concerned at some measures such as the increase in Bank Levy, would have sat up in concern at another potentially costly change. The change to UK legislation, effectively, removes the ability for such transactions to be included in a UK partial exemption calculation. The input tax will need to be recovered by reference to transactions undertaken by the UK. It is expected that this will lead to an increase in irrecoverable UK VAT as the view is that the UK head office is likely to undertake proportionately more transactions with EU counterparties, which do not confer a right to input tax recovery. The press releases and notes published as the Chancellor sat down, however, revealed a measure with substantially less of the “new car smell” about it. In very large part, the proposed measures simply bring into UK legislation the active parts of the 2013 Credit Lyonnais judgment of the CJEU. The new measures are to have effect from 1st August 2015. It is unclear how much real impact the changes will have in day to day business. The HMRC Budget Notice states, unambiguously, that UK law allows non UK transactions to be taken into account in UK partial exemption calculations. However, the practical experience of agreeing such an inclusion with HMRC has frequently been more varied, with many officers displaying considerable resistance to such provisions. In line with many financial services businesses, banks are unable to recover all of the input VAT incurred on their cost base. The method of calculating the extent of such recovery is known as a partial exemption method. Typically the methods use a methodology which relies upon identifying the total value (or number) of transactions with non EU counterparties and comparing this to the total value (or number) of transactions with all counterparties. The resulting calculation gives a percentage which is then applied to VAT incurred to determine how much may be recovered. Along with the additional considerations required by implementation of the CJEU’s Skandia decision, it looks as though the VAT treatment of branches is likely to be on the VAT radar over the coming months. 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. It has been reasonably common for banking entities in the UK to have branches established outside of the UK. Similarly it is also common for the UK head office to bear some costs for those overseas branches. Historically this has caused an issue as there are no transactions, originating from the UK, to link to the costs and so determine VAT recovery. As an administrative easement HMRC had, until now, allowed the UK VAT incurred in relation to the overseas branch to be recovered by reference to transactions undertaken by that branch. For banks with non-EU branches this had historically led to high recovery as many of the transactions undertaken were, unsurprisingly, with non EU counterparties. E: [email protected] T: +44 (0)20 7054 2743 CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 9 PM-Tax | Recent Articles The Ingenious Media judicial review case by James Bullock This was previously published on LexisPSL. With HMRC facing allegations of unlawful disclosure plus damages, James Bullock explains why the Court of Appeal ruled in HMRC’s favour in R (on the application of Ingenious Media Holdings plc and another) v HMRC [2015] EWCA Civ 173. What is the background to this case? The case concerned whether HMRC unlawfully disclosed information to the press about a promoter of film schemes and whether the disclosure breached his human rights and should give rise to damages. Ingenious argued that “a function of HMRC” was limited to a direct connection between tax collecting in a specific case or cases, whereas HMRC argued that it had a wider meaning of generally raising more tax revenue. Giving the leading judgment in the Court of Appeal, Sir Robin Jacob said that a reasonable citizen would think “a function of HMRC” had the wider meaning of generally raising more revenue. Indeed he went as far as to say that a reasonable citizen contemplating investing in a scheme that HMRC did not think worked would expect HMRC to publish its concerns and “might even feel aggrieved if the Revenue did not”. In 2012, Dave Hartnett, then Permanent Secretary at HMRC, gave an ‘off the record’ briefing to two journalists from The Times about film schemes, which he believed would not be published. The journalists mentioned Ingenious Media (Ingenious), a promoter of film schemes and its founder and CEO, Patrick McKenna. Mr Hartnett acknowledged that he had spoken to Mr McKenna and made some comments about him, which were subsequently published. The comments included “he’s a big risk for us so we would like to recover lots of tax relief he’s generated for himself and for other people”. Mr Hartnett had also described film schemes as “scams for scumbags”, although this comment was not published. The Court dismissed Ingenious’s arguments that HMRC had breached its own Information Disclosure Guide as Ingenious said the disclosures about Mr McKenna went beyond what was necessary and proportionate. The judge pointed out that the HMRC guide could have no binding effect on the proper construction of a statute. He considered that because there were only two main promoters of film schemes, the comments about Ingenious and Mr McKenna, after the journalists had mentioned their names, were justifiable. Ingenious and Mr McKenna brought a claim for judicial review of HMRC’s actions in discussing Ingenious and Mr McKenna in the briefing with the journalists. In the High Court, Sales J dismissed the claim and Ingenious and Mr McKenna appealed to the Court of Appeal. What were the key factors considered by the Court of Appeal? The Court of Appeal considered whether Sales J was correct to rule that: The Court of Appeal refused to overturn Sales J’s decision that although the right to a private and family life under Article 8(1) of the ECHR applied, the disclosure was justified by Article 8(2). Bearing in mind that the disclosures were made only to the journalists and Mr Hartnett did not expect the comments to be published, there was no breach of the right of respect for private life, and in any event there was no evidence of any damage to reputation. •HMRC had not acted unlawfully in disclosing information about Mr McKenna •HMRC had not interfered with Mr McKenna’s right to respect for private and family life under Article 8 of the European Convention on Human Rights (ECHR) •a claim for £20 million of damages as a result of HMRC breaching the right to peaceful enjoyment of possessions under Article 1 Protocol 1 (A1P1) of the Human Rights Act failed. The judge said that Ingenious’s claim for damages was based on a loss of future custom as a result of the damage to its reputation. However, he said that Denimark v UK [2000] 30 EHRR 133 established that a mere loss of future income was not an interference with “possessions” within the meaning of A1P1 and so the claim failed. What did the Court decide? The Court had to first consider whether the disclosures were in breach of Section 18 of the Commissioners for Revenue and Customs Act 2005. This states that HMRC may not disclose information unless the disclosure is made “for the purposes of a function of the Revenue and Customs”. CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 10 >continued from previous page PM-Tax | Recent Articles Ingenious Media case – Lexis Q&A (continued) To what extent does the court’s decision clarify the law in this area? In the context of the comments made over the course of the intervening period by Rt. Hon. Margaret Hodge MP and other MPs on the Public Accounts Committee about the tax affairs of companies, such as Google, Starbucks and more recently directors of HSBC, these comments from Dave Hartnett look pretty tame. However, an important distinction is that MPs are protected by Parliamentary privilege, whereas HMRC has to abide by the duty of confidentiality. It is perhaps surprising that Dave Hartnett was not more guarded in his choice of language, particularly as it is generally understood (and a fundamental part of any ‘media training’) that no conversation with a journalist is ever truly ‘off the record’. However, an important factor in the case was that it was the journalists who first mentioned the names of Ingenious Media and Patrick McKenna and there were only two major promoters of film schemes. The judge pointed out that the position might well have been different if there had been a number of providers of film schemes and there had been no good reason for picking on Ingenious rather than any of the others. He also thought that even if Mr Hartnett had not named Ingenious, people would have thought he was talking about Ingenious because there were so few major promoters of film schemes. Are there any implications for investors in Ingenious film schemes? It is important to note that this case does not consider whether the underlying film schemes promoted by Ingenious are effective – that is being considered in a separate case in the First Tier Tribunal. The FTT hearing began in November 2014, but has been held up by a procedural issue and is not expected to resume sitting until June at the earliest. See our summary of the recent decision in Ingenious Games for further details. HMRC has been issuing accelerated payment notices (APNs) to users of tax schemes, including the Ingenious Media film schemes. These require the outstanding tax to be paid within 90 days, even though the merits of the scheme have not been fully considered by the FTT. Some Ingenious Media investors, represented by Pinsent Masons have been given permission to bring a claim for judicial review against HMRC’s decision to issue APNs. 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 CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 11 French real estate holdings through Luxembourg vehicles may need to be revisited PM-Tax | Recent Articles by Franck Largorce Structures for investments from overseas investors in French real estate that involve Luxembourg vehicles may need to be restructured if an expected change to the double tax treaty between France and Luxembourg takes effect. A change to the capital gains article of the France/Luxembourg double tax treaty of 1 April 1958 was agreed in a Fourth Protocol to the treaty that was signed in September 2014, but has not yet come into force. The effect of the change is that a Luxembourg company will be taxed in France on capital gains made on the sale of an entity whose assets predominantly comprise French real estate or derive directly or indirectly more than 50% of their value from French real estate. The date the change takes effect will depend upon when the ratification of the treaty changes in each country is notified: but the change will not have effect until 1 January 2016 at the earliest; and if the last of the notifications does not occur before 30 November 2015, then the change will not come into force before 1 January 2017, at the earliest. The fact that the change may come into effect in 2016 means that investors using Luxembourg structures should act now during 2015 to revisit their investment strategy in French real estate; and/or accelerate arbitrations before 2015 year-end. One structure that remains efficient is to use a French non-listed REIT vehicle (an OPCI) to invest in France; either for existing investments, or for future projects. The double tax treaty change is a genuine business issue internationally as for a number of years most players have chosen Luxembourg vehicles to invest in real estate in, among other countries, France – one of the most important real estate markets in Europe. Luxembourg vehicles are frequently used as a conduit by investors from outside France or Luxembourg – with many of the master funds situated in the UK and structured as UK Limited Partnerships (LPs) or Scottish LPs. Franck Lagorce is a tax partner in our Paris office. With over 25 years’ experience, Franck advises both French and international clients on domestic and cross-border matters. He assists with general aspects of direct and indirect taxation and has considerable experience in international tax. Franck works closely with our real estate lawyers, advising both French and foreign institutional players, governmental bodies, investment funds and real estate asset management companies on their operations. The treaty change is already influencing some large transactions on the French market. Share deals are being rushed through and some portfolios are being placed on the market because of this change. Under the current system, although capital gains on disposals of real estate held directly by a Luxembourg company have been taxed in France since 2008, sales by Luxembourg entities of shares in companies that own French real estate are still not taxed in France. The current double tax treaty provides that the gains can be taxed in Luxembourg, where internal rules usually leave quite a reasonable tax liability in the Grand-Duchy. E: [email protected] T: +33 1 53 53 08 67 One very popular structure over the last 10 years for holding French real estate has been for the property to be held by a French Société Civile, owned by a Luxembourg entity. Under this structure, the sale of the asset by the Société Civile is subject to French corporation tax when the property is sold but not when the Luxembourg company sells the Société Civile. When the double tax treaty Fourth Protocol change comes into force, the Luxembourg entity will be taxed in France, subject to French corporation tax at 34%. Other structures affected by the change include those where a Luxembourg entity holds French real estate through a French tax paying company or through a Luxembourg company. CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 12 PM-Tax | Recent Articles Tax developments in insolvency proceedings by Eloise Walker and Penny Simmons Eloise Walker and Penny Simmons consider recent tax developments and how they might affect decision making in the run up to an insolvency procedure. Tax, and how, when and under what circumstances it must be paid, has been an increasingly hot topic in the UK in recent months. Although offshore avoidance has been hogging the headlines, changes are afoot which could affect a wide range of taxpayers, with those companies in financial difficulty needing to take particular care not to make a difficult situation terminal. One of the key complications in debt restructurings has been the – in HMRC’s eyes – misuse of the reliefs in tax avoidance scenarios, especially the debt-for-equity exemption and the connected party rules. In combatting such perceived misuses HMRC has steadily built up layers of anti-avoidance legislation until it has become somewhat difficult for a company in actual distress to wend it way between the rules to achieve relief short of insolvency proceedings. In this article we will look at some recent developments: Consequently, in December 2014, HM Treasury published draft legislation introducing a new ‘Corporate Rescue’ exemption, providing additional tax relief for borrowers following a debt release. The exemption will be an alternative to the debt for equity swaps exemption and a release may qualify for both exemptions. •A proposed new tax rule for restructuring and amending UK corporate debt •A new exemption from withholding tax for qualifying private placements •New proposed powers for HM Revenue & Customs (HMRC) to recover tax debts directly from taxpayers’ accounts. The new exemption will apply where it is reasonable to assume that without the debt release (and other related amendments/ refinancings) there would be a material risk that at some point within the next 12 months the debtor company would be unable to pay its debts. A company will be “unable to pay its debts” if it is unable to pay its debts as they fall due, or where its assets are worth less than its liabilities. Tax on UK debt restructurings – a new ‘corporate rescue exemption’ Subject to certain exceptions (that are outside the scope of this article) when a corporate lender agrees to release a debt, the lender will be entitled to a tax deduction, which will be used to reduce its taxable profits. The new exemption is aimed at companies in significant financial distress but not yet in an insolvency arrangement (when other reliefs kick into effect). In draft guidance published in January, HMRC explained that a material risk of insolvency would require a significant risk of insolvency of “real concern” to the directors. Conversely, generally, the release of a debt will trigger a tax charge for the borrower (at a rate of 20% from 1 April 2015). Clearly, this is not ideal for a company that is seeking forgiveness of some of its debt because it is in financial distress. Consequently, several exemptions exist that seek to ensure that the borrower does not incur a tax charge following a debt release. One exemption, that is commonly relied upon in relation to restructuring distressed debt, relates to debt for equity swaps. Broadly, a borrower is not taxable where a debt is released in consideration of the issue of shares or an entitlement to shares (i.e. a warrant/option over shares). Another key exemption is a waiver of debt between connected parties, which is tax neutral for both lender and borrower. However, there are a number of conditions and complications that can arise when structuring such waivers and it is advisable that specialist tax advice is sought at an early stage of the restructuring process. Reassuringly, HMRC has confirmed that the fact that there is a real risk of insolvency does not imply that by continuing to trade the directors will breach their company law obligations and be guilty of wrongful trading. The guidance explains that a “reasonable assumption” of insolvency will normally require evidence of circumstances that may result in insolvency practitioners being engaged or insolvency arrangements being considered (such as the breach of financial covenants or enforcement action by creditors). HMRC has indicated that an insolvent balance sheet is likely to be the strongest evidence of a “reasonable assumption” that a company will be unable to pay its debts within the next 12 months. CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 13 >continued from previous page PM-Tax | Recent Articles Tax developments in insolvency proceedings (continued) The key to the success of the new exemption will depend on two factors. First, HMRC’s willingness to allow some leeway in what is or is not financial distress significant enough to fall within it – apply it too strictly and no-one will be able to use it so they may as well not have bothered. Secondly, the market’s willingness to avoid misusing the new exemption in scenarios for which it is not readily intended – if this happens, the first factor will come into play and the rules will tighten until the exemption becomes useless. To date, withholding tax has been a significant expense to businesses seeking to raise finance that are unable to secure debt finance from a bank. It is hoped that this new exemption will create opportunities for businesses to secure financing to purchase distressed debt without incurring substantial withholding tax costs. However, as ever with tax legislation, the devil will be in the detail and it is almost impossible to assess the effects of the new exemption without understanding the exact conditions that will need to be satisfied. HM Treasury has a long tradition of proposing measures that make great sound-bites but are so hedged round with anti-avoidance that they do not actually deliver on their initial promises, so we will have to wait and see if this proves an exception to that general rule. In last week’s Budget, the Treasury announced that the legislation providing for the new exemption would not be included in the current Finance Bill that is due to be enacted by the end of March. However, it has been confirmed that the draft legislation will apply retrospectively to releases and to credits arising from 1 January 2015. At the time of writing, it remains unclear when the draft legislation will become law. Given the fast approaching General Election, there is now a small but real risk that this new exemption could ultimately be shelved by a new government. Clearly, there is still the risk that the new exemption will be so narrowly drawn that it will have limited value to the refinancing market for distressed debt and will not provide the boost that the market currently seeks. At the time of writing it is anticipated that the new exemption will be introduced at the end of March 2015 (when the Finance Bill is enacted); therefore, it is hoped that we will not have long to wait until the finer details are published. Withholding Tax Exemption for Private Placements Another potentially helpful tax development is the proposed new exemption from UK withholding tax for private placements. HMRC’s Power for the Direct Recovery of Debts (DRD) In the 2014 Budget, the Government announced its intention to introduce a new power to enable HMRC to collect tax debts directly from taxpayers’ (both individuals and businesses) bank accounts. Generally, a company has a duty to withhold UK tax (currently at a rate of 20%) on payments of UK interest. There are a number of exceptions to this rule; for example, there is currently no withholding tax on payments of interest on quoted Eurobonds (although this could all change after the General Election, since Labour wants to abolish this!). Broadly, the new power will enable HMRC to collect debts directly from a taxpayer’s bank account where the following conditions are satisfied: Primarily, the new exemption is being introduced to encourage the use of private placements as an alternative form of finance. The UK’s private placement market is currently underdeveloped. In March 2012, the Breedon Report recommended increasing the number of UK-based private placements investors in order to unlock a new source of financing for mid-sized borrowers. •The taxpayer owes more than £1,000 •The taxpayer has received a face to face visit from HMRC and has not been identified as “vulnerable” •The taxpayer will have a minimum balance of £5,000 across its accounts after the tax debts are collected. In brief, the new exemption will only apply to certain unlisted private placements. Originally, it was also intended that the private placement should be issued for at least 3 years. However, in last week’s Budget, HM Treasury announced that this requirement was to be removed. Draft legislation published in December 2014, specifies that the private placement also needs to meet other conditions outlined in regulations. However, at the time of writing, these regulations have not been published and therefore, it is very difficult to determine the potential application of the new exemption. It should be noted that there will be a right of appeal to the County Court against an action by HMRC for DRD. Such a power could lead to a significant reduction in HMRC winding up petitions in circumstances such as the Parkwell and Changtell cases. Generally, HMRC is an unsecured creditor in insolvency procedures. Consequently, there is concern across industry that HMRC could use its new powers directly before, or even during, an insolvency process to gain an advantageous position over other creditors – thereby, effectively reinstating the abolished Crown preference. The banking community in particular, has expressed concern about this and how such powers could affect a bank’s position as a secured creditor and its right to exercise set-off. HM Treasury has published details of conditions that are likely to be introduced; however, there is little merit in evaluating the effectiveness of the new exemption until these conditions are finalised. It should also be noted that HM Treasury has indicated its intention to introduce anti-avoidance rules to ensure that the exemption can only be applied where the private placement has been issued and held for genuine commercial reasons. CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 14 >continued from previous page PM-Tax | Recent Articles Tax developments in insolvency proceedings (continued) HMRC has confirmed that there is no intention that the new measures should affect insolvency proceedings. Indeed, draft legislation published in December 2014, contains provisions to restrict HMRC’s ability to use DRD in specified insolvency situations. In last week’s Budget, it was confirmed that this measure will not be introduced until the next Parliament and therefore, legislation is not going to be included in the current draft Finance Bill. Given the impending General Election, it is still uncertain whether and indeed how exactly this measure will be introduced but the authors are hopeful that HMRC will make good on its promises. 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. E: [email protected] T: +44 (0)20 7490 6169 Penny Simmons is a Senior Professional Development Lawyer in the tax team and provides technical assistance to clients and members of the team on all areas of corporate tax including corporate finance and M&A work, private equity, employment tax and property tax. Penny also has experience of advising high net worth individuals on various personal tax matters, particularly in relation to residence and domicile. E: [email protected] T: +44 (0)20 7418 8294 CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 15 >continued from previous page PM-Tax |PM-Tax Our Comment | Cases Cases Senex Investments Ltd v The Commissioners for Her Majesty’s Revenue & Customs [2015] UKFTT 107 (TC) Building last used as a church qualified for BPRA Senex converted a disused church into a restaurant and claimed business premises renovation allowance (BPRA) on the refurbishment costs. BPRA is a capital allowance for the costs of bringing commercial premises, in disadvantaged areas, that have been unused for more than 12 months back into use for commercial purposes. The FTT accepted that the church, whilst being a non-profit making organisation would aim to have met its costs or even make a surplus. It noted that Section 360C CAA did not require the carrying on of a trade with a view to realising a profit or on a commercial basis. It accepted that the church did not have to make a profit or have a profit motive to be carrying on a trade, profession or vocation in accordance with the case of Incorporated Council of Law Reporting of England and Wales. Senex said that the church qualified for BPRA because it was last used “for the purposes of a trade, profession or vocation” within the meaning of Section 360C(1)(c)(i) CAA and that part of the premises had last been used as an office within the meaning of Section 360C(1)(c)(ii) CAA. The FTT dismissed HMRC’s arguments that BPRA was introduced to address the mischief of unused shops and that the allowance relates only to business premises. It said that the policy purpose of BPRA was to foster the regeneration of deprived areas in the UK, by encouraging private investment in those areas in order to increase local enterprise and employment. It said the “mischief” was derelict business property in deprived areas and/or the redevelopment of brownfield sites. It also accepted that the vestry was used as an office. Senex said that the minister of the church would have been carrying on a profession. It argued that activities which carried on by an individual constitute a profession are potentially taxable as a profession or trade when carried on by an unincorporated association. Relying on the 1888 case of Incorporated Council of Law Reporting of England and Wales, it said that a body like the church did not have to have a profit making motive in order to be carrying on a trade, profession or vocation, the profits of which are liable to corporation tax. Comment This case shows that the type of properties qualifying for BPRA may be wider than might be expected. HMRC denied the claim saying that “trade, profession or vocation” relates to business activities and that Senex’s claim went against the intention of Parliament when introducing BPRA. They even quoted passages from the Bible about Jesus driving the money lenders from the temple in support of their argument that the church was not carrying on a trade. Read the decision CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 16 >continued from previous page PM-Tax | Cases Cases (continued) Ingenious Games LLP & Others v HMRC [2015] UKUT 0105 (TCC) HMRC could raise fraud in cross examination even though they had not pleaded fraud Ingenious are LLPs investing in Ingenious Media film loss schemes seeking to create deductible losses. The FTT is hearing a case concerning whether the schemes work. Very late on during the FTT hearing, Ingenious submitted an application for the adjournment of the hearing, which was rejected by the FTT. Henderson J said that, “as a matter of professional duty, counsel may not put questions to a witness suggesting fraud or dishonesty unless they have clear instructions to do so, and have reasonably credible material to establish an arguable case of fraud”. He also said “it is not open to the tribunal to make a finding of dishonesty in relation to a witness unless (at least) the allegation has been put to him fairly and squarely in cross examination, together with the evidence supporting the allegation and the witness has been given a fair opportunity to respond to it”. However, he said that these obligations are quite different from and do not entail, a prior requirement to plead the fraud or misconduct which is put to the witness. The application for an adjournment was a result of allegations made by HMRC in a document setting out HMRC’s submissions based upon the evidence in the case. HMRC’s document alleged that the prospectus for one of the schemes contained a number of serious inaccuracies and alleged in several places that key individuals either were or should have been aware of these inaccuracies. Henderson J said (and the FTT found) it was “reasonably clear … [the allegations] were meant to include express allegations of dishonesty.” Henderson J went on to say that whilst the FTT had stated that the evidence as it stood was not sufficient for the FTT to find fraud, the evidence is still being presented as the case is only part heard. He refused to overturn the FTT’s decision and held that HMRC should still be permitted to put allegations of dishonesty to the three individuals. Ingenious took exception to these allegations because dishonesty had never been pleaded by HMRC. Ingenious argued in the UT that HMRC should not have been allowed to make allegations of dishonesty procedurally. In considering whether the FTT erred in refusing the adjournment sought, Henderson J stated that “It would in my view have been quite inappropriate (and, arguably, so unreasonable as to amount to an error of law) if the FTT had granted a lengthy adjournment for Ingenious to prepare evidence, and make unspecified further disclosure, in relation to allegations of dishonesty which had not yet been put to the witnesses concerned, but had merely been advanced (prematurely, on the evidence as it then stood) in HMRC’s Evidence Paper”. Henderson J said that in cases where the burden of proof lay on HMRC to establish fraud or dishonesty, HMRC could not raise dishonesty without having pleaded it. However, in this case the burden of proof was on Ingenious, as an HMRC amendment to a tax return within normal time limits places the burden of proof as to the inaccuracy of the amendment onto the taxpayer. As the burden of proof was on Ingenious he said that HMRC were able to cross-examine a witness as they pleased, without making their intentions of cross-examination known beforehand. Comment The Ingenious case, looking at whether the film schemes are effective, began to be heard in November 2014. The case considered here, although expedited by the FTT and the UT, will delay things further and it is unlikely that the hearing on the substantive case will begin again until the summer. In the meantime HMRC have issued accelerated payment notices to many of the users of the schemes requiring payment of the disputed tax within 90 days. A group of Ingenious Media investors have been given permission to bring a judicial review against HMRC’s issue of accelerated payment notices. Read the decision CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 17 >continued from previous page PM-Tax | Cases Cases (continued) HMRC v Colaingrove [2015] UKUT 0080 (TCC) Fixed charge for electricity in chalets and caravans did not benefit from reduced rate of VAT and was part of a single complex standard rated supply of accommodation Colaingrove provide serviced chalets and static caravans at holiday parks in the UK. The issue at dispute was whether the provision of electricity as part of the supply by Colaingrove to certain users of its serviced chalets and static caravans should be taxed at a reduced rate of VAT notwithstanding that the charge for electricity is an element of a single complex supply of serviced accommodation taxed at the standard rate. Before the UT hearing, the FTT decision in Colaingrove was considered by Vos J in the UT in WM Morrison Supermarkets v HMRC. He said that the principle in CPP was overriding, and the French Undertakers case could only have any application where the national legislation made specific provision for a reduced rate to apply to a concrete and specific element of a specified category of a complex supply. As part of a promotion for Sun readers, cheap holidays were provided by Colaingrove. The charge for accommodation was collected by The Sun (and later paid on to Colaingrove), but a fixed daily charge for electricity was paid direct to Colaingrove in order for the booking to be accepted. In the UT appeal Colaingrove argued that UK domestic legislation does provide for a reduced rate to apply to the supply of electricity where that supply forms a concrete and separate part of a wider supply. Although Hildyard J said that the issues were not as clear cut in this case as in the WM Morrison Supermarkets case, concerning charcoal in disposable barbecues, he found for HMRC and decided that the provision of the electricity by Colaingrove could not qualify for the reduced rate of VAT. In the FTT, Colaingrove had failed on its argument that there were two separate supplies, one of holiday accommodation and one of electricity. However the FTT said its supply of electricity should be treated as a ‘concrete and specific’ aspect of its transactions with, and supply to, Sun readers, and that the relevant UK legislation provided for a reduced rate of VAT to that aspect of the supplies. HMRC appealed. The Judge said he was persuaded by VosJ’s analysis in Morrison that the French Undertakers case did not ‘trump’ or oust the CPP analysis. He said that applying CPP there was single complex supply of serviced accommodation. This meant that for the purposes of section 29A VATA, the supply made by Colaingrove was not a supply specified in Schedule 7A, even though a supply on its own of electricity to chalets and caravans would be. The FTT had relied on the case of European Commission v France (Case C- 15 94/09) (the ‘French Undertakers case’). The FTT said the French Undertakers case was authority for the entitlement of a Member State to legislate that a reduced rate of VAT should apply to the provision of electricity even where, if by virtue of CPP that provision would be characterised as merely an element in a larger single complex supply. It said that Parliament had so legislated in section 29A and Group 1, Schedule 7A VATA. Colaingrove had argued that the position for holidays provided to Sun readers should not be different to that for its other customers who paid for their electricity by reference to meter readings and benefited from the reduced rate of VAT. However, looking at it objectively Mr Justice Hildyard said that Parliament may have wanted to draw a distinction between provision of electricity for domestic use in a verifiable amount and a fixed charge irrespective of use or its amount. Comment This is another of the many cases involving Colaingrove and its holiday parks looking at different issues surrounding single and multiple supplies. Unsurprisingly this decision follows the line taken by Vos J in the Morrison case and followed in other cases, including in AN Checker. Read the decision CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 18 >continued from previous page PM-Tax | Our Cases Cases (continued) Leekes Ltd v HMRC [2015] UKFTT 93 (TC) Losses acquired on succession to a trade can be offset against profits of combined trade of the successor. Leekes carried on a trade of running out of town department stores. In 2009 it purchased the share capital of Coles of Bilston Limited for £1. Coles’ trade at that date comprised three furniture stores plus warehousing facilities. In the eight months of trading prior to the sale Coles had a trading loss of £950,321. It had trading losses carried forward of £2,262,120. HMRC’s starting point was to look at s 393 as applied to Coles prior to the succession and ask what relief would have been available to Coles. Since Coles had no profits for the period, HMRC argued that no relief was available under s 393 and therefore there were no losses to which s 343(3) could apply. HMRC argued that in determining what losses were available to the successor company, it was necessary to treat the original company’s trade as a continuing separate trade after the succession and losses could only be claimed to the extent that that continuing trade gave rise to profits. The business of Coles was hived-up to Leekes and Coles became dormant. One of the Coles stores was renovated and re-opened selling Leekes’ products. All three Coles stores were re- branded as Leekes stores and continued to trade selling the same types of products. The three Coles stores sustained a trading loss for the accounting period ending 31 March 2010. Leekes said there was no justification for restricting the losses available to it. It said that all of the losses stated in Coles’ accounts as at the date of succession could be used against the new combined trade of the two companies. Leekes claimed relief for losses of £1,655,756 against its profits in its corporation tax return for the year ending 31 March 2010 as a result of its succession to the business of Coles. HMRC denied the claim. The FTT found for Leekes and said that the preferable interpretation of s 343, on the premise that a succession has occurred, is that all the losses of the predecessor’s trade which have been subsumed with the successor’s trade should be available for offset against the combined profits of the successor company. HMRC accepted that Leekes had succeeded to the Coles trade but argued that the losses could only be used against profits of the Coles trade post succession. HMRC argued that s 343(3) on its face refers to a succession to “a trade” that trade being the trade of Coles and that therefore in determining what losses are available to be taken over by the successor company, only the losses which would have been available to Coles as a “relief” under s 393 in its trade had the succession not occurred are taken account of. The FTT preferred Leekes’ interpretation because: •it recognised that there is no explicit reference to a requirement to stream losses in s 343(1) and (3) •it avoided the extensive deeming and practical difficulties of application which are the unavoidable result of HMRC’s approach; •it provided an approach to the legislation which is more closely aligned to commercial reality. The FTT said that s 343(3) was drafted with a situation in mind in which the successor company takes on the original company’s trade and there is no existing trade of the successor with which the predecessor trade is amalgamated. It said there was nothing in the statutory wording which gave any clear guidance either way as to how the legislation was intended to work if the successor had an existing trade to which the original trade is added. The FTT also said there was nothing in any of the authorities which provided definitive guidance on the point. Comment It is surprising that there are no authorities covering this point as you would have thought that the situation would come up regularly. However, the decision will be welcome as it supports a much less restrictive interpretation of section 343 than argued for by HMRC. Read the decision CONTENTS BACK NEXT 7802 PM-Tax | Wednesday 25 March 2015 19 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. How to avoid the criminal offence of corporate failure to prevent fraud, tax evasion and other economic crimes It is becoming increasingly likely that a criminal offence of corporate failure to prevent economic crime will be introduced imminently. The proposed offence already has cross-party support and the public backing of the Director of the SFO, and according to the UK Anti-Corruption Plan, the Government has set itself the deadline of June 2015 for consideration of the proposal. But the recent and extensive media coverage of the allegations that HSBC enabled tax evasion has added fuel to the fire, leading the Chief Secretary to the Treasury and Liberal Democrat MP Danny Alexander to announce that the proposed offence would not only be a key part of his party’s election manifesto, but that he intended to pursue it within the existing Government in the coming weeks. In this seminar our corporate crime and investigation team, joined by our Head of Tax, Jason Collins and one of our in-house Forensic Accounting Services colleagues, aim to help attendees stay one step ahead by explaining: •what the offence is likely to cover, including case study examples; •what the implications are likely to be; and •the actions companies should be taking to prepare not to fail to prevent economic crime Date: Thursday 30 April 2015 Time: 4.30pm until 7.00pm Venue: Pinsent Masons LLP, 30 Crown Place, London EC2A 4ES If you would like to attend please contact Marina Dell. 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 25 March 2015 CONTENTS BACK 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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