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Due to the Easter break, the next edition of PM-tax will not be published until 15 April.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.
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PM-Tax | Wednesday 25 March 2015
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>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
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PM-Tax | Wednesday 25 March 2015
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>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
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PM-Tax | Wednesday 25 March 2015
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>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
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PM-Tax | Wednesday 25 March 2015
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>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
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PM-Tax | Wednesday 25 March 2015
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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.
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PM-Tax | Wednesday 25 March 2015
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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
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PM-Tax | Wednesday 25 March 2015
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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
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PM-Tax | Wednesday 25 March 2015
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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”.
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PM-Tax | Wednesday 25 March 2015
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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
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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.
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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.
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PM-Tax | Wednesday 25 March 2015
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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.
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PM-Tax | Wednesday 25 March 2015
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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
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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
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PM-Tax | Wednesday 25 March 2015
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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
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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
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PM-Tax | Wednesday 25 March 2015
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>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
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PM-Tax | Wednesday 25 March 2015
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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:
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PM-Tax | Wednesday 25 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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