154. Jersey company distributions found to be taxable to income tax

The First-tier Tribunal (FTT) has determined that payments from a Jersey company were taxable income distributions, following detailed analysis of case law and Jersey law.

The taxpayer held shares in a company incorporated in Jersey, domiciled in Switzerland, and listed on the London Stock Exchange. For five successive tax years, the company made payments to him from the share premium account, and on one occasion gave him additional shares, which were treated as cash in this decision. The share premium account was funded by a restructuring. Jersey law does not use the term dividend.

The taxpayer argued that the payments were capital receipts, or alternatively dividends of a capital nature. The FTT had to consider the history of the law on dividends in both Jersey and the UK, and the current position in both legal systems. Ultimately, it determined that although the payments were made out of the share premium account, they were income dividends. The judge noted that the form in which the payment is made must be taken to determine its character. The mechanism chosen in this case represented an income distribution for Jersey law and therefore also for English law purposes.

Beard v HMRC [2022] UKFTT 129 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

155. Film production company wins appeal on enterprise investment scheme

The First-tier Tribunal (FTT) has ruled in favour of the taxpayer, a film production company, finding that the investments did meet the risk to capital test required for enterprise investment scheme (EIS) relief.

The taxpayer was incorporated in 2015. Several small rounds of fundraising took place before the issue of EIS shares in 2019. During that time, the taxpayer acquired the rights to an unpublished script for a film, The Ballad of Billy McCrae. Other than a small investment in another film made in conjunction with another production company, The Ballad of Billy McCrae was the only project being undertaken by the taxpayer.

HMRC refused to issue the EIS certificates on the grounds that investment did not meet the risk to capital test, as the taxpayer did not have any objectives to grow and develop the trade in the long term, as evidenced by there being only one main project, nor was there any significant risk for investors. The FTT considered both these points in turn.

First, although the taxpayer did not appear to have any intention of taking on any employees, or acquiring its own film production equipment, subcontracting production is not uncommon for start-up film production companies. It is also unrealistic to characterise the company as a ‘one-project’ venture simply because it was starting with just one project because of limited finances. The FTT found sufficient evidence of the taxpayer’s mission to develop Welsh filmmaking, and a number of ideas for future projects should the first film be successful. It therefore concluded that the taxpayer had at that time the objective to grow and develop the business in the long term.

The second point was swiftly dismissed. The prospect of any return to investors depended entirely on the commercial success of the first project and any future projects pursued. It was perfectly possible for investors to lose all of their investment. The taxpayer’s appeal was allowed. 

Inferno Films Limited v HMRC [2022] UKFTT 141 (TC)

From the weekly Tax Update published by Smith & Williamson LLP 

156. The interplay between damages and loan relationships

Hexagon Properties [2022] UKFTT 00137 (TC) is another of those cases where the question to be answered is simple, and at first blush one would have thought the answer obvious. It is only when one looks at the world through the distorting lens that is the UK’s tax legislation that the picture becomes at all fuzzy.

Let us explain.

A property developer alleged that it had suffered damage at the hands of a bank. The parties settled out of court to the tune of about £3.5m.

If the bank had paid over the £3.5m, it would without any shadow of doubt have been necessary to determine the taxation consequences of the receipt by reference to the character of the damages. There is an extra-statutory concession (D33) that is relevant in some circumstances, which may have the result that some or all of the amount received is tax-free.

But the bank did not pay over the £3.5m as such. Instead, it accepted £1.5m in full and final settlement of a pre-existing debt of £5m that the developer owed to the bank.

So what? Surely damages are damages: the fact that the mechanics of the settlement involve setting off against a debt rather than a separate receipt cannot possibly affect the tax treatment? You would think so – and so did the company.

HMRC argued differently. Under the loan relationship rules, a company is required to bring into charge any ‘profits that arise to it from its loan relationships and related transactions’. The loan was plainly a loan relationship: its extinguishment by ‘exchange, redemption or release’ was plainly a ‘related transaction’ and the £3.5m was plainly a profit that arose from the related transaction. Ergo, the £3.5m was taxable in full under the loan relationship rules; no further enquiry was necessary.

Happily, and surely correctly, the First-tier Tribunal disagreed with HMRC. Yes, there was a loan relationship and a related transaction, but: “Any objective consideration of what the £3.5m arose from in this case would conclude that it arose ‘from’ the Appellant’s claim in damages against its bank and not ‘from’ any related transaction of its loan relationships.” Quite so: good call.

However, there is one sideline to the case. During the course of argument, counsel for HMRC contemplated the release by a shareholder of a debt owed to the shareholder by the company, submitting that “any resulting credit in the company’s accounts would be chargeable under the loan relationship regime as a profit arising from the release, and would not fall outside that regime on the basis that it really ‘arose from’ the bounty of the shareholder in releasing the debt”.

The Tribunal agreed with that observation, while distinguishing it from the facts before it in the present case. But consider: if a shareholder (or anyone else) gratuitously donates money to a company, that receipt might or might not be chargeable to tax in the hands of the company, depending to a large degree on the motivation of the donor. It may well be taxable: but the question has to be considered in every case. But if the donor happens to be a creditor and effects the same donation by the mechanics of a release of all or part of the debt, there is at the very least a considerable risk that the treatment in the hands of the company will be governed solely by the loan relationship rules. Sometimes (especially where the transaction is effected between connected companies) that may be helpful: sometimes it will not.

Contributed by David Whiscombe writing for BrassTax, published by BKL

157. Changes to corporate interest restriction administration from late 2022

HMRC has updated its guidance pages Restriction on corporation tax relief for interest deductions and Submit a corporate interest restriction return to highlight upcoming changes in approved filing processes for compliance with the corporate interest restriction (CIR) rules.

From ‘late 2022’, businesses within the scope of the rules will be required to submit their CIR returns under one of two approved electronic methods – either using commercial software or completing an online form. This will apply to both original and revised returns, and whether returns are full or abbreviated. CIR returns sent to HMRC by any other means after this time will not be validly submitted. Similar changes are planned for notices of appointment (or revocation) of a group’s reporting company for CIR purposes. Draft regulations, a draft explanatory memorandum and a draft notice in relation to the changes have been published. The notice includes details of additional information that will need to be included in CIR returns filed following the change.

From the weekly Business Tax Briefing published by Deloitte

158. Gift aid and naming of buildings

A benefit received by a donor or connected person can sometimes render a donation ineligible for gift aid.

In HMRC’s Charities: detailed guidance notes on how the tax system operates, chapter 3.18 sets out the basic rule on benefits received by donors and connected persons and the subsequent sections explain the items that do not count as benefits and the limits on the value of benefits where they are provided.

HMRC has recently updated the guidance to clarify when naming rights do not count as benefits. 3.19.8 states: “Sometimes charities may want to name a building or part of a building after an individual donor who’s provided a substantial donation to the charity. The principles given in 3.19.1 apply here, and as long as the naming does not act as an advertisement or sponsorship for a business, then the naming of the building or part of the building after the individual donor would not be considered a benefit. If separate advertisement or sponsorship agreements are entered into, these transactions would be outside the scope of the Gift Aid scheme.”

3.19.1 states: “An acknowledgement of an individual donor’s generosity, for example, in a printed brochure or on a plaque. This must be a simple acknowledgement and not an advertisement for a business or some form of business sponsorship. A commemorative type plaque recording the name of the individual donor and that they provided a donation, would not be considered a benefit. However, a sign which also promoted a business would be an advert and so would be considered a benefit.”

The key to securing gift aid is to ensure that the naming is unsolicited and not at the request of the donor and there is no element of trading the naming rights.

Contributed by Caroline Miskin

159. The cost of cost confusion

When you sell or otherwise dispose of a chargeable asset, capital gains tax (CGT) has to be considered, by comparing the sale proceeds (or in some cases market value) with the capital costs of acquiring the asset and (broadly) improving it.

It is not, strictly speaking, absolutely necessary to be able to show conclusive proof of these costs: ultimately the amount of any gain is a question of the balance of probabilities. If, for example, you no longer have the completion statement for a piece of land you bought 50 years ago, that does not mean you will not be allowed to deduct anything for its cost when you come to sell it – but you may have to demonstrate to HMRC what the purchase price is likely to have been.

So, of course, it is wise to keep a record of what an asset cost you and what ‘enhancement expenditure’ you have incurred.

These issues were explored by the Upper Tribunal (UT) in Peter Lowe and another v HMRC [2022] UKUT 84 (TCC).

Mr Lowe had bought (jointly with his business partner) some property in Sheffield. Building works had been undertaken in the 1980s. The evidence as to the nature and cost of the works consisted of quotes and invoices from builders. Most of the quotes were addressed to Mr Lowe; most of the invoices to a company controlled by Mr Lowe and his partner. It was accepted by HMRC that the work had been done, that the amounts on both the quotes and the invoices had been paid, and that there was no duplication between them.

The problem lay with the invoices addressed to (and assumed to have been paid by) the company. Was this expenditure ‘incurred by or on behalf of’ Mr Lowe, as it had to be to render it deductible?

The dispute came down to the meaning of ‘on behalf of’. Did it have ‘a broader meaning that extended to the situation where one person incurred expenditure for the purpose of benefiting another’ or was it ‘confined to a situation where one person is acting as agent, or similar, for another’?

Agreeing with the First-tier Tribunal (FTT), the UT held that the phrase should be given ‘its ordinary and natural meaning of connoting a relationship of agency’. To the extent that the cost of the building work was borne by the company, the expenditure was therefore not incurred ‘on behalf of’ Mr Lowe.

Of course, if there had been evidence that the cost of the work, although initially borne by the company, had been debited to Mr Lowe’s loan account with the company, or treated as his remuneration or as a distribution made to him, the position would have been different. Certainly, in any of those cases the expenditure would have been ‘incurred’ by Mr Lowe. But there was no evidence of such debiting or of such treatment.

Back to the observations at the start of this piece about ‘balance of probabilities’. Could Mr Lowe have argued that, although 30-odd years after the event one could not be sure, it was more likely than not that the amounts paid by the company to fund building work on his land were either debited to his loan account or treated as remuneration – perhaps on the grounds that they jolly well should have been? And thus that, on the balance of probabilities, he had incurred the cost. The Tribunal might not have agreed (and it is unlikely that the UT would have been able to overturn any finding the FTT had made on the matter). But it would not be the first time that a tabula in naufragio had rescued a drowning man.

Contributed by David Whiscombe writing for BrassTax, published by BKL

160. Sub-sale relief scheme fails

The First-tier Tribunal (FTT) has found that group relief could not be claimed on a transaction subject to stamp duty land tax (SDLT), as it was not a sub-sale as defined in the legislation. The whole transaction was designed to avoid tax.

The taxpayer acquired a 999-year lease on a property from another company in the same group purely for commercial reasons. The method chosen for the transfer was, however, designed to achieve a corporation tax advantage of approximately £44m in the form of a £170m tax-free step-up from book cost to the considerably higher market value, with all the steps being carried out on the same day. The lease was transferred at book value to another group company (A), A being transferred to the taxpayer, with the lease being transferred from A to the taxpayer at book value. The taxpayer accepted after enquiry that no corporation tax advantage could be obtained, but maintained its claim to group relief from SDLT.

The FTT rejected this claim. No group relief was available, as this transaction was part of arrangements designed to avoid tax, although the corporation tax avoidance failed.

The transaction was not a sub-sale, as the transfers were done in successive steps, rather than one being incomplete before the second was carried out. SDLT should be charged on the lease transfer from A to the taxpayer. There was a market value charge even though the consideration was book value.

The Tower One St George Wharf Limited v HMRC [2022] UKFTT 154 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

161. Domestic reverse charge sales lists to be discontinued

A domestic VAT reverse charge was introduced for sales of mobile phones and computer chips in 2007, to counter missing trader VAT fraud that increasingly revolved around sales of these goods. Shifting responsibility for VAT accounting from supplier to customer effectively deprived fraudsters of the opportunity to perpetrate their fraud, and they turned their attention to other areas. Since 2007, other domestic reverse charges have therefore been introduced for carbon emissions allowances (2010), gas and electricity (2014), telecommunications services (2016), renewable energy certificates (2019) and construction services (2021). Unlike these later iterations, the original reverse charge for mobile phones and computer chips required businesses to complete sales lists (as they would have done for intracommunity supplies of goods).

In Revenue & Customs Brief 9 (2022) HMRC has acknowledged that it no longer needs the data provided through these sales lists because the fraud risk for mobile phones and computer chips has reduced significantly and HMRC now has other, more effective, ways of monitoring risk through operational and intelligence activity. The Value Added Tax (Reverse Charge Sales Statements) (Revocation, Saving and Transitional Provision) Regulations 2022, SI 2022/548 will therefore withdraw the obligation to submit sales lists from 1 July 2022, making the reverse charge simpler and quicker to operate for those businesses selling mobile phones or computer chips in the UK according to the accompanying tax information and impact note.

From the weekly Business Tax Briefing published by Deloitte

162. City card treated as multi-purpose voucher

A tourist visiting Stockholm might buy a city card allowing them access to up to 60 attractions, for a fraction of what it would cost to visit each of them individually. DSAB Destination Stockholm (which sells the cards) knows that in reality the tourist will not have time to visit all of them. It might therefore charge €65 for a card that is valid for 24 hours, confident that it will, in most cases, have to pay less than that to the attractions visited.

The Court of Justice of the European Union (CJEU) has ruled that such city cards (provided that they specify the attractions that they are valid for, and provided that the attractions are obliged to accept them instead of charging admission) should be treated as vouchers for VAT purposes. As the attractions that the tourist might visit cannot be foreseen in advance (and some would charge VAT for admission, whereas others would not), the city cards should not be treated as single-purpose vouchers and therefore fall to be treated as multi-purpose vouchers. Having answered the question referred by the Swedish courts about whether to classify the cards as vouchers, the CJEU has not addressed other questions that arise from the treatment of city cards, such as the VAT treatment of amounts retained by DSAB. 

From the weekly Business Tax Briefing published by Deloitte

163. Input tax restricted following offset in insolvency

In 2015, HA.EN purchased a secured loan that had been taken out by a Lithuanian property developer. The developer was already in financial difficulties, and the following year
HA.EN purchased the property from the developer for €4.5m plus VAT. This reduced the amount owed by the developer, but no cash changed hands. Predictably, the developer was then unable to pay the output tax due on its next VAT return. The Lithuanian tax authorities therefore denied HA.EN input tax recovery on the basis that it knew or should have known that the developer would not honour its obligation to account for VAT.

In the Opinion of Advocate General (AG) Julianne Kokott, trading with businesses that are in financial difficulties is not necessarily fraudulent (even if they default on their VAT payments) and is not an abuse of law. Lithuania could not therefore deny input tax recovery by invoking the Kittel principle. However, the AG then doubted whether HA.EN was entitled to any input tax recovery based on first principles. She considered that HA.EN could only deduct input tax if it had paid VAT in addition to the offset amount. In the AG’s opinion, Lithuania was therefore entitled to deny input tax recovery without having to invoke Kittel. 

From the weekly Business Tax Briefing published by Deloitte

164. Self-invested pension plan did not qualify for VAT insurance exemption

The essential features of an insurance transaction are that an insurer undertakes to indemnify an insured-against risk in consideration for a premium. That basic definition is reflected both in cases relating to insurance regulation and VAT, but in Intelligent Money Limited (IML), the First-tier Tribunal (FTT) has noted some differences between the two fields. IML provided self-invested personal pensions plans (SIPPs), which allowed investors to control investment decisions relating to their pension investments within a tax-efficient wrapper.

The FTT found that the SIPP was an investment contract that provided for the payment of a benefit either on death, incapacity, or retirement and concluded that it should probably be treated as insurance for regulatory purposes (ie, akin to a life assurance policy). For the purposes of the VAT exemption, however, it was necessary to consider who bore the risk under the plan. Insurance qualifies for exemption as a matter of EU law because of the difficulty in separating consideration for services provided by the insurer from the part of the premium used for paying claims. Insurance is therefore only exempt if, according to the FTT, the insurer assumes some financial risk, resulting in uncertainty about how to split the premium. IML’s SIPP would return the value of the investments made by the investor, and was thus excluded from VAT exemption as, although payments might be triggered by a life/death uncertainty, IML assumed no financial risk. Fees payable to IML by members of the SIPP were therefore subject to VAT, and IML’s appeal was dismissed. 

From the weekly Business Tax Briefing published by Deloitte

165. No VAT recovery on Royal Mail services treated as exempt

The Supreme Court has dismissed Zipvit Ltd’s appeal concerning the recovery of input tax on services that the Royal Mail had incorrectly treated as exempt, applying the explanation provided by the Court of Justice of the European Union in January 2022. In order for Zipvit to be able to recover input tax, VAT must have been ‘due’ or ‘paid’.

In the Court’s judgement, VAT could not be regarded as having been included in the price paid by Zipvit to Royal Mail in return for the services (and therefore had not been ‘paid’) and had not been requested by Royal Mail (and therefore was not ‘due’). In view of this ruling, the Supreme Court did not rule on the significance of Zipvit being unable to produce a VAT invoice in support of its claim (as Royal Mail had not issued any). The court also ruled there was no reason for HMRC to exercise its discretion to accept alternative evidence that VAT had been paid, as this would simply give Zipvit an unmerited windfall. 

From the weekly Business Tax Briefing published by Deloitte

166. HMRC publishes guidance on changes to VAT penalties and VAT interest charges

HMRC’s new guidance confirms that there will be a period of familiarisation with the new rules. HMRC will not charge a first late payment penalty in the first year from 1 January 2023 until 31 December 2023, if the business pays in full within 30 days of its payment due date.

167. Taxpayer deceived by fraudulent agent wins appeal

A taxpayer with low income appointed an agent who then filed a fraudulent return and kept the refund. He has won an appeal against HMRC’s attempt to recover the tax directly from him.

The taxpayer, who was homeless and unemployed, earned £2,500, which he wanted to report to HMRC. He appointed an agent he met in a pub, who filed a return including a fraudulent claim to seed enterprise investment scheme relief, and reporting a much higher income than he had had. The repayment generated was paid to the agent. The taxpayer appealed HMRC’s discovery assessment, as he had never seen the return that was filed, and had just been told that the matter was sorted. He received no correspondence from HMRC as he had no permanent address.

The agent he had tried to appoint was the sister company of the one that filed his return. The First-tier Tribunal found that an appointed agent cannot delegate authority to file a return, so the filing agent had not been appointed by the taxpayer, and the return was invalid. The taxpayer was unsophisticated, had tried to comply with obligations, but fallen victim to a fraud, so the discovery assessment was invalid.

McCumiskey v HMRC [2022] UKFTT 00128 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

168. Late appeal allowed after agent fraud

The First-tier Tribunal (FTT) has granted an offshore oil rig worker permission to make a late appeal. Much of the delay was due to his work and as an unsophisticated taxpayer whose agent had defrauded him, a lack of knowledge about how to appeal was understandable.

The taxpayer, who worked on offshore oil and gas rigs, wanted to file a return to claim expenses for equipment he had purchased. The agent he appointed claimed relief for non-existent enterprise investment scheme investments, and kept 70% of the tax repayments generated, without giving him details. He had limited time onshore and little contact with the world when offshore, so did not receive correspondence from HMRC.

He appealed HMRC’s assessments reclaiming the tax repayments, out of time. In his shock when he finally received the assessment letter, he had not read to the end and noticed the appeal rights. He had called HMRC in the appeal period, not been told he had to appeal, and had then been offshore for two months. He had submitted a written appeal on his return. Given the nature of his work, and his lack of knowledge about tax, as well as falling victim to a fraud, the FTT granted permission for a late appeal. Given the decision reported above, this indicates the FTT’s sympathy towards taxpayers who have, through no fault of their own, fallen victim to fraud.

Huntly v HMRC [2022] UKFTT 135 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

169. Upper Tribunal refuses permission for respondent to raise new argument

The Upper Tribunal (UT) has handed down a procedural decision in the tax case Wyatt Paul v HMRC. The sole ground of appeal to be pursued by the taxpayer in a future substantive hearing concerns whether a notice of enquiry was properly served by HMRC on the taxpayer. In HMRC’s preliminary written response, it disputed that the points raised amounted to errors of law by the First-tier Tribunal (FTT). However, HMRC also sought to make an argument not previously raised at the FTT: that the appellant was ‘estopped by convention’ from denying that a valid enquiry had been opened in line with the Supreme Court’s 2021 judgement in Tinkler. HMRC argued that precedents requiring an appellant to obtain the Tribunal’s permission to argue a new point did not apply to respondents in HMRC’s circumstances. The UT disagreed. Furthermore, as HMRC was a party to the Tinkler litigation and had opportunity to make the same point at the FTT stage, and that further evidence might have been adduced on fact-sensitive issues if it had, the judge concluded permission should be refused. 

From the weekly Business Tax Briefing published by Deloitte

170. Court of Appeal upholds HMRC win in tax avoidance case

As at the Upper Tribunal (UT) and First-tier Tribunal (FTT), the taxpayer has lost his appeal in a lead case on income from a tax avoidance scheme. The Court of Appeal (CA) upheld the UT’s decision that the discovery assessments were valid, and HMRC’s decision to disapply a PAYE regulation such that the liability fell on the scheme user was valid.

The taxpayer had engaged in a tax avoidance scheme, under which his income was partly paid in the form of interest-free loans. The non-UK resident employers paid sums into employee benefit trusts (EBTs), which were intended to be lent on to the taxpayer on the understanding that they would never be repaid. The income reported was simply the loan benefit.

He argued that, even if the loan was employment income, he should receive a tax credit for PAYE that the end user should have deducted. As it was a non-UK employer, HMRC had exercised its statutory discretion to relieve the end user from the PAYE liability, and therefore charged it on the taxpayer. The taxpayer disputed the scope and legality of this use of discretion. The CA agreed with the tribunals that HMRC had this discretion, but that the FTT did not have jurisdiction to determine whether or not HMRC had exercised it correctly.

HMRC’s alternative argument, that the taxpayer allowing his non-resident employer to dispose of his income fell within the transfer of assets abroad (TOAA) rules, was rejected. His employer, in fact, had no income after valid deductions for the contributions to the EBTs, so the TOAA rules could not apply.

Permission for a judicial review was also refused.

Hoey & Ors v HMRC [2022] EWCA Civ 656 

From the weekly Tax Update published by Smith & Williamson LLP

171. Non-compliance with follower notice found to be reasonable

The First-tier Tribunal (FTT) has cancelled non-compliance penalties issued to a taxpayer who was advised by his agent not to obey follower notices relating to a scheme they had sold him. It was reasonable for him to rely on their advice.

The taxpayer had worked as an IT contractor and decided to use the tax planning services of a firm recommended by his colleagues, which appeared to be of good reputation. Unbeknownst to him, a tax scheme they promoted was one in which they held a vested interest, and led to enquiries into his returns. He was issued with follower notices and advance payment notices, but was told by the firm not to comply as they were appealing.

He was issued with penalties for non-compliance. The FTT cancelled these, finding that it was reasonable for him to rely on the firm’s advice. He was not tax literate and had carefully researched to find a firm he considered reputable for the umbrella company he needed.

Andreae v HMRC [2022] UKFTT 142 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

172. Remuneration trust scheme defeated

The First-tier Tribunal (FTT) has found that a marketed tax avoidance scheme involving a remuneration trust was not effective for tax purposes.

A company (C) made contributions to a trust (T) that made loans to the three individuals who were also employees and indirect shareholders of C. The contributions in question were made in the periods ended 31 December 2011 to 31 December 2014. HMRC denied corporation tax (CT) deductions for both the contributions to T and the fees paid by C for the marketed avoidance scheme. It also concluded that the loans by T should be subject to PAYE and national insurance contributions (NIC).

The FTT found for HMRC and agreed with the disallowed CT deductions. C’s explanation that the contributions to T were to establish a ‘fighting fund’ to protect the business and give insurance discounts were found not to be credible, as these were not referred to in the scheme documents and there were other ways to give discounts. The FTT concluded that the contributions were made to obtain a tax deduction and were not wholly and exclusively for the purpose of the trade. The treatment of the fees followed this.

The FTT found that the contributions were not automatically earnings as initially argued by HMRC because the loans were made with a legal obligation to repay. They were, however, taxable as employment income under the disguised remuneration rules. Various aspects were considered, including that the funds were paid as part of a pre-arranged transaction to onward lend and that the individuals had taken salary reductions. NIC were also due.

CIA Insurance Services Ltd v HMRC [2022] UKFTT 144 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

173. Subsidy Control Act receives Royal Assent

Royal Assent has been given to the Subsidy Control Act. When the UK was a member of the EU, it followed the EU’s State aid regime, which governed the awarding of subsidies. The new Act establishes the UK’s post-Brexit domestic subsidy control regime, providing a legal framework within which public authorities will make subsidy decisions, as well as oversight and enforcement mechanisms. The new regime is expected to come into force in autumn 2022. 

From the Deloitte Monthly Tax Update

174. Postponement of border controls for goods imported from the EU

Additional border controls on imports from the EU, due to be introduced from 1 July 2022, have been pushed back until the end of 2023. No further import controls on EU goods will be introduced this year, but controls that have already been introduced will remain in place.

The transformative programme to digitise Britain’s borders is being accelerated, harnessing new technologies and data to reduce friction and costs for businesses and consumers.

Introducing controls in July would have replicated those that the EU applies to their global trade. This would have introduced complex and costly checks that would have then been altered later, as the UK’s transformation programme is delivered.

A Target Operating Model will be published in the autumn. This will set out the new border import controls regime and will target the end of 2023 as the revised introduction date. This new approach will apply equally to goods from the EU and goods from the rest of the world. It will be based on a proper assessment of risk, with a proportionate, risk-based and technologically advanced approach to controls.

Specifically, the following controls that were planned for introduction from July 2022 will now not be introduced:

• a requirement for further sanitary and phytosanitary (SPS) checks on EU imports currently at destination to be moved to border control post (BCP);
• a requirement for safety and security declarations on EU imports;
• a requirement for further health certification and SPS checks for EU imports; and
• prohibitions and restrictions on the import of chilled meats from the EU.

Contributed by Neil Gaskell

175. Pension schemes and manufactured overseas dividends

The Supreme Court has allowed HMRC’s appeal in Coal Staff Superannuation Scheme Trustees Limited. The case concerns the manufactured overseas dividend (MOD) regime, which was repealed with effect from 1 January 2014. Stock lending arrangements often require the borrower to pay the lender amounts equivalent to any dividends received during the period of the loan. Under the MOD regime, UK tax needed to be withheld on these payments where the loaned shares were in an overseas company and where withholding tax would have been imposed by the country of origin.

In 2019, the Court of Appeal held that the differences under the regime between the treatment of overseas and UK shares amounted to an unjustified restriction contrary to the EU free movement of capital.

The Supreme Court considers that the economic analysis used by the Court of Appeal, when it applied a ‘but for’ test needed to evaluate the dissuasive effects of the MOD regime, was flawed. Under its own analysis, the Supreme Court finds that the regime did not constitute a restriction contrary to EU law. The Supreme Court also concludes that, even if there had been a breach, the appeal would nonetheless have succeeded on the basis that the remedy sought by the taxpayer was out of proportion. 

From the weekly Business Tax Briefing published by Deloitte

176. European Commission publishes draft directive to address tax-induced debt equity bias

The European Commission has published a proposal for a new EU tax directive to address asymmetry in the tax treatment of debt and equity financing across the EU that can incentivise companies to take on debt rather than increase equity to finance their growth. The proposal includes a debt-equity bias reduction allowance (referred to as ‘DEBRA’) in the form of a notional interest deduction on equity, and a new limitation on the tax deductibility of debt-related interest payments.

The Commission’s Q&A document describes how the equity allowance would be based on the year-on-year increase in a company’s net equity, multiplied by a notional interest rate. This allowance would then be granted for 10 years, limited to 30% of the taxpayer’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) and subject to carry-forward and anti-abuse provisions. The allowance would be accompanied by a rule limiting the general deductibility of interest to 85% of the taxpayer’s ‘exceeding borrowing costs’, the excess of interest paid over interest received. This would run in parallel to the existing interest restrictions introduced in accordance with the EU’s Anti-Tax Avoidance Directive (ATAD). For the proposed directive to be adopted, the 27 member states would need to unanimously agree on the text in the Council of the EU. 

From the weekly Business Tax Briefing published by Deloitte

177. Exceptional circumstances can include moral obligations

The First-tier Tribunal (FTT) has found that a taxpayer was non-UK resident, despite exceeding the permitted days. The fact that she was in the UK to care for a relative who could not be helped by others met the criteria for exceptional circumstances. The FTT also rejected some of HMRC’s submissions on the nature of the exemption, keeping to the statutory basis.

The taxpayer moved to Ireland on 4 April 2015. In the 2015/16 tax year she received dividends on which over £3m of income tax would have been due had she remained UK resident. In that tax year, she had to spend 45 or fewer days in the UK to be non-UK resident, but in fact spent 50 days in the UK. She argued that six of these days should be discounted, as she had visited the UK in December and February of that year to support her twin, who was experiencing serious ill health, and to assist in the care of her twin’s children.

The FTT had to consider what the test defined as exceptional circumstances. HMRC contended that foreseeable circumstances were not exceptional, and that the taxpayer would have been aware of her sister’s difficulties before she moved. The FTT found that foreseeability was not a factor that prevents circumstances from being exceptional. HMRC also argued that the exemption should only apply where a person was physically unable to leave the UK, or kept there by a legal obligation. The FTT found that moral obligations could also qualify, such as a need to attend a deathbed. HMRC also argued that the exemption should only apply to those who came to the UK and were then prevented by leaving when the circumstance arose, rather than those who came to the UK due to the circumstance. The FTT rejected this, as there was no statutory justification.

Overall, the FTT allowed the appeal. It accepted the taxpayer’s evidence that she was the only person able to assist her twin sister at the time and was under a moral obligation to come. It also agreed with her that HMRC’s submission that she could have left the UK at the end of each day, then returned the next, was impractical, despite the fact that she had a private jet at her disposal.

A taxpayer v HMRC [2022] UKFTT 133 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP

178. Reporting by digital platforms

Following a consultation on the implementation of the Organisation for Economic Co-operation and Development’s Model Reporting Rules for Digital Platforms, the government has decided the new rules will start from 1 January 2024 in the UK instead of the planned date of 1 January 2023.

While the collection of information by digital platforms will start from January 2024, the deadline for submitting the first reports will be the end of January 2025.

HMRC plans to publish the government’s response to the consultation and draft regulations giving details of the new rules at the next Legislation Day in the summer.