HMRC’s online tool for calculating balancing charges on disposal of super deduction and special rate allowance assets

The super deduction and 50% allowance for special rate assets were available for expenditure by companies between 1 April 2021 and 31 March 2023. 

Special rules apply to deal with the calculation of balancing charges arising when assets are disposed of on which these allowances were claimed. Depending on the date of disposal, the disposal proceeds may be fully or partially uplifted to reflect the uplifted allowance available on acquiring the asset concerned. 

HMRC’s online tool aims to help to make these calculations easier. To use the tool, you need to know:

• the disposal value of the asset;
• the total cost of the asset qualifying for capital allowances;
• the amount of that cost eligible for the super deduction or special rate allowance; and
• the start date of the accounting period in which the asset was disposed of.

Contributed by Richard Jones

Meaning of ‘tunnel’ and ‘aqueduct’ for capital allowances purposes

The Supreme Court has unanimously dismissed HMRC’s appeal in the capital allowances case HMRC v SSE Generation Limited. The appeal concerned capital expenditure of approximately £200m on the construction of certain items for the collection and transmission of water to, through and from a hydroelectric power station at Glendoe in Scotland. HMRC contended that the disputed items constituted expenditure on ‘tunnels’ or ‘aqueducts’ within the meaning of those words as used in List B of s22, Capital Allowances Act 2001 (CAA 2001), which sets out a list of structures, assets and works in respect of which capital expenditure does not ordinarily qualify for capital allowances.

The Supreme Court agreed with the Court of Appeal that ‘tunnel’ and ‘aqueduct’ each bore two possible ordinary meanings. The Supreme Court stressed that “[where] there are two ordinary meanings there is no reason for making an a priori assumption that the wider meaning should be taken” and that “[...] some means needs to be found to decide which was the meaning intended. There is nothing wrong in principle in relying upon a thematic connection which explains the grouping of items in a list. That is an important part of the statutory context.” Applying this principle, the Court concluded that, in the context of Item 1 of List B, the ordinary meaning of ‘tunnel’ intended here was that of “a subterranean passage for a way to pass through” rather than a broader meaning of “any subterranean passage”. Similarly, the Court noted that the word ‘aqueduct’ was listed in the context of a theme of structures relating to the construction of transportation routes and concluded that the word here was intended to mean “a bridge-like structure for carrying water” rather than water conduits in general. This was sufficient to dismiss the appeal in the taxpayer’s favour, and the Court declined to consider the taxpayer’s alternative case that the disputed items could have otherwise qualified by virtue of falling within List C in s23, CAA 2001.

From the weekly Business Tax Briefing dated 19 May 2023, published by Deloitte

Court of Appeal rules in favour of HMRC in business premises renovation allowances case

The Court of Appeal (CA) has given its judgement in London Luton Hotel BPRA Property Fund LLP v HMRC. The case concerns how much of the expenditure (the development sum), incurred by the limited liability partnership (LLP) in 2010/11 under a contract with a developer in connection with the redevelopment of a property into a hotel, qualified for business premises renovation allowances (BPRA). BPRA were a form of 100% capital allowances introduced in 2007 and withdrawn in 2017. HMRC disallowed £5.3m of the £12.5m claimed by the LLP. On appeal, the First-tier and Upper Tribunals both concluded that some elements of the disputed expenditure qualified for BPRA, while others did not.

The CA dismissed the LLP’s primary argument that the development sum claimed qualified for BPRA in its entirety, arguing that the Tribunals had erred by focusing on how the developer was to spend the development sum. The Court disagreed, and held that, in viewing the facts realistically, regard had to be given to the substance of what was provided by the developer.

Section 360B, Capital Allowances Act 2001 required that qualifying BPRA expenditure be incurred “on or in connection with” the conversion. The Court considered that the Tribunals had interpreted this too widely. It held that, construed in the statutory context and in the light of the purpose of the legislation, a relatively narrow meaning applied, and that expenditure must “have a strong and close nexus with the physical work on the building to qualify for BPRA”. The Court went on to apply the “qualifying expenditure’ test to each element of the disputed expenditure in turn, and the CA agreed with HMRC that most of the remaining elements under appeal did not qualify for BPRA.

From the weekly Business Tax Briefing dated 6 April 2023, published by Deloitte 

Super deduction for partnerships with all corporate members

HMRC has updated its guidance to state that partnerships can claim the 130% super deduction, provided that every partner is a corporate partner. Previously, the assumption was that only companies could claim this deduction.

The new page added to the guidance states:

“… a partnership whose members are all within the charge to corporation tax … may be entitled to claim capital allowances that are only available to companies within the charge to corporation tax, for example certain first year allowances.”

Partnerships with only individuals as members cannot claim the super deduction. This perceived shift in position may mean that already filed returns could be updated to claim additional relief.

www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca11145

From the weekly Tax Update dated 15 February 2023, published by Evelyn Partners LLP

Court of Appeal hands down judgement in capital allowances case

The Court of Appeal (CA) has handed down its judgement in the capital allowances case Urenco Chemplants Limited and another v HMRC. The case concerns the availability of allowances for expenditure incurred on the construction of a £1bn specialised facility for the treatment of radioactive waste. HMRC disputed claims for plant and machinery allowances of approximately £192m in relation to five key elements of the facility. In 2019, the First-tier Tribunal (FTT) found that most of this expenditure was not incurred “on the provision of plant or machinery”, and that, in any case, all of the expenditure was excluded as being “on the provision of a building”. In January 2022, the Upper Tribunal (UT) found what it considered to be material errors of law in the FTT’s consideration of both of these issues and remitted the case back for further consideration.

The CA has allowed each of the grounds of appeal raised by HMRC against the UT’s decision. Inter alia, the CA found that the FTT was entitled to reach the conclusions it had in respect of the ‘plant’ issue, and that its decisions in respect of the ‘building’ issue were not voided by any material errors of law. The CA also allowed one of the taxpayers’ grounds, concerning the language in ‘List C’ of s23, Capital Allowances Act 2001 (CAA 2001), and that the section should apply to expenditure “on the provision” of certain list items, not merely expenditure “on” them. The CA agreed that “something must have gone wrong in the drafting” of CAA 2001, and that the relevant legislation should be construed, as the taxpayers contended, in the same manner as it did in CAA 2001’s precursor.

From the weekly Business Tax Briefing dated 2 December 2022, published by Deloitte

Importance of the contract for EZAs

A claim for enterprise zone allowances (EZAs) has been rejected, with the Court of Appeal (CA) finding that the property built was materially different from the original contract agreed before the enterprise zone expired.

Enhanced rates of capital allowances were available for construction of buildings in enterprise zones. On the last day before the enterprise zone expired, a ‘golden contract’ was entered into that contained a number of different options, which the developer and contractor hoped would ensure EZAs could still be claimed on future conduction on the site.

Previously, the Upper Tribunal found some of the property construction expenditure qualified for EZAs. This was partly on the grounds that the developer had a legitimate expectation following HMRC correspondence with an industry body.

The CA disagreed, focusing on the original contract and finding that none of the expenses qualified for EZAs. The property that was ultimately built was determined to be materially different from the original contract. The changes made were radical enough that the original contract did not apply and the property was built under a new contract. As the development was therefore not built under a contract entered into before the enterprise zone expired, no EZA was available.

Cobalt Data Centre 2 LLP & Anor v HMRC [2022] EWCA Civ 1422

From the weekly Tax Update dated 9 November 2022, published by Evelyn Partners LLP

Court of Appeal dismisses taxpayers’ appeal in partnership case

The Court of Appeal has dismissed an appeal by the taxpayers in BCM Cayman LP and another v HMRC. The case covers two separate corporation tax issues. 

The ‘profit allocation issue’ concerned the treatment of an interest in a UK limited partnership held via a Cayman Islands limited partnership. While the Court of Appeal disagreed with certain elements of the Upper Tribunal’s approach, it agreed that the Cayman partnership’s general partner was solely subject to tax on the profit allocations from the UK partnership to the exclusion of the other partners in the Cayman partnership. The right of the general partner to that allocation was not as fiduciary but, construing the statutory provisions purposively pursuant to the Ramsay approach, as beneficial owner. 

The ‘interest deductibility issue’ concerned a claim by the general partner for corporation tax relief on loans taken out to fund the original acquisition of the UK partnership interest. The Court of Appeal found that the Upper Tribunal was correct to hold that the loans were not trading loan relationships, precluding the relief claimed.

From the weekly Business Tax Briefing dated 13 October 2023, published by Deloitte

Appeal on non-deductibility of redress payments

The Upper Tribunal (UT) has dismissed an appeal by the taxpayers, and allowed a cross-appeal by HMRC, in ScottishPower (SCPL) Limited and others v HMRC, concerning the corporation tax deductibility of payments made pursuant to settlement agreements with regulators. 

The taxpayers, regulated by the UK energy regulator Ofgem, entered into various agreements with Ofgem in settlement of a number of regulatory investigations. Under the various settlement agreements, the taxpayers paid sums called ‘penalties’ in nominal amounts, together with ‘redress’ payments to consumers, consumer groups and charities totalling approximately £28m, which HMRC considered to be non-deductible. In 2022, the First-tier Tribunal (FTT) decided that the vast majority of the redress payments were not deductible, with the exception of a payment of approximately £550,000, paid directly to consumers, which the FTT considered allowable due to its compensatory nature.

The UT agreed with HMRC that the principles set out in the House of Lords 1999 judgement McKnight (HM Inspector of Taxes) v Sheppard, denying a trading deduction for expenses connected with a fine, apply to all payments with a punitive nature or character, that the principles are to be applied by reference to substance rather than form, and that the subsequent enactment of s46, Corporation Tax Act 2009 (Generally accepted accounting practice) did not affect their applicability. In respect of the amounts that the FTT found to be non-deductible, the UT agreed that, based on the FTT’s characterisation of them as being made in place of, or in lieu of penalties, they were non-deductible under these principles. The UT, however, disagreed with the FTT’s analysis of the £550,000 payment. It considered that it was part of a package that was in lieu of a penalty, and that the FTT was wrong to distinguish it on the basis that it had some of the characteristics of compensation.

From the weekly Business Tax Briefing dated 8 September 2023, published by Deloitte

Taxpayer loses appeal on SSE

The Upper Tribunal (UT) has rejected the taxpayer’s appeal, agreeing with the First-tier Tribunal (FTT) that substantial shareholding exemption (SSE) was not available.

The taxpayer, a standalone company, created a new subsidiary in June 2015, hived down its trade to this subsidiary in September 2015 and sold it in May 2016. The taxpayer went on to claim SSE, exempting the gain on disposal from corporation tax on a chargeable gain.

For SSE to apply, a subsidiary must be held for more than 12 months before sale, which was not the case.

The taxpayer sought to rely on a provision that allows the period in which the trade has been carried on by another group company to be considered when looking at the 12-month ownership period. The taxpayer had in fact been a standalone company for the period between May and June 2015 and so the case focused on whether you can have a group with just one member.

In their argument, the taxpayer’s counsel provided some interesting examples of when you may have a group with one, or indeed no members. The tribunal rejected these arguments, agreeing with the FTT that such a liberal interpretation of the legislation would give a result that could not have been intended by parliament. The claim for SSE was therefore rejected.

M Group Holdings Ltd v Revenue and Customs Commissioners [2023] UKUT 213 (TCC)

From Tax Update September 2023, published by Evelyn Partners LLP

Allocation of purchase consideration for the purposes of calculating goodwill

The First-tier Tribunal (FTT) has dismissed an appeal in respect of the valuation method used for property acquired as part of trade and asset purchases.

When calculating the value of goodwill as part of a trade and assets purchase, it is the difference between the total consideration and the fair value of all the identifiable assets. Under UK generally accepted accounting practice (GAAP), that fair value should be market value if there is an open market for similar assets, in a similar condition. If no such market is available assets should be valued at depreciated replacement cost.

The taxpayer, who had purchased several care home businesses, argued that in most cases properties used as care homes were sold as part of an ongoing business and so there is not an active market for such properties to be valued as standalone assets. On that basis depreciated replacement cost was an appropriate valuation method for the properties. HMRC disagreed.

The FTT concluded that operational care homes are sufficiently like the properties in question, such that it is possible to ascribe their values by reference to the sales of operational care homes on the open market, with appropriate adjustments as per the Royal Institution of Chartered Surveyors (RICS) guidance. Although the market value should reflect the properties as standalone assets, without staff, residents, contracts, chattels, etc, the values, as per RICS guidance, will reflect the trading potential of the properties.

For stamp duty land tax purposes the apportionment of the total consideration on a trade and assets purchase is done on a ‘just and reasonable’ basis. HMRC argued and the FTT agreed that market values, where available, should form the basis for any apportionment. The taxpayer has been given the right to appeal.

HMRC v Nellsar Ltd [2023] UKFTT 718 (TC)

From Tax Update September 2023, published by Evelyn Partners LLP

Loan interest payable disallowed due to unallowable purpose

The Upper Tribunal (UT) has upheld the findings of the First-tier Tribunal (FTT) that the main purpose of a loan relationship to which the taxpayer was party was to obtain a UK tax advantage. The loan therefore had an unallowable purpose, and no deduction was allowed for the resulting interest expenses.

The taxpayer, a UK incorporated company, was a member of a multinational group with its ultimate parent company in the US. It was set up to acquire a US group worth $1.1bn. The transaction involved a series of steps that sought to maximise group interest deductions while minimising taxable credit interest. Overall, the funding arrangements provided a deduction for third-party interest in the US, and group interest in the UK with no taxable credits in the US, UK or Cayman Islands, where a finance company had also been set up.

The FTT found that the presence of free-standing loan relationship deficits that were surrendered by way of group relief to UK members of the group, without any corresponding taxable receipts, did mean that the taxpayer had secured a tax advantage by being party to the loan relationship. Evidence, including reports and internal emails, showed the sole purpose of the funding arrangement was to obtain a UK tax advantage. The UK and Cayman Island companies had no employees or tangible assets, which further evidenced the lack of genuine commerciality in the loan agreements.

The taxpayer appealed the FTT decision on the grounds that it had looked too widely, considering why the taxpayer, as opposed to another group company, was party to the loan rather than focusing on the motives of the taxpayer company alone. The UT rejected this argument, stating that narrowing the interpretation of the law would go against Parliament’s intention.

Having agreed that the main purpose of the loan was the avoidance of UK tax, the UT went on to consider to what extent the debits should be attributed to that purpose and thus disallowed. The FTT’s logic that this need only be considered if the taxpayer could prove that tax avoidance was not the main, or one of the main, purposes was rejected. It was noted that, when reaching its conclusion that the whole loan had an unallowable purpose and so the interest payments should be disallowed in full, the FTT had considered all the evidence available to it and so the UT saw no reason to rule otherwise. 

JTI Acquisition Company (2011) Limited v HMRC [2023] UKUT194 (TCC)

From Tax Update August 2023, published by Evelyn Partners LLP

Upper Tribunal rules in favour of HMRC in licensing agreement transfer appeals

The Upper Tribunal (UT) has dismissed a taxpayer’s appeal, and allowed HMRC’s appeal, in the related corporation tax and income tax cases of JC Vision Limited v HMRC and HMRC v Conran. They concern a licensing agreement entered into between an LLP and a high-street retailer in 2007 relating to the development and sale of goods branded with a trademark. In 2008, the benefits and obligations of the agreement were transferred from the LLP to the corporate appellant (JCV). JCV was owned, indirectly, by the individual respondent, who was also the controlling member of the LLP, and who received a sum of £8.25m as a result of the transfer.

JCV claimed corporation tax relief for intangible amortisation on the £8.25m paid. HMRC’s position, however, was that, as the valuable trademark itself was not transferred, the open market value was £1. The First-tier Tribunal (FTT), and now the UT have agreed with HMRC’s conclusions on valuation, rejecting arguments that £8.25m was the relevant figure for corporation tax relief. 

In the personal tax appeal, the UT held that the FTT had effectively incorrectly reversed the burden of proof when considering the correct taxation of the amount received. The UT considered that there was insufficient evidence to displace the burden on the taxpayer to show the amount was received in some capacity other than as an indirect shareholder of JCV, and so upheld HMRC’s assessment that the amount was subject to income tax, as a distribution in respect of shares.

From the weekly Business Tax Briefing dated 21 July 2023, published by Deloitte 

Corporate tax deductions for net settled and cash cancelled share options

HMRC has published new guidance (the five pages from BIM44410 to BIM44414, within the employee share schemes chapter of HMRC’s Business Income Manual) on the corporate tax treatment of expenses incurred on net settled and cash cancelled share options. Net settlement occurs where an employee partially disposes of the right to acquire shares in exchange for a cash payment to settle tax amounts due at vesting/exercise (eg, PAYE and national insurance contributions), while cash cancellation occurs when an option is cancelled and settled instead by a cash award. 

The guidance confirms that a corporation tax deduction is allowable on the cash settled element, but that this should be limited to the lower of the accounting charge and the amount on which the employee is liable to UK income tax. In the guidance, HMRC takes the view that, where accounting expenses are recognised in earlier accounting periods, a deduction cannot be taken in the year that the award vests or the option is settled. 

From the weekly Business Tax Briefing dated 14 July 2023, published by Deloitte

Loss carry back claims and self assessment

The Court of Appeal has unanimously dismissed the taxpayer’s appeal in the corporation tax losses case Civic Environmental Systems Ltd. In its return for the year ended 30 April 2008, the company made trading losses of approximately £450,000. The return included a claim under s393A, Income and Corporation Taxes Act 1998 (subsequently rewritten as s37, Corporation Tax Act 2010) to carry back tax losses to be offset against the total taxable profits of approximately £140,000 previously included in the 2007 return. 

HMRC subsequently opened an enquiry into the company’s taxable profits for 2007, and following a closure notice and appeal, the First-tier Tribunal (FTT) concluded that the taxable profits in the 2007 return should have been approximately £680,000. The FTT, and later the Upper Tribunal (UT), however both rejected arguments that, as carry back claims generally require losses to be carried back to the greatest possible extent, the revised assessments for 2007 should have reflected an increase in the loss carry back to the maximum £450,000.

The Court of Appeal has upheld the analysis of the UT. In its view, the right to make a claim to carry back a loss “is supplemented by other provisions which detail both how the taxpayer can make a claim and how such a claim is to be given effect”. As the carry back claim was made after 30 April 2009, the latest date on which the 2007 return could have been amended by the taxpayer through self assessment, the claim was given effect by Sch 1A, Taxes Management Act 1970 (claims and elections not included in returns). This claim was therefore formally outside of the 2007 return enquired into by HMRC, and the amount carried back was therefore unaffected by the later closure notice or FTT decision.

From the weekly Business Tax Briefing dated 30 June 2023, published by Deloitte

No deduction for costs of facilitating the disposal of mortgaged property

The First-tier Tribunal (FTT) has found for HMRC in a complex case where a deduction was claimed for a payment of £33.5m to an Irish government agency. The company claimed that a deduction was due under either the loan relationship rules, or in computing the chargeable gain on the sale of a property.

The taxpayer’s argument was that the payment should be viewed in two component parts: the amount paid to the government agency for the release of that agency’s security over the property that the taxpayer was developing; and a payment made in relation to a guarantee in relation to another company’s debts that secured the taxpayer ongoing access to development finance for the property.

The FTT first considered whether a payment by the taxpayer, a property developer, was deductible under the loan relationship rules in calculating profits for corporation tax purposes. The FTT held that the payment was instead made in the interests of the wider group of companies, in particular two individual shareholders/directors, of which the taxpayer was a member, and that a deduction should be denied under the loan relationship rules.

The FTT then considered whether a deduction was available in calculating the chargeable gain on the disposal of the property, and concluded that the sum was not paid wholly and exclusively for enhancing the value of the property. It was made in the wider interests of the group and not solely in the interests of the taxpayer itself. As such, no deduction was allowed and the appeal was dismissed.

This ruling helps to illustrate:

• That the substance of transactions needs to be considered in order to ascertain whether they are made for the benefit of an entity or the wider interests of the taxpayer’s group, or its individual shareholders.
• What qualifies as “from a transaction for the lending of money” for loan relationship purposes.
• The significance of the “wholly and exclusively” requirements in s38, Taxation of Chargeable Gains Act 1992 for capital gains tax acquisition and disposal costs.

Swiss Centre Ltd v HMRC [2023] UKFTT 449 (TC)

From Tax Update July 2023, published by Evelyn Partners LLP

Special securities

The question whether the terms of debt finance are such as to create a ‘special security’ and a distribution is often a live issue, particularly but not uniquely in the context of overseas financing of UK property investment. The recent Upper Tribunal (UT) decision in Shinelock [2023] UKUT 107 (TCC) throws some light in this area. 

Shinelock Ltd had agreed with its owner Mr Ahmed that, in return for Mr Ahmed’s providing certain financing or guarantees in connection with its purchase of a property, it would account to him for any capital gain it might make on selling the property.

Shinelock sold the property, made a gain, paid an amount to Mr Ahmed and sought tax relief for the payment under the loan relationship rules.

HMRC resisted the deduction on a number of grounds, one of which was that the payment was a ‘distribution’. Distributions are never deductible in computing profit: in particular they can’t qualify for relief under the loan relationship rules.

The First-tier Tribunal (FTT) held that the payment wasn’t a distribution; but that it wasn’t deductible under the loan relationship rules for other reasons. We commented in some detail on the case in 2021.

Although the outcome on appeal to the UT was the same (Shinelock didn’t get its tax relief), it was for a different reason – one which is of wider interest.

Among many other things, ‘distribution’ is defined to include a payment which is made out of the assets of the company ‘in respect of securities which are special securities’. Thus the main question to which the UT addressed itself was whether the ‘security’ in question (which term is defined to include any loan whether or not secured) was ‘special’. In particular, was it a security to which ‘Condition C’ applied – was it the case that ‘the consideration given by the company for the use of the principal secured depends (to any extent) on the results of (a) the company’s business, or (b) any part of the company’s business’?

The FTT had said no: a payment the amount of which was determined by the gain on the disposal of a single asset did not meet that criterion. The UT disagreed: 

“Condition C is widely framed in a number of important respects. It applies to a company’s business, which is a wider concept than trade. It applies to any part of that business. The words ‘results of’ are wider than profits, and encompass both income and capital items. Finally, it applies where the consideration depends ‘to any extent’ on those results.

“The FTT failed to take into account the breadth of the provision. The facts that the property had been owned by Shinelock for several years, and that the disposal was ‘one-off’, which were relied on by the FTT, were not sufficient to prevent Condition C from applying. The results of an isolated disposal of ‘a single asset’ held for several years are not outside the scope of ‘the results’ of the business. Where, as here, it was not in issue that the payment depended on the gain resulting from the disposal of the asset, Condition C would only fail to bite if the disposal was not part of Shinelock’s business.”

Contributed by David Whiscombe writing for BrassTax, published by BKL

Tonnage tax regime – regulations made for new election window

The UK tonnage tax regime provides an elective alternative regime for shipping companies to calculate their UK corporation tax by reference to the ‘net tonnage’ of their ships. When the regime was introduced in 2000 there was a time limit of 12 months from the passing of Finance Act 2000 for existing shipping businesses to choose to elect into it. After that time, generally only companies and groups commencing a new shipping business have been able to elect into the regime. Following substantive reforms to the regime made by Finance Act 2021, and in line with an announcement at Spring Budget 2023, HM Treasury has now made the Tonnage Tax (Further Opportunities for Election) Order 2023, SI 2023/508. This Order exercises powers within Finance Act 2000 to introduce a new time-limited window for qualifying existing shipping companies and groups to elect into the regime. Such elections can be made during the 18 months from 1 June 2023 to 30 November 2024.

From the weekly Business Tax Briefing dated 19 May 2023, published by Deloitte

HMRC updates unallowable purpose guidance

The ‘unallowable purpose’ rule can prevent debits from being taken into account for corporation tax purposes where a loan relationship or related transaction has an ‘unallowable purpose’ in an accounting period. HMRC has updated the unallowable purpose guidance in its Corporate Finance Manual. The updated guidance, starting at CFM38100, is more detailed than the previous version and includes new examples that use a selection of illustrative underlying fact patterns that HMRC has identified as useful in indicating its views on the kinds of situations in which the unallowable purpose rule may or may not apply (CFM38190). The guidance acknowledges that there can be significant resource requirements for both taxpayers and HMRC in examining questions of purpose and a new section at CFM38200 sets out HMRC’s approach to unallowable purpose enquiries.

From the Deloitte Monthly Tax Update dated 19 May 2023

Corporation tax for accounting periods straddling 1 April 2023

The reintroduction of a small profits rate on 1 April 2023 means that there are commencement provisions where an accounting period (AP) straddles that date. 

The commencement provision in para 34(2), Sch 1, Finance Act 2021 (FA 2021) treats the different parts of the straddling period falling in the different financial years as if they were separate APs. This apportionment is necessary to see if the company is entitled to the small profits rate or marginal relief for the profits falling in financial year 2023 (FY23) (ie, the thresholds need to be time apportioned for the short AP that arises). Consideration needs to be given to the number of associated companies that a company has in the FY23 AP. 

Given this transitional rule, there has been concern about how profits should be apportioned between the accounting periods – particularly where there are chargeable gains. 

Section 2, Corporation Tax Act 2009 (CTA 2009) charges tax on profits in a financial year. Profits include income and chargeable gains. 

Section 8(5), CTA 2009 says that if an accounting period straddles more than one financial year, the profits are apportioned between the financial years. 

Section 4, Corporation Tax Act 2010 (CTA 2010) provides that the profits of a company’s accounting period on which corporation tax is chargeable are the company’s total taxable profits, which are made up of: 

• the amount on which the company is chargeable in respect of income after deduction of all reliefs; and 
• chargeable gains of the accounting period after any relevant reliefs (ie, net of allowable capital losses of the period and brought forward capital losses). 

Apportionment between different periods is normally on a time basis as per s1172, CTA 2010. However, s1172(2) does provide for a different basis where specific provisions override the normal time basis. The commencement rules at para 34(3), Sch 1, FA 2021, do not provide for an alternative basis and simply state all necessary apportionments are to be made between the two separate accounting periods. 

HMRC has confirmed to ICAEW that all profits are allocated between the two accounting periods on a time basis. 

To give an example, a standalone company (ie, with no associates) has a 30 September 2023 year end with trading profits of £200,000 and a £100,000 gain on 30 April 2023. The £300,000 total taxable profits would be split across the two APs on a time basis as follows: 

FY22 182/365 x £300,000 = £149,589 chargeable at 19% 

FY23 183/365 x £300,000 = £150,411 chargeable at 25%

NB, the time apportioned profits exceed the adjusted upper limit of £125,342 in the short FY23 period, so the company would not be eligible for the small profits rate or marginal relief. Any associated companies would further reduce the upper limit amount. 

HMRC publishes guidance on research and development tax relief changes

Further to a consultation in December 2022, HMRC has finalised and published updated guidance on recent changes to research and development tax relief. The guidance is intended to clarify technical aspects of how these changes will work in practice and when they will take effect. The guidance covers changes to the treatment of expenditure on data licences and cloud computing services, changes to the treatment of expenditure on advancements in mathematics, the new obligation for certain claimants to submit a claim notification to HMRC, and new requirements for additional information supporting R&D claims. Legislation for most of these changes is included in the Spring Finance Bill 2023 and the new guidance will be added to HMRC’s Corporate Intangibles Research and Development Manual (CIRD) once the Bill receives royal assent.

From the weekly Business Tax Briefing dated 21 April 2023, published by Deloitte 

Court of Appeal dismisses historical EEA permanent establishment group relief appeal

The Court of Appeal has dismissed the taxpayers’ appeal and allowed HMRC’s cross-appeal in the corporation tax cross-border group relief case VolkerRail Plant Limited and others v HMRC. The case concerned the UK’s rules for claiming group relief, as they stood prior to 1 April 2013, in respect of the tax losses of a UK permanent establishment of a Dutch-resident group company. Based on a 2013 judgement of the Court of Justice of the European Union (CJEU) – Philips Electronics UK Limited – it was thought that conditions designed to prevent tax losses being used in more than one country were incompatible with the EU freedom of establishment when the company was resident elsewhere in the EU. This led to amendments of the UK law for EEA-companies with effect from 1 April 2013. 

However, a later decision of the CJEU (NN A/S) led HMRC to take the position that the pre-2013 law was compatible with the freedom of establishment. The Court of Appeal has agreed. It held that the CJEU’s reasoning and conclusion in NN conflicted with that in Philips on the issue of justification, and can only be rationalised on the basis that the CJEU departed from Philips in a critical respect. Applying the reasoning of NN, the Court of Appeal has found that the restrictions within the pre-2013 rules were compatible with EU law. There was no need to adopt a conforming interpretation of the pre-2013 rules and, as a result, the group relief claimed was unavailable.

From the weekly Business Tax Briefing dated 10 March 2023, published by Deloitte 

Partnerships and intangible fixed assets

The First-tier Tribunal (FTT) has dismissed the taxpayers’ appeal in Muller UK & Ireland Group LLP and others v HMRC. In 2013, three UK resident companies incorporated a limited liability partnership (LLP) and transferred their trades and certain assets to it. HMRC disputed whether intangible assets and goodwill transferred to the LLP should, as the taxpayers contended, be treated as falling within the intangible fixed assets regime of Pt 8, Corporation Tax Act 2009 for the purposes of calculating the subsequent taxable profits attributable to each member. This required consideration of the general rules for calculating the taxable profits arising to corporate partners from a trade carried on by a partnership – which requires computation of the profits of a notional company carrying on the same trade – and how the notional company concept interacted with Pt 8.

The Tribunal held that, in applying the required statutory fiction, the notional company is assumed to be owned in the same way as the partnership. Applied to the facts of the case, each corporate member was to be considered a ‘related party’ of the notional companies. Accordingly, the assets transferred to the LLP remained outside of the scope of Pt 8, and the appeals were dismissed. Amendments to Pt 8 were made by Finance Act 2016 to clarify the rules in relation to transfers involving partnerships. The Tribunal also considered and dismissed the taxpayers’ arguments that these amendments were either ineffectively drafted and/or did not affect debits arising on assets transferred prior to the effective date of the change in the law.

From the weekly Business Tax Briefing dated 10 March 2023, published by Deloitte

Date goodwill acquired based on facts, not contract dates

The First-tier Tribunal (FTT) has allowed amortisation relief for goodwill on the transfer of a dental business to a limited company based on the date of an oral agreement and other evidence, rather than the later date when contracts were signed.

Before December 2014, the taxpayers ran their dental practice as a partnership and decided to incorporate. The company claimed an amortisation debit on the goodwill purchased from the partnership on the basis it had been acquired on or before 1 December 2014, when it started trading. Changes in Finance Act 2015 restrict relief for goodwill acquired after 3 December 2014. HMRC contended that the date of goodwill transfer was 23 October 2015 and denied amortisation relief.

The FTT was shown a board minute detailing an oral agreement to transfer the business, property and NHS contracts dated 30 November 2014. There was no written agreement for the transfer of goodwill. HMRC had denied amortisation relief on the basis that the property was not formally transferred on 1 December 2014, and that the transfer of NHS contracts from the partnership to the company was dated 23 October 2015. The FTT agreed that an oral agreement was not an effective transfer of the goodwill under the law. It confirmed, however, that an intention to transfer a business that is subsequently realised can, as a matter of law, effect a transfer earlier than realisation even where there is no legally binding agreement. This will be a question of fact.

In this case, the FTT found there was substantial contemporaneous evidence that the actual transfer of the business, including the goodwill, occurred on 1 December 2014, with formal transfers following. The amortisation deduction for the company was allowed.

2 Green Smile Limited & Dr Ameeka Patel v HMRC [2023] UKFTT 15 (TC)

From the weekly Tax Update dated 19 January 2023, published by Evelyn Partners LLP

Substantial commercial interdependence test for small company profit rate

A new main rate of corporation tax of 25% will apply from 1 April 2023. Smaller companies (with annual profits of no more than £50,000) will continue to pay tax at 19%, with marginal relief available to companies with annual profits of between £50,000 and £250,000.

The thresholds at which the small company rate and marginal relief kick in will be divided by the number of associates a company has (plus itself). However, this will only apply where there is substantial commercial interdependence between the companies concerned.

The Corporation Tax Act 2010 (Factors Determining Substantial Commercial Interdependence) Regulations 2022, SI 2022/1203 laid before Parliament on 21 November 2022 confirmed that the factors specified in para 3(3), Sch 1, National Insurance Contributions Act 2014 are to be taken into account for the purposes of determining substantial commercial interdependence.

Those factors are:

• financial interdependence;
• economic interdependence; and
• organisational interdependence.

Readers who have been in the tax world since the last time we had a small companies’ rate will find these factors familiar as they also applied in determining the number of associates a company had at that point. Indeed, HMRC’s Company Taxation Manual still provides guidance on how to interpret these factors and can be found at CTM03770.

ICAEW’s Tax Faculty recommends that owners of multiple companies review the commercial interdependence there is between those companies in determining what thresholds to apply for the small company rate and marginal relief purposes.

Contributed by Richard Jones, Technical Manager, Business Tax, ICAEW

Unallowable purpose on debt restructuring upheld

The Upper Tribunal (UT) has upheld the First-tier Tribunal (FTT) decision to disallow interest deductions for a group. The group had reorganised its debt with the aim of claiming increased interest deductions and accessing significant losses much earlier than would otherwise be possible. Facilitating utilisation of existing losses is a tax advantage under the unallowable purpose provisions.

The taxpayers were a group of companies that undertook a debt reorganisation. This involved assigning several intra-group loan receivables to one group company, increasing the interest rate on those loans and issuing new loans. As a result, the creditor company was able to access and utilise trapped brought-forward non-trade loan relationship losses of £48m in two to three years, rather than an estimated 25 years. The group also incurred increased interest costs to set off against income. HMRC denied all tax deductions relating to these arrangements, on the basis that the loans were for an unallowable purpose.

The FTT found that the only purpose of the new loans was to secure a tax advantage by way of the group accessing losses earlier and claiming higher tax deductions for interest payments. All the debits in respect of the new loans were attributable to the unallowable purpose and disallowed. In relation to the pre-existing loans, there were found to be two main purposes: the obtaining of a tax advantage, and the original commercial purposes for which the loans were first taken out. Debits in respect of these loans were also disallowed, but only to the extent of the increased interest rate. Both parties appealed to the UT.

The UT agreed with the findings of the FTT. It confirmed that utilisation of existing losses was a relief and thus a tax advantage under the unallowable purpose provisions. It was also clear from the substantial evidence available that the debt restructure was largely tax driven and there was a tax advantage to the group arising from the new arrangements. The FTT decision was therefore upheld in full and the appeals dismissed.

Kwik-fit Group Limited (and others) v HMRC [2022] UKUT 314 (TC)

From the weekly Tax Update dated 7 December 2022 published by Evelyn Partners LLP

HMRC’s appeal allowed in management expenses case

The Court of Appeal (CA) has allowed HMRC’s appeal in the corporation tax expenses of management case HMRC v Centrica Overseas Holdings Limited. The taxpayer company had incurred professional fees, including vendor due diligence and banking fees, in connection with a reorganisation and disposal of parts of a subgroup that it held through an intermediate holding company. The CA dismissed HMRC’s first ground of appeal that the disputed expenses were not ‘expenses of management’ as defined by s1219(1), Corporation Tax Act 2009 (CTA 2009). The CA found that the First-tier Tribunal had correctly directed itself as to the relevant legal principles, including case law such as Camas, carefully considered and applied these principles to the facts, and been entitled to reach the conclusion that the fees were expenses of management.

HMRC’s second ground of appeal was that the disputed expenditure comprised ‘expenses of a capital nature’, which have been unallowable for expenses of management purposes since the enactment of s1219(3), CTA 2009 in 2004. The CA found that the Upper Tribunal (UT) had erred in its approach. The UT had considered that the test for expenses of management and the capital expenditure test to be similar and, as a result, considered that expenses of management were likely to be revenue expenses. Agreeing instead with the analysis of the 2004 legislation put forward by counsel for HMRC, and applying ‘well-established’ capital versus revenue principles derived from similar rules for trading profits, the CA unanimously found that the timing and nature of the professional fees meant that, while they were expenses of management of the company, they were also capital in nature and thus unallowable.

From the weekly Business Tax Briefing dated 25 November 2022, published by Deloitte

Pensions auto-enrolment extension act receives Royal Assent

The Pensions (Extension of Automatic Enrolment) Act 2023 received Royal Assent on 18 September 2023. Originating as a private members bill, but subsequently backed by the government, the new Act will enable the Department for Work and Pensions (DWP) to make regulations to modify certain pension auto-enrolment provisions within the Pensions Act 2008. The DWP has indicated that it will use the new powers to make regulations to lower the age at which eligible workers must be automatically enrolled by their employers into a pension scheme from 22 to 18. Planned regulations will also amend qualifying earnings limits so that pension contributions are “calculated from the first pound earned” (while retaining the existing £10,000 automatic enrolment earnings trigger threshold for determining whether a worker earns enough to be eligible for auto-enrolment). The DWP will launch a consultation on the implementation approach and the timing of changes in due course.

From the weekly Business Tax Briefing dated 22 September 2023, published by Deloitte

Payment to employee benefit trust found to be earnings

The First-tier Tribunal (FTT) has found that a payment to an employee benefit trust (EBT) was earnings of a director of the company that made the payment. The EBT had loaned the money to the director and it was linked to his work for the company, despite this being a short-term loan.

The taxpayer, a company, paid £800,000 to the trustee of an EBT, which made a loan of the same amount to a director of the taxpayer. HMRC classed the payment to the EBT as earnings of the director, and the taxpayer appealed.

The taxpayer argued that this was a genuine loan, which as the documents showed, was repayable on demand after five years. It argued that the EBT’s purpose was to reward and incentivise employees in the short term, like with this short-term loan. The director was using shares in the taxpayer company as security for the loan, which he had purchased from his wife. Receipt of capital of a loan used to purchase shares in a close company is not taxable.

The FTT rejected this and found for HMRC. The payment to the EBT was paid by the company as a reward for the services the director supplied to the company. It was therefore earnings. There was no evidence that the £800,000 would have been paid to the director if the loan arrangement was not used, but the trustees made the payment to him because he was considered to have been under-rewarded. The fact that this ruling created double taxation did not affect the ruling, as it was simply a consequence of the arrangements put in place by the taxpayer.

M R Currell v HMRC [2023] UKFTT 613 (TC)

From Tax Update July 2023, published by Evelyn Partners LLP

Rent not an allowable deduction from employment income

The Upper Tribunal (UT) has disallowed a claim for accommodation expenses as a deduction from employment income, overturning a First-tier Tribunal (FTT) decision that allowed the claim in part. This was incidental expenditure and none was an allowable deduction.

The taxpayer, an experienced dental surgeon from Southampton, chose to take a four-year course to train as a maxillofacial surgeon in London. He rented modest accommodation locally and claimed the cost against his employment income while on the course. HMRC denied the claims, arguing that he was not required by his employment contract to live near the hospital and he did not work from home. HMRC argued, therefore, that he did not incur the expenses in the performance of his duties and derived personal benefit from the accommodation. To claim expenses against employment income, they must have been incurred wholly, exclusively, and necessarily for the purposes of the employment.

The taxpayer explained that London was the only available location to take the course and his family could not move. He had found that the commute from Southampton left him too exhausted to discharge his obligations as a doctor safely. He was also required to spend two nights a week and one weekend in six on-call, when he had to be able to reach the hospital within 30 minutes. He was telephoned by the hospital on most other nights for advice. He had returned to the family home on his free weekends, using the accommodation only to study and sleep.

The FTT allowed his claim in part. It found that only the proportion of the accommodation costs related to the nights that he was on call was allowable, along with time taking telephone calls from the hospital, and visits to the hospital on nights that he was not formally on call.

HMRC disagreed with the FTT ruling and appealed to the UT on the basis the FTT had erred in law. The UT agreed with HMRC, and disallowed the taxpayer’s appeal in full. Although he used the accommodation while performing his duties, the rent was not incurred wholly, exclusively and necessarily in the performance of his duties, but purely incidental expenditure. It put him in a position to do the work, but the cost was not incurred in the performance of his duties.

Kunjar v HMRC [2023] UKUT 154 (TCC)

From Tax Update July 2023, published by Evelyn Partners LLP

Time limits when setting up a new PAYE scheme

Applications to set up a new PAYE scheme cannot be made earlier than two months before the first payday. Once registered, HMRC will close your PAYE scheme if you’re a new employer and you do not send a report to or pay HMRC in 120 days. A nil employer payment summary (EPS) does not count as a report. To avoid the PAYE scheme being closed, the employer needs to make a payment to an employee and submit a full payment submission (FPS) within 120 days of the scheme being created.

ICAEW’s Tax Faculty has suggested to HMRC that allowing applications to set up a PAYE scheme earlier and a longer period between setting up and the first payday would eliminate two pinch points.

Contributed by Peter Bickley

Who's your client? A fresh look at the agency rules

Prisma Recruitment Ltd [2023] UKFTT 291 (TC) is an interesting case, and perhaps carries lessons for all taxpayers.

Prisma operated what the First-tier Tribunal (FTT) described as an employment business, engaging and payrolling temporary and contract workers who were introduced to customers under an agency contract.

The rules specifying the circumstances in which an employment business is required to treat its workers as employees for tax purposes and to operate PAYE on payments to them have changed over the years. Some fundamentals have remained the same, though. For the rules to apply there must be a contract between ‘agency’ and ‘client’ pursuant to which ‘worker’ personally provides services to ‘client’ which are not ‘excluded services’.

One of the ways in which services count as ‘excluded services’ is where the services are provided at premises which are ‘neither controlled or managed by the client nor prescribed by the nature of the services’. It follows, therefore, that in order to determine whether services are ‘excluded’ you need first to identify the ‘client’.

Prisma supplied workers to a workplace consultancy business with which it was not connected, called BGM. BGM was described by the FTT as “in the business of workplace change. It was a consultancy providing services to its clients, including RBS, enabling them to adopt ‘agile’ working practices and reduce the space needed for their operations”.

Although BGM had its own offices, none of the workers provided to it by Prisma carried out their duties there. Sometimes (for example, to carry out a space utilisation survey) workers were at the premises of BGM’s clients, but most of the time they could and did work wherever they pleased, including at home or in coffee bars.

Historically, Prisma had operated PAYE on payments to its workers. The FTT found that this was because the company had not (until the events which gave rise to the appeal) considered the status of the workers, but had been content to operate the ‘agency’ legislation on the basis that the full cost would be recovered from customers.

In 2013, for reasons that we don’t need to consider, the company re-examined the rules carefully and concluded that it didn’t need to operate PAYE after all. It tumbled to the fact that its client was BGM, the workers didn’t work at BGM’s premises, and the services were therefore ‘excluded services’.

HMRC contended that for the purposes of the legislation the ‘client’ in question was not BGM but the client of BGM for whom the work was done. The reported case gives little insight into how HMRC sought to justify that contention and it is frankly difficult to see how on any reading of the legislation they could have done so. The FTT accordingly had “no hesitation in finding that Prisma’s client, for the purposes of section 44 of ITEPA, was BGM”. For good measure the FTT noted that even if HMRC’s contention had been correct, s44 would still not have applied because there was no contract between Prisma and BGM’s client.

HMRC does not come out of the case well, and not only for seeking to sustain an unsustainable position. It cited a number of procedural and administrative reasons (all happily rejected by the FTT) why Prisma should not be allowed to have the case heard, including denying either that they had made an appealable decision on which the FTT could opine or that Prisma had made a valid claim to overpayment relief. And, astonishingly, back in 2014 HMRC had (allegedly) refused even to consider Prisma’s argument that PAYE tax was not due unless Prisma first agreed to pay the tax and provided “a written opinion from a lawyer or other expert”.

The lessons, then?

Read the law; stick to your guns; and don’t be bullied by HMRC.

Contributed by David Whiscombe writing for BrassTax, published by BKL

Excess mileage payments 

The deadline to complete and submit the report of expenses and benefits (P11D) for 2022/23 is 6 July 2023, which may seem a long way off, but there is a lot to do. 

The information regarding benefits needs to be gathered from employers, and you may need to ask some probing questions about employee expenses which could exceed the set exemptions and allowances. 

For example, the tax-free and national insurance contribution (NIC)-free authorised mileage allowance payment (AMAP) rates of 45p or 25p have not been adjusted for over a decade, so those rates no longer cover the cost of running a private car which the employee needs to use for business. Some employers now pay higher mileage payments for business journeys, but the excess over the AMAP amounts is taxable. 

There are examples in HMRC’s Employment Income Manual (EIM) at EIM31335 of how to calculate such excess mileage payments and where to report them. 

The EIM guidance suggests the excess should be reported on the P11D (under reg 87(1)), and the P11D notes suggest this should go in section E of that report. The employee should be given a copy of the P11D information and report the amount in box 16 on the employment pages of their tax return. 

However, the law suggests that an excess mileage payment should be treated as earnings and put through the payroll (subject to tax and NIC), but also reported on the P11D in section M: ‘Amount from which tax has been deducted’. This should avoid the amount being doubly taxed.

Where the employee’s car is purely electric the employer can still pay up to the AMAP rates, tax- and NIC-free. 

Where the employee charges their private electric car at a charging point at work for free, there is no taxable benefit for the employee on using that electricity. Things get more complicated if the employer pays for the employee to charge their private electric car at the employee’s home. Check out the guidance in EIM 23900. 

Excess mileage payments EIM31355

Electric car mileage and paying to charge: EIM23900 

From the weekly Tax Tips dated 27 April 2023, published by the Tax Advice Network 

Taxpayer had not given consideration for employment-related securities

The First-tier Tribunal (FTT) has found that restricted share units were related to the taxpayer’s employment, rather than being consideration for sale of his shareholding.

The taxpayer had shares in his employer company. On the sale of that company, he was given restricted stock units (RSUs) in the company that bought it. On the first and second anniversaries of this grant he received shares as the RSUs vested, with total value of $10m. It was common ground before the FTT that these were employment-related securities.

HMRC argued that the two receipts of shares should be charged to income tax and national insurance contributions on the taxpayer. The taxpayer argued that he had given consideration of $9m for them, so was not taxable on the whole amount.

On consideration of the documents governing the sale and share agreements, the FTT agreed with HMRC that the RSUs were granted as part of an employee incentive scheme. They were not part of the consideration for the sale of his shareholding in the first company, though he had declared them as proceeds taxable to capital gains tax on that basis.

Moore v HMRC [2023] UKFTT 399 (TC)

From Tax Update May 2023, published by Evelyn Partners LLP

Taxpayer found to have met terms of its dispensation

The First-tier Tribunal (FTT) has found that HMRC cannot claim that an issued dispensation does not apply if a taxpayer has not met conditions set by HMRC.

HMRC issued a company with PAYE and national insurance contributions determinations and decisions for subsistence payments made to employees. The company had a dispensation to make tax-free payments to employees for some meals, on condition that it kept records to show entitlement, and made routine checks. HMRC argued that this dispensation could not be used for the payments, as these requirements had not been followed.

The FTT found for the taxpayer. These were not round sum allowances, but represented amounts actually spent. The taxpayer had complied with the conditions, and as the dispensation existed then it would have been exempt whether or not it had complied with the conditions.

NWM Solutions Ltd v HMRC [2023] UKFTT 364 (TC)

From Tax Update May 2023, published by Evelyn Partners LLP

Lineker and the BBC

No, of course we’re not weighing in on that tiff: this note is about the First-tier Tribunal (FTT) case [2023] UKFTT 340 (TC) on the tax treatment of the amounts that the BBC (and BT) paid to secure Mr Lineker’s services. But, in its field, it’s likely to set the cat among the pigeons quite as much as anything Mr Lineker has tweeted.

Fearing that it might have to operate PAYE on the payments, the BBC insisted that Mr Lineker should provide his services via a partnership, so that the PAYE buck should be passed to that intermediary vehicle. So Gary duly formed a partnership with his then-wife Danielle, which contracted with the BBC and (separately) BT to provide his services.

HMRC, on investigation, concluded that the BBC’s concerns had been well founded: if it had contracted directly with Mr Lineker instead of with the partnership, that would have been a ‘contract of service’. Therefore, HMRC said, the infamous IR35 rules applied and the partnership was required to account for, broadly, the PAYE and national insurance contributions that would have been payable had there been a direct contract.

Usually in such cases the argument between the parties is as to whether the notional direct contract would have been a ‘contract of service’.

But in this case the FTT didn’t get as far as considering that issue. It decided the case on different grounds.

It was argued on behalf of Mr Lineker that because a partnership is not a legal entity, it could not be an ‘intermediary’ under the IR35 rules. Given that the rules explicitly say that it can be, and even make special provision as to the manner of their application to a partnership, this was always going to be a somewhat difficult argument to make, and it was duly rejected by the FTT.

Almost as brave was the argument that the relationship between Gary and Danielle was not really a partnership at all, but something else – even though it was governed by a written document headed ‘Partnership Agreement’; partnership accounts had been drawn up; partnership returns had been filed; and the existence of a partnership had been confirmed at a meeting with HMRC at which Mr Lineker had been present. Again, the argument was rejected.

So: if this was a partnership and IR35 can apply to partnerships, why (or indeed how) did the FTT conclude that the IR35 rules were not capable of applying to this partnership?

The answer is that, although in the case of both the BBC and BT the broadcaster concerned contracted with a partnership for the services of Mr Lineker, and although Mr Lineker signed each contract in his capacity as a partner, the FTT considered that “he did so as principal, thereby contracting directly with the BBC and BT Sport. As such, the intermediaries legislation cannot apply – it is only applicable ‘where services are provided not under a contract directly between client and the worker’ (emphasis added). In this case Mr Lineker’s services were provided under direct contracts with the BBC and BT Sport.”

Some will consider this, if true, to be one of the odder consequences of the IR35 rules. The more so because the FTT accepted that if the contracts had been signed on behalf of the partnership not by Gary but only by Danielle (whose signature would have bound the partnership in exactly the same way), there would not then have been a direct contract between the client and ‘the worker’ (Mr Lineker) and there would have been no bar to the application of the IR35 rules.

The notion that the IR35 rules are or are not capable of applying to a partnership depending on which partner signs the contract on behalf of the partnership is a surprising one. It will be interesting to hear what the Upper Tribunal has to say about it on the appeal which is surely inevitable. 

Contributed by David Whiscombe writing for BrassTax, published by BKL

Payroll hygiene 

It is very irritating when HMRC accuses a client of owing more PAYE than is actually due. This can happen when the HMRC computer has recorded a duplicate employment for an employee, without ceasing the previous employment.

For example, William Smith is employed and is paid a regular salary of £2,000 per month. On the first full payment submission (FPS) he is recorded as William Smith. On a later FPS he is recorded as Bill Smith. The HMRC computer will assume that William Smith and Bill Smith are two different people. 

As the employment record for William Smith has not been closed the HMRC computer will generate a PAYE charge for both William and Bill on the basis that the employer has paid out £4,000 in salary that month.

The April 2023 Employer Bulletin includes several tips on how to avoid duplicate employment records: 

• Use consistent employee names.
• Only include the start date on the first FPS when a new employee joins, do not alter that start date later. 
• Use a unique payroll number for each employee.
• Do not re-use employee numbers.
• If an employee rejoins the payroll after leaving, give that person a new payroll number, and reset their year-to-date payment information to zero.
• If one person works two jobs for the same employer on different payrolls, make sure that person has a different payroll number on each payroll. 
• Use the ‘irregular payment pattern’ indicator for any employee who is paid infrequently.

As you can see a lot of problems arise around payroll numbers. Talk to your clients about how their payroll software generates payroll numbers. 

Where new payroll software is used for the first time, or payrolls are merged, meaning new payroll numbers are issued for employees, the payroll ID ‘change indicator’ must be used. HMRC also recommends that the employer:

• enters the previous payroll number into the ‘old’ field; and
• enters the new payroll number into the ‘new’ field.

If an incorrect PAYE charge does arise you need to first contact the HMRC employer helpline: 0300 200 3200. If the helpline can’t fix the problem, ask the issue to be referred to HMRC’s charge resolution team.

Employer Bulletin: April 2023

From the weekly Tax Tips dated 20 April 2023, published by the Tax Advice Network

Appeal on furlough scheme dismissed

A company must repay a grant claimed under the coronavirus job retention scheme (CJRS) in respect of an employee who had erroneously not been added to the payroll before the relevant date.

To make a claim for this employee under the CJRS scheme, they had to have been included on a real time information (RTI) return submitted to HMRC before the lockdown. The taxpayer had employed and paid the wife of a director from December 2019, but failed to add her to its RTI submissions until June 2020. CJRS grants claimed in respect of her were thus invalid.

The taxpayer argued that its accountants had failed to carry out its instructions to add the new employee to the payroll, and the directors had only discovered this in May 2020. The First-tier Tribunal did not disagree with this but found that the legislative requirements did not allow for an exception, even if the company amended its previous RTI submissions. HMRC’s assessment to reclaim the CJRS grants was upheld.

Luca Delivery Ltd v HMRC [2023] UKFTT 278 (TC)

From the weekly Tax Update dated 29 March 2023, published by Evelyn Partners LLP

International relocation payments for teachers and trainees

The Department for Education (DfE) has started a new scheme, offering generous international relocation payments (IRP) of £10,000 for non-UK teachers and teacher-trainees of certain subjects. The scheme is open for applications from autumn 2023.

So far there is limited guidance regarding the tax treatment of the IRP. However, correspondence with the DfE has provided some clarification of the position.

Trainees on fee-paying teacher training courses should not have to pay UK tax or national insurance contributions (NIC) if they receive an IRP. For trainees who receive a paid salary to work during training, the DfE should pay grossed-up basic rate income tax and NIC on the IRP such that the individual receives the full £10,000 IRP. However, where salary exceeds the basic rate income tax band, the individual may have to pay the higher rate income tax and NIC themselves.

Similarly, for qualified teachers, the DfE should pay the grossed-up income tax and NIC on the IRP received, at the basic rate. Teachers who have a total income of more than £50,270 may need to pay higher rate income tax and NIC on the IRP personally.

The IRP payment will only be available to individuals working or training in England.

We await formal guidance, expected to be published later in the year.

Contributed by David Treitel, Managing Director, American Tax Returns Ltd

Cars in dealership found to have been made available for private use

The Upper Tribunal (UT) has largely upheld a First-tier Tribunal (FTT) judgement on benefit-in-kind (BiK) and national insurance contributions (NIC) charges against a car dealership and its director. In any year in which he had used the cars for private journeys, they had effectively been available to him, even if taxed as off road.

HMRC assessed an individual to a BiK charge covering five tax years in respect of two cars. It also issued NIC determinations on the company believed to have made them available to him, for a slightly different time period. The appeals were heard together by the FTT, which dismissed both.

The company was a car dealership, which also owned two expensive cars. The taxpayer and his wife were the directors. The Tribunal heard evidence on how the cars were used in the business, for example to attract business, and how they were taxed as off road except when taken out specially. In some years, a BiK was declared on one or the other, and some years not, which was intended to reflect the years in which the cars were occasionally used for private journeys.

The FTT had found that in any year where the cars had been used for private journeys, they had in effect been made available to the director, even if taxed as off road. It also found that the cars had been made available in more years than had been declared.

The UT upheld the FTT judgement, except by allowing the appeal against one year’s discovery assessment on the taxpayer, as it was issued during the enquiry period so invalid.

The P11D(b) filing deadline is 6 July; businesses may want to check the treatment of any unusual BiK arrangements.

Norton & Anor v HMRC [2023] UKUT 48 (TCC)

From the weekly Tax Update dated 9 March 2023, published by Evelyn Partners LLP

Gifts of £5m to former employees taxed as earnings

A company undergoing a takeover made gifts to two former employees to repay loans. The loans were taken out to acquire shares, but had fallen in value. The First-tier Tribunal (FTT) found for HMRC that the payments or gifts were earnings, as they were ultimately ‘from’ employments.

The taxpayer, a company, made gifts to two former employees. The gifts were to enable them to repay loans that they had taken out to acquire shares. The shares had been acquired as a result of their employment and had fallen significantly in value. The company was being purchased by another company at the time it made the gifts. HMRC issued PAYE determinations to the company, holding that the gifts were earnings from their former employments.

The taxpayer argued that the gifts were not earnings, as the employments were not the reason the gifts were made. The employments had ceased years earlier, and the payments were made for commercial reasons to remove an obstacle to the sale of the company, as the company had given indemnities to the former employees. The payments therefore derived from rights held under the share arrangements, and were just payments for release from the indemnities, not related to the employments.

The FTT ultimately agreed with HMRC and dismissed the taxpayer’s appeal, after hearing considerable evidence. As the gifts were ‘from’ the former employments, they were taxable as earnings, and the PAYE determinations were upheld. 

Different PAYE, national insurance and reporting obligations may exist where loans to employees or directors are effectively waived. Where there is uncertainty, taxpayers should consider getting confirmation of the tax treatment to prevent unexpected outcomes. 

Gain Capital Ltd v HMRC [2023] UKFTT 61 (TC)

From the weekly Tax Update dated 8 February 2023, published by Evelyn Partners LLP

Parental bereavement leave and pay and proposals for change

Under current law, from April 2020, if baby loss (eg, a stillbirth) occurs after 24 completed weeks of pregnancy or a child under 18 dies, employees are legally entitled to two weeks’ parental bereavement leave, which may be paid if earnings exceed the relevant threshold, (ie, the lower earnings limit for national insurance). For mothers, the leave is a day one right and the pay is a week 26 right. For fathers/partners, both leave and pay are week 26 rights. 

These rights, like the right to maternity, adoption, paternity, etc, are split as follows:

• the right to leave – employment law
• the right to pay – social security law

However, if someone suffers a pregnancy loss in the first 23 weeks of pregnancy (a miscarriage), it is up to the employer to decide to provide any paid leave. This means that women across the UK have to return to work immediately after suffering such a traumatic incident or take holiday leave (paid or unpaid). 

The Miscarriage Leave Bill, introduced by SNP MP Angela Crawley, that will amend the Employment Rights Act 1996 in Great Britain (GB) to provide for three days’ statutory parental bereavement leave and pay for employees who experience a miscarriage including an ectopic or molar pregnancy, was laid in parliament last year. The second reading of the bill on 2 December 2022 was ‘talked out’ and it will now be debated on 24 March 2023. 

In Northern Ireland (NI), there was a consultation at the end of 2022 on a proposal to introduce 10 days’ miscarriage leave and pay as a day one right. The Parental Bereavement (Leave and Pay) Act (Northern Ireland) 2022, which has applied to stillbirths and child deaths from April 2022, required this consultation by the Department for the Economy. Depending on the outcome, the statutory right to parental bereavement leave and pay will be extended to employees who are bereaved of a child up to the end of the 23rd week of pregnancy, (ie, a miscarriage). The day one right to leave will be inserted into the Employment Rights (Northern Ireland) Order 1996 and the conditional right to pay will be inserted into NI’s social security legislation, removing the requirement for 26 weeks of service. 

The fact that this a statutory right to leave and payment with the same name could apply differently in two parts of the UK is an example of where employers in GB and in NI need to be aware of the impact of devolution of employment law. In this case it all depends on whether the employment contract is written under employment legislation applying in GB (Employment Rights Act 1996) or NI (Employment Rights (Northern Ireland) Order 1996). ICAEW’s response to the NI consultation recommended that official guidance and software specifications provided by government to payroll developers highlight this distinction.

Employers across the UK can recover 92% of the cost of statutory parental bereavement or 103% if they are ‘small’, (ie, paid £45,000 or less in class 1 national insurance contributions (ignoring reductions like employment allowance)) in the last complete tax year before the ‘qualifying week’, which is the week (Sunday to Saturday) before the employee is bereaved of the child. 

Miscarriage Leave Bill 

Northern Ireland consultation Miscarriage leave and pay 

Official guidance for parents – Statutory bereavement and pay 

Official guidance for employers – Statutory bereavement and pay employer guidance 

Get financial help with statutory pay 

Maternity Action guidance: Miscarriage, stillbirth and neonatal death – rights to time off and pay

Contributed by Peter Bickley, Technical Manager, employment taxes and NIC, ICAEW

Win for taxpayer in off-payroll working case

The First-tier Tribunal (FTT) has found that a sports commentator for Sky TV was in business on his own account, rather than effectively being an employee, so found that he had paid the correct tax by working through his personal service company (PSC).

Following a career as a rugby union player, the taxpayer provided his services commenting on rugby union to several media organisations, including newspapers and broadcasters. He worked through his PSC. He was engaged by Sky as a commentator in 1994 and HMRC took issue with contracts covering six tax years, arguing that he was effectively an employee and should have been taxed as such, issuing PAYE and national insurance contributions determinations.

On consideration of the contracts, and the actual working relationships, the FTT found for the taxpayer. On constructing a hypothetical contract that would reflect the reality, it found that there was mutuality of obligation, as the parties were obliged respectively to do the work and to pay for it, and that Sky had sufficient control over how the taxpayer worked to satisfy the control test. On consideration of the other factors, however, the overall test for treating the taxpayer as an employee was not met. He worked for many organisations and drew about 40% of his income from those other than Sky. His working days for Sky varied without his fixed annual fee varying, he could reuse his opinions in his newspaper articles, and had flexibility over when he agreed to cover live matches. He was in business on his own account.

S&L Barnes Limited v HMRC [2023] UKFTT 42 (TC)

From the weekly Tax Update dated 25 January 2023, published by Evelyn Partners LLP 

Appeal dismissed on deductibility of subsistence expenses

The First-tier Tribunal (FTT) has found that agency workers were at permanent rather than temporary workplaces, so travel and subsistence expenses were not deductible.

The taxpayer was an umbrella company supporting temporary workers at a number of employment agencies by providing a salary service, so the workers were actually engaged by the taxpayer. The taxpayer argued that, as it engaged each worker on an ongoing contract, every place where they carried out an assignment was a temporary workplace, and so reimbursements for travel and subsistence were deductible against income tax and national insurance contributions (NIC) for each worker. It also argued that it was entitled to reimburse round sums or in accordance with a set scale without evidence of the expense from the worker, despite not having a dispensation.

The FTT upheld HMRC’s PAYE determinations and NIC decision notices, agreeing with HMRC that each assignment was a separate employment at a permanent workplace, so the expenses were not deductible at all. In the absence of a dispensation, the taxpayer was not allowed to reimburse in that way it had done, with no evidence.

The case predates two important 2016 changes. First, most agency or umbrella workers are unable to claim relief for such travel expenses, as specific legislation was introduced to prohibit claims in specific circumstances.

Second, dispensations have been replaced by ‘approval notices’. HMRC has been focused on tax relief claimed on travel expenses by agency or umbrella company workers for a number of years and many businesses are now reviewing any such claims to ensure they remain compliant.

Mainpay Limited v HMRC [2023] UKFTT 16 (TC)

From the weekly Tax Update dated 19 January 2023, published by Evelyn Partners LLP

Tax and Settlement Agreements

The taxation treatment of amounts received by an employee on leaving employment can be fraught and is notoriously fact-specific. Nonetheless, there are some ground rules, as the recent anonymised case of Mrs A v HMRC [2022] UKFTT 421 (TC) reminds us. And it also reminds us that appealing to the First-tier Tribunal (FTT) carries the risk that your tax bill may be increased, not reduced.

Mrs A had held a senior position in a retail organisation. She alleged that in the course of her employment she had been harassed, bullied, victimised and intimidated by the owner of the organisation. She settled out of court for a payment of £1.1m.

£45,000 was in compensation for “injury to feelings and aggravated damages” arising from her treatment during her time as an employee. There was no dispute about the tax treatment of that amount: it wasn’t taxable.

The balance was expressed as being “compensation for the termination of your employment and any and all claims you have or may have against the Employer, [the Owner]” etc.

There are two possible heads of charge on such amounts. First stop is s225, Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), which charges tax on a payment made in respect of “an undertaking which restricts [an] individual’s conduct or activities” given “in connection with the individual’s current, future or past employment”.

Most Settlement Agreements on termination of employment include an undertaking on the part of the employee to discontinue legal proceedings. In principle, payment for such an undertaking falls within s225. But it is HMRC’s published practice to accept that no chargeable value is to be attributed to a limited undertaking of that kind.

However, Settlement Agreements usually include much wider undertakings. Mrs A’s was not untypical: she agreed among many other things to keep confidential all details of the grievance, the termination of her employment, the Employment Tribunal proceedings and the Settlement Agreement; and not to make any derogatory or detrimental statements about her employment, the Employer or the Owner. Payment for such wider undertakings falls within s225.

It was contended on behalf of Mrs A that s225 should be read as applying only to undertakings that restrict conduct or activities in connection with the individual’s current, future or past employment. The FTT disagreed: if the undertakings were given in connection with an employment (as Mrs A’s plainly were) then it didn’t matter whether they affected Mrs A’s employment or her personal life: they fell within s225.

That disposed of the appeal. But the FTT went on to consider whether, if it was wrong as regards the application of s225, the amount was nonetheless chargeable to tax under s401, ITEPA 2003, which charges to tax any “payment received in connection with the termination of an employment” or whether, as Mrs A contended, it had no connection with the termination, but was wholly in consideration of her entering into the confidentiality and non-disclosure obligations.

Again, the FTT found against Mrs A. The “additional purpose or effect” of the Agreement in securing confidentiality and non-disclosure did not mean that there was no connection with the termination. Having regard to the terms of the Agreement and all the evidence in the round, there was such a connection.

It’s worth noting that HMRC’s position had been that the charge lay under s401, which affords exemption for the first £30,000 of the amount. The FTT found that the charge lay under s225 (which affords no similar exemption). So this is another of those cases where the effect of the FTT’s decision has been to increase the taxpayer’s liability beyond the figure that HMRC had been seeking.

Contributed by David Whiscombe writing for BrassTax, published by BKL

Whether Mainpay is binding precedent 

Mercy Global Consult Ltd (MGC) employed doctors and nurses, who were seconded to recruitment agencies and then sub-seconded to the NHS. MGC charged VAT to the agencies, but neglected to pass that VAT to HMRC, resulting in a VAT assessment for £21m and MGC’s insolvency and liquidation. MGC’s liquidators sued the people behind MGC, who argued in their defence that MGC’s services had been VAT-exempt. This was a direct challenge to the Court of Appeal’s judgement in Mainpay Ltd, which distinguished between supplies of staff (which are subject to VAT) and supplies of what those staff do (which might be exempt healthcare services). The defendants to the liquidators’ claim argued that Mainpay had been based on an assumption that the exemption for healthcare services was the same in UK and EU law (whereas they considered the UK exemption was broader), and should not be treated as binding precedent. 

The Court of Appeal has rejected this argument. Even if UK and EU law were not effectively the same it would still be necessary to distinguish between a supply of staff and a supply of the services provided by those staff. The court also agreed with Mainpay’s distinction between supplying staff while retaining control of their work and supplying staff without controlling them, and concluded that there was nothing “manifestly wrong” about the judgement. The High Court had been correct to refuse the application to defend the liquidators’ claim based on the VAT exemption.

From the Weekly VAT News dated 16 October 2023, published by Deloitte

Outsourced loan servicing is subject to VAT

In 1997, the Court of Justice of the European Union (CJEU) held, in SDC, that exempt payment services had to have the effect of transferring funds, changing the legal and financial position of the parties to the payment. However, it was not clear whether this was limited to only those services that themselves changed the legal and financial position (the “narrow interpretation”), or whether it could also include services that automatically and inevitably caused those changes to happen (the “wide interpretation”). 

In Target Group, the Supreme Court has now ruled that the narrow interpretation is correct. Target Group provided a post-origination loan administration service to Shawbrook Bank: processing loan repayments, contacting borrowers where necessary, calculating interest, and maintaining loan accounts. These activities might lead to a payment being made by a borrower to the lender, but Target did not credit or debit accounts directly and payments were executed by third parties (such as BACS) acting on its instructions, not by Target itself. Consequently, Target’s services did not qualify for exemption, and its appeal was dismissed.

From the weekly Business Tax Briefing dated 13 October 2023, published by Deloitte

VAT treatment of repatriation of bodies

UK Funerals On-line (UKFO) repatriated the bodies of deceased persons (typically when someone died in the UK and their family wished them to be laid to rest overseas). UKFO arranged for an “out of England” form to be granted from the coroner, prepared the body for transport (including sealing the body in a zinc-lined coffin or casket in accordance with regulations), obtained a “freedom from infection” certificate, arranged the flight, and delivered the body to the airport. 

HMRC considered that UKFO’s services qualified for VAT exemption as the making of arrangements in connection with the disposal of the dead, and the First-tier Tribunal (FTT) agreed. However, did the services also qualify for zero-rating as the making of arrangements for the international transport of goods? The FTT considered that the predominant part of UKFO’s services from the perspective of the typical customer was the supply of specialist transport services. Consequently, the FTT has held that UKFO’s services also qualified for zero-rating. Where services qualify both for zero-rating and exemption, the zero rate applies. UKFO’s appeal was therefore allowed, and it was entitled to recover input tax on its costs.

From the Weekly VAT News dated 9 October 2023, published by Deloitte

’Free’ tablets with new subscriptions to magazines

Between 2014 and 2017, Deco Proteste-Editores (DPE) (a Portuguese publisher) gave basic tablets and smartphones to customers who took out new subscriptions to its magazines. In the judgement of the Court of Justice of the European Union (CJEU), the gift of the tablet was separable from the magazine. There was no minimum tie-in period, so a customer could cancel their subscription after one month and keep the tablet; and customers would not be given another tablet if they renewed a subscription at the end of the year. 

However, the CJEU also ruled that the provision of the tablet appeared to be ancillary to the magazine. It was part of DPE’s commercial strategy to incentivise customers to take out subscriptions by providing the tablets, and part of the associated cost was recovered through increased subscriptions. In addition, the tablets provided customers with the ability to access digital editions (and were therefore for the better enjoyment of the magazines). DPE was therefore supplying magazines (which included a linked supply of the tablets) and was not gifting the tablets to subscribers. Consequently, it was unnecessary for the court to consider DPE’s challenge to the validity of certain Portuguese rules on business gifts (under which it had been assessed for approximately €3.5m of VAT).

From the weekly Business Tax Briefing dated 6 October 2023, published by Deloitte

Insurance exemption for SIPPs

Under Court of Justice of the European Union case law, a VAT-exempt insurance transaction involves an insurer undertaking to indemnify an insured against a risk in consideration for a premium. Intelligent Money Ltd (IML) provided self-invested pension plans (SIPPs), which allowed customers to control investment decisions relating to their pension investments within a tax-efficient wrapper. For regulatory purposes (under UK domestic case law) such plans may qualify as insurance. 

The Upper Tribunal (UT) has considered whether they are insurance for VAT purposes. IML argued that “risk” in the context of the insurance exemption should simply refer to a contingent “trigger event” rather than specifically to a financial risk. The UT considered that even if “risk” referred to a range of uncertain contingent events, it was still a risk that had to be borne by the insurer. A distinction therefore had to be drawn between IML’s SIPPs (where the amounts contributed remained substantially owned by the customer) and other life insurance contracts (where premiums were owned by an insurer who had to pay out benefits from its own resources). This approach was supported by the fact that neither the administration and investment fees paid to IML nor the contributions to the SIPPs could properly be described as premiums. IML was administering a trust fund to provide benefits to customers who had invested through it. In doing so, however, it did not expose itself to risk, as an insurer might. The UT concluded that IML’s services could not therefore qualify for VAT exemption and dismissed its appeal. 

From the Weekly VAT News dated 2 October 2023, published by Deloitte

Judicial review of application of HMRC concession

In 2017/18, the Royal Surrey NHS Foundation Trust was provided with a grant of £4.1m to purchase two Linac radiotherapy machines. Following standard NHS procedures, the Linacs were purchased by the NHS’s central procurement entity (NHS Supply) which provided them to Royal Surrey. After the orders were placed, Royal Surrey decided that it would lease the machines to a new subsidiary (Healthcare Partners Ltd (HPL)), which would provide Royal Surrey with a managed radiotherapy facility. Royal Surrey expected to recover VAT on the purchase of the Linacs, as they were to be used for business purposes (leased to HPL). The NHS operates as a divisional VAT registration and although NHS Supply is legally separate from Royal Surrey, it does not charge VAT on supplies to it. Accordingly, only NHS Supply held a VAT invoice from the supplier. 

However, under an HMRC concession, NHS bodies are able to recover VAT on goods procured through NHS Supply for use in their business activities, provided NHS Supply issues “VAT acceptable” alternative documentation. HMRC objected to the application of the concession in this case. The High Court has allowed Royal Surrey’s application for judicial review. The Court found that there was no reason to doubt Royal Surrey’s evidence, and the relevant intention was that of Royal Surrey, not NHS Supply, at the time of the purchase. At the relevant time, Royal Surrey had clearly changed its intention and intended to use the Linacs for business purposes. Consequently, the High Court declared that Royal Surrey was entitled to the benefit of the concession. 

From the Weekly VAT News dated 2 October 2023, published by Deloitte

VAT and agency

All Answers runs websites that allow students to commission answers to their essays, dissertations and coursework, which All Answers contracts out to self-employed writers. In September 2016, HMRC assessed All Answers on the basis that it delivered the essays to the students as principal, and therefore should have charged VAT on the amount remitted to the writers as well as on the part of the fee that it retained. In July 2020, the Upper Tribunal ruled that All Answers had been acting as principal since 2012 and dismissed its appeal. 

All Answers had made some changes to its agreements with the writers: from October 2016 copyright in the work remained with the writer, and the agreement expressly stated that acceptance of an assignment created a contract “between yourself [the writer] and the Customer [student]”. Could the revised terms justify treating it as agent from October 2016? The First-tier Tribunal has decided that they did not. The changes to the copyright were not sufficiently important to justify a different approach, and the revised wording about the relationship between writer and student did not explain how a contract came into existence or what its terms were. Nothing significant had changed in 2016, and All Answers’ appeal was dismissed.

From the Weekly VAT News dated 2 October 2023, published by Deloitte

VAT claims by recipient of supply to tax authorities

Michael Schütte, a German farmer and forester, purchased timber from suppliers at a 19% VAT rate, which he sold to customers as firewood at a 7% rate. The German tax authorities considered that Mr Schütte should have charged VAT at 19%. 

The German domestic court concluded that he had correctly applied the lower rate, but that the lower rate should also have applied to the purchases of timber, and that he had therefore over-recovered input tax. Mr Schütte’s suppliers refused his request for revised invoices, relying on a defence of limitation. He therefore asked the tax authorities to remit the over-recovered input tax. The tax authorities refused Mr Schütte’s claim. The Court of Justice of the European Union (CJEU) has previously ruled that the principle of effectiveness permits claims by recipients of a supply directly against the tax authorities if it is impossible or excessively difficult to recover overpaid VAT from the supplier, in cases of supplier insolvency. 

In this case, the CJEU has ruled that the principle of effectiveness also required the tax authorities to accept Mr Schütte’s claim where his suppliers had a valid limitation defence to a contractual claim; Mr Schütte therefore had a valid claim against the German tax authorities. In the UK, Revenue and Customs Brief 4(2022) states that, following Brexit, any action to recover VAT overpaid by a customer to a supplier is a commercial matter between the two parties, and there can be no direct claim against HMRC for overpaid VAT.

From the weekly Business Tax Briefing dated 15 September 2023, published by Deloitte

Mini umbrella company fraud 

Impact Contracting Solutions pooled the services of 3,300 mini umbrella companies (MUCs), some of which supplied the services of a few individuals for a few months, before vanishing without honouring their VAT or PAYE obligations. HMRC denied Impact Contracting Solutions the right to recover VAT charged by the defaulting MUCs (applying Kittel), but that did not necessarily prevent the fraud from continuing. HMRC therefore invoked the Ablessio principle, and deregistered Impact Contracting Solutions for VAT on the basis that its VAT registration was being used to facilitate fraud. Impact Contracting Solutions argued that Ablessio (like Halifax, Kittel, and other abuse of law cases from which it is derived) should be seen as a principle of statutory interpretation, and that it could not be used to override the clear obligation in VAT Act 1994 (VATA 1994) for Impact Contracting Solutions to be registered for VAT. 

The Upper Tribunal (UT), however, has ruled that Ablessio is a free-standing principle rather than a method of statutory interpretation, and that it did not need to be applied in a way that conformed with VATA 1994. Even if this was not evident from previous judgements of the UK courts, Halifax had been expressly imported into UK statute post-Brexit by s42, Taxation (Cross-border Trade) Act 2018. The UT also confirmed the First-tier Tribunal’s (FTT’s) decision that Ablessio applied to facilitators who knew or should have known about fraud by the MUCs, even if they made untainted supplies that exceeded the VAT registration threshold. HMRC’s action was not disproportionate (as a matter of EU law) just because it might take alternative action. Impact Contracting Solutions’ appeal on preliminary points of principle was therefore dismissed, and it will now have to seek to convince the FTT that it was not appropriate for HMRC to deregister it based on its own particular facts.

From the Weekly VAT News dated 11 September 2023, published by Deloitte

VAT tour operators margin scheme

In 2013, the Court of Justice of the European Union (CJEU) ruled that wholesale supplies of travel services fell under the tour operators margin scheme (TOMS). HMRC issued Revenue and Customs Brief 5 (2014) and amended paragraph 3.2 of Notice 709/5 to acknowledge this new treatment, but described it as optional and allowed businesses to continue to deal with business to business (B2B) supplies outside TOMS. Between 2017 and 2021, Golf Holidays applied TOMS to its B2B supplies of golf holiday packages, but realised that it would have been beneficial for it to have treated these supplies as outside TOMS and submitted a notice of error correction to reclaim overpaid VAT. 

The First-tier Tribunal (FTT) has ruled that it was not entitled to do so. Golf Holidays had applied a legitimate VAT treatment based on the direct effect of the CJEU’s judgement. All HMRC did, when refusing the VAT claim, was require Golf Holidays “to live with the consequences of its actions”. There was no error for the business to correct. Furthermore, Golf Holidays’ submission that HMRC had paid claims by other businesses in a similar situation was effectively a complaint about unfair administration (which lay outside the FTT’s jurisdiction) rather than an argument based on fiscal neutrality. The FTT did not therefore need to determine HMRC’s argument that fiscal neutrality can no longer be relied upon as a cause of action since the UK’s departure from the EU. Golf Holidays’ appeal was dismissed.

From the weekly Business Tax Briefing dated 8 September 2023, published by Deloitte

VAT recovery on fundraising share sale

To fund the development of a new hotel in Milton Keynes, Hotel La Tour Ltd (HLT) decided to sell its existing hotel in Birmingham, by way of the sale of shares in a subsidiary that owned the hotel. HLT sought recovery of the VAT incurred on the marketing and legal costs associated with the sale, on the basis that the relevant services were directly and immediately linked to its downstream taxable activities, namely the developing and operating of the new Milton Keynes hotel. HMRC denied input tax recovery on the basis that the costs related to the exempt share sale. The First-tier Tribunal (FTT) and now the Upper Tribunal (UT) agreed with HLT.

At the UT, HMRC relied on BLP Group Plc, in which transaction costs had been attributed to an exempt share sale, rather than the subsequent application of the sale proceeds to BLP’s wider taxable activities. The UT, however, considered that the jurisprudence of the Court of Justice of the European Union (CJEU) had evolved considerably since BLP, in particular in AB SKF, where the CJEU indicated that input tax could potentially be recoverable on share sales by reference to the ultimate economic purpose of a transaction. 

In the UT’s judgement, the FTT had not erred in law in applying AB SKF and Frank A Smart & Son Ltd, which similarly attributed input tax to an ultimate taxable farming activity rather than an intervening non-business activity. The FTT’s decision – that HLT could recover input tax as the purpose of the transaction was to fund HLT’s taxable activities, that the funds were so used, and that the services were cost components of the taxable activities – was described by the UT as “unimpeachable” and HMRC’s appeal was dismissed. It will be interesting to monitor HMRC’s position on this issue for taxpayers who have historically restricted VAT incurred in comparable situations.

From the weekly Business Tax Briefing dated 28 July 2023, published by Deloitte

TOMS on short-term apartment stays 

Since 2017, Sonder Europe Ltd has leased self-contained apartments on an annual basis from third-party landlords. If necessary, Sonder instals furniture, beds, sofas, lamps, etc (two-thirds of the apartments are unfurnished). Sonder then markets the apartments as short-term accommodation (the average customer stays for five nights). The First-tier Tribunal (FTT) has ruled that Sonder’s services should be subject to VAT under the tour operators’ margin scheme. Sonder should be treated as a tour operator that provided apartments for the benefit of travellers; and it acquired the apartments from landlords that were in business for the purposes of its own business. 

The FTT’s key finding was that Sonder did not materially alter or process the apartments procured from the landlords when providing them as short-term accommodation. Sonder occasionally carried out some minor maintenance, arranged for housekeeping to clean the apartments between stays, and provided a concierge helpline. In the FTT’s judgement, neither these services nor the initial furnishing of the apartment (which could easily be reversed) amounted to processing the apartments; nor did the fact that Sonder leased the apartments annually, but provided them to customers on a short-term basis. In light of this finding, the FTT thought it unnecessary to determine whether the rule that the apartments should not be altered or processed (which appears in the UK’s TOMS) was consistent with the EU Principal VAT Directive. Sonder’s supplies should be treated under the margin scheme, and its appeal was allowed.

From the Weekly VAT News dated 24 July 2023, published by Deloitte

Operation of the VAT margin scheme for intra-EU art sales

If an art dealer such as Harry Mensing (who owns galleries across Germany) buys art from a German artist, he can operate the margin scheme and account for VAT on the difference between the sales price and the VAT-inclusive price paid to a local artist. The VAT is simply part of the purchase price he has paid to the artist. If he imports art from outside the EU, then the EU Principal VAT Directive expressly allows him to deduct import VAT from his margin (even though the VAT is paid to the tax authorities rather than to the artist). However, there is no equivalent provision for acquisition VAT on purchases from artists elsewhere in the EU. 

The CJEU has ruled that the principle of fiscal neutrality cannot be applied to bring the intra-EU purchases in line with domestic purchases and non-EU imports. Although the CJEU acknowledged that it is inherent in the VAT system that transactions that are essentially the same should not be treated differently, it observed that fiscal neutrality could not be used to extend the wording of the Principal VAT Directive in a way that would run counter to its clear wording. Despite arguments from Mr Mensing and the European Commission, the court ruled that Mr Mensing’s inability to deduct acquisition tax resulted directly from the wording of the Principal VAT Directive. 

From the Weekly VAT News dated 17 July 2023, published by Deloitte

VAT treatment of directors’ fees 

TP, an eminent lawyer, acts as a director of several companies in Luxembourg. Should he charge VAT on the remuneration he receives? The EU Principal VAT Directive expressly states that employees should not charge VAT to their employers, but does not mention directors. In the opinion of Advocate General Julianne Kokott, the question of whether directors are in business turns on whether they are conducting an economic activity independently of the company. 

In this case, TP was not remunerated for his own activities, but for his contribution to the activities of the board of directors. His services as a director could only be of use to the board, and could not be provided on the free market. Furthermore, his remuneration was determined unilaterally at a general meeting, rather than by negotiation; and that remuneration (even if it had included performance-related bonuses) would never have exposed TP to the risk of losses. 

Overall AG Kokott thought that TP was not acting independently of the companies of which he was a director. She further opined that the treatment of TP’s director’s fees should not be “infected” by the fact that one of the companies he served might also engage him as a lawyer. Finally, she observed that imposing VAT on directors’ fees could create an unjustified difference for partly-exempt businesses operating through a limited company (which is required by law to appoint a board of directors), rather than as a sole trader. Subject to verification by the referring court, AG Kokott concluded that TP should not charge VAT on his director’s fees.

From the Weekly VAT News dated 17 July 2023, published by Deloitte

Is tourist tax consideration for a supply?

Gemeinde A, a municipality in Germany, owned a thermal spa which it made available for use both by residents and tourists without any entry charge. The operation of the spa was partly funded by a tourist tax, which the municipality considered should be subject to VAT. On this basis it claimed VAT recovery on associated operating costs of the spa. 

The CJEU has ruled that the tourist tax did not represent consideration for a supply. The tourist tax was collected from tourists who stayed in the municipality (by hotels, campsites, etc) regardless of whether they visited the spa. Conversely, residents might visit the spa without being subject to the tax. In the CJEU’s judgement, the tourist tax therefore lacked the requisite direct link with use of the spa facilities. It was not consideration for a supply, and could not justify input tax recovery by the municipality.

From the weekly Business Tax Briefing dated 14 July 2023, published by Deloitte

Zero-rating of trading in gold 

Glint Pay Services Ltd enables consumers to invest in gold, and to use the value of that gold in everyday transactions. The gold is physically held in a Brinks vault in Switzerland, with StoneX (a member of the London Bullion Market Association (LBMA)) having custody of it. Supplies of investment gold are exempt from VAT, except when they involve an LBMA member (when they are governed by the Terminal Markets Order (TMO) and qualify for zero-rating). The scope of the TMO in relation to gold is explained in a memorandum of understanding (MOU) between HMRC and the LBMA. According to the MOU, the TMO (and therefore the zero-rating) applies to sales of gold between non-members, provided that an LBMA member is involved and retains physical control of the gold. 

HMRC did not accept that the MOU applied to Glint’s services, and the High Court has now refused Glint’s application for judicial review. The court considered that the MOU was intended to cover wholesale trades on the bullion and precious metals markets, and not the retail transactions in which Glint was involved. Neither StoneX nor Brinks were party to Glint’s transactions with its customers, in that they did not have title to the gold, did not clear the transactions in question and did not record them. Therefore, there was no involvement by an LBMA member in the transactions in the way envisaged by the MOU. 

The judge has ruled that as the MOU did not state in terms that were clear, unambiguous and devoid of any relevant qualification that Glint’s supplies should be covered by the TMO, Glint had no legitimate expectation that it should be allowed to zero-rate its supplies. Even had the court found that there was a legitimate expectation, the judge concluded that HMRC’s duty to apply the VAT law would have taken precedence, in the absence of conspicuous unfairness or abuse of power. Glint’s supplies were exempt, and it was not entitled to recover input tax on its costs. 

From the Weekly VAT News dated 10 July 2023, published by Deloitte

VAT exemption for medical care

The VAT exemption for medical care covers the diagnosis and treatment of disease or ill-health as well as preventative care. The First-tier Tribunal (FTT) has ruled that this does not extend to non-surgical cosmetic procedures such as Botox injections, dermal fillers and microdermabrasion. These procedures are often chosen by people to change their physical appearance for cosmetic rather than for medical reasons. However, there may also be a psychological aspect to that choice and, in some cases, the procedure may be recommended by a medical professional. These factors can therefore bring into question whether such procedures are exempt from VAT as medical care. 

Illuminate Skin Clinics provided an anecdote of one customer in his early fifties who was suffering from long COVID and depression, and approached the clinic for skin tightening treatment to make him “feel like he can recognise himself in the mirror again”. In the FTT’s judgement, the fact that people went to the clinic feeling unhappy with some aspect of their appearance, and were happier when a treatment was performed, did not mean that the treatment had a medical or therapeutic aim. Helping someone to achieve goals in relation to their appearance may improve their self-esteem and self-confidence, but it was not treating their mental health and it would be “a misuse of language” for it to qualify as VAT-exempt healthcare. The clinic should have charged VAT on its treatments and its appeal was dismissed. 

From the Weekly VAT News dated 10 July 2023, published by Deloitte

VAT on service charges

The Property Chamber of the First-tier Tribunal (FTT) has considered the VAT on service charges at two developments. The landlords in this case engaged a managing agent who employed staff to manage the developments. The employment of staff by the agent and not the landlords created a VAT cost which the landlords could not recover, and therefore they passed it on to the owners as part of the service charges. Under s19, Landlord and Tenant Act 1985, landlords can only include in their service charges costs that are “reasonably incurred”. 

The apartment owners applied to the FTT that the landlords should have employed the staff directly, or at least jointly with the managing agent. The FTT has dismissed the owners’ application. In its judgement, the owners had failed to establish that it was unreasonable for the landlords not to have used an alternative employment model. The FTT’s decision highlighted some of the problems of joint employment contracts, from legal, practical and VAT perspectives. Conversely, outsourcing to a managing agent had a number of practical advantages. Overall, the owners had failed to demonstrate that an alternative employment model, even if achievable, would have led to any overall reduction in the service charges.

From the Weekly VAT News dated 10 July 2023, published by Deloitte

Serviced accommodation 

Realreed Ltd owns Chelsea Cloisters, which includes more than 200 flats that are used to provide serviced accommodation. The services (dry-cleaning, linen changes, Wi-Fi, etc) are provided by Chelsea Cloisters Services Ltd (an affiliated company), and Realreed has always treated its supplies of the flats (in isolation) as exempt from VAT. In 2019/20, HMRC issued assessments for £4.8m on the basis that Realreed should have charged VAT (on the basis that the flats were similar to hotels). Realreed appealed the assessments to the First-tier Tribunal (FTT), but also started judicial review proceedings regarding HMRC’s approach. 

Realreed had been visited by HMRC on three occasions in the early 1990s and again in 2005, and on each occasion the visiting officer was aware that Realreed was making supplies that it considered to be VAT exempt (raising small assessments to reflect an increase in purchases being attributed partly to exempt supplies). However, the High Court has ruled that none of the HMRC officers had critically examined whether the exemption applied. Even if they had done so, then Realreed had shown (through its challenge in the FTT) that it was capable of making its own judgement about the liability of its own supplies. The High Court concluded that Realreed could not show that it had relied on any expectation created by HMRC to its own detriment, and did not have a legitimate expectation defence to the assessments under UK law.

From the Weekly VAT News dated 3 July 2023, published by Deloitte

Fixed establishment 

Under a 2012 agreement, Cabot Switzerland GmbH (Cabot CH) engaged Cabot Plastics Belgium SA (an associated company) as a toll manufacturer. Cabot Plastics stored raw materials owned by Cabot CH, manufactured them into articles used in making plastics, and held the finished items until they were sold by Cabot CH. Cabot Plastics also facilitated customs formalities (acting as importer of record), managed packaging materials, and suggested improvements to production processes. 

Following an audit in 2017, the Belgian tax authorities considered that Cabot Plastics had put its production plants, distribution centre, and warehouses at the disposal of Cabot CH, and had also made its operational staff available to Cabot CH. Consequently, they concluded that Cabot Plastics amounted to a fixed establishment of Cabot CH, and that it should have charged Belgian VAT of €10.6m to Cabot CH on its services. In April 2022, the CJEU ruled in Berlin Chemie that a Romanian subsidiary should not be regarded as a fixed establishment of its German parent in relation to marketing, legal, and regulatory support that it provided. 

In Cabot Plastics, the CJEU has adopted a similar approach. It recognised that a contract could in theory give Cabot CH immediate and permanent access to human and technical resources in Belgium. However, it endorsed the European Commission’s observation that, if Cabot Plastics remained responsible for those resources and provided them to Cabot CH at its own risk, then those resources did not become resources of Cabot CH even if it was Cabot Plastics’ only customer. The CJEU concluded that Cabot CH did not have an establishment in Belgium, and that Cabot Plastics had correctly treated its services as a cross-border supply that was outside the scope of Belgian VAT.

From the Weekly VAT News dated 3 July 2023, published by Deloitte

TOMS for B2B hotel consolidator

C. sp. z o. o., a company based in Poland, bought accommodation from hotels in various countries, which it sold to business clients. Although it offered to advise its clients on their choice of hotel, most of its business related to the simple buying and reselling of accommodation. 

The Polish tax authorities considered that C should not apply the tour operators’ margin scheme (TOMS) to these supplies, because C was not providing a complex package of services (meaning that the simplification offered by TOMS was unnecessary). The CJEU, however, disagreed. If C’s simple supplies of rooms were not dealt with under TOMS, then (because it procured accommodation in various EU member states) it would need to understand and apply rules on place of supply, valuation and input tax deduction in multiple countries. Its VAT accounting would potentially become so complicated that it could stifle its business. Furthermore, it would mean that the application of TOMS would depend on the constituent elements of the services offered to each traveller (an argument previously rejected by the CJEU in Alpenchalets). The CJEU concluded that TOMS should apply to C’s supplies of hotel rooms.

From the Weekly VAT News dated 3 July 2023, published by Deloitte

VAT recovery on costs incurred in 3D printing PPE

In March 2020, in response to the shortage of personal protective equipment (PPE) at the start of the COVID-19 pandemic, a small group of individuals with access to 3D printers formed 3D Crowd CIC to produce face shields for healthcare workers. 3D Crowd mobilised other volunteers, and printed 130,000 shields in the first six weeks of its operation. At the time, it was illegal to sell PPE without accreditation, except to central government. Initially, therefore, funded by public donations and supported by volunteers’ contributions, 3D Crowd donated the shields to NHS trusts and health care authorities. By the time it achieved accreditation in September 2020, the government had found other sources for PPE, and so 3D Crowd never charged anything for its shields.

Following a dispute with HMRC as to whether 3D Crowd could recover VAT on its costs, the First-tier Tribunal has ruled that 3D Crowd intended to sell the shields in the future, which was a business activity. The costs of obtaining accreditation were incurred in relation to this business, and qualified as recoverable input tax, even though 3D Crowd was never able to sell any shields. The costs of producing the shields were linked to the business activity generally, partly because the initial production was required to demonstrate that 3D Crowd could deliver reliable goods in quantity and at speed. However, the Tribunal was not satisfied that this was the only, or even the predominant, purpose of incurring the costs. A significant part of the reason for purchasing materials was, at least in the first instance, to make shields that would be given away. Consequently, the Tribunal concluded that VAT incurred by 3D Crowd on PPE production needed to be apportioned between its altruistic (non-business) purpose and its business purpose.

From the weekly Business Tax Briefing dated 23 June 2023, published by Deloitte

Historical VAT bad debt relief

In 2009, British Telecommunications plc (BT) submitted a VAT bad debt relief (BDR) claim that it had been unable to claim between 1978 and 1989 because the BDR scheme in force at the time depended on proving debtors’ insolvency. BT appealed HMRC’s rejection of its claim, and the appeal started with the Upper Tribunal (UT), and then the Court of Appeal (CA), considering three preliminary issues. Firstly, the UT and CA agreed that there was no general principle of EU law that meant BT was time-barred from pursuing its claim. Secondly, however, the CA agreed with HMRC that the ‘old’ BDR scheme had effectively been repealed in 1997, and therefore BT’s 2009 claim was effectively time-barred. BT returned to the First-tier Tribunal (FTT) for consideration of the third question: whether BT’s claim should properly be characterised as a claim under s80, Value Added Tax Act 1994 (which provides for repayment of overpaid VAT), as then, in accordance with the Fleming time limits, its claim would have been in time. The FTT struck out BT’s appeal, ruling that the CA had clearly found that BDR claims for 1978-89 were not governed by s80.

The UT has now endorsed the FTT’s decision. In the UT’s judgement, the CA had been clear that the correct mechanism for claiming BDR was the old BDR scheme (suitably moulded to remove the insolvency condition). If no valid BDR claim had been made, then there was no basis on which to adjust the VAT accounted for by BT under any part of s80. The UT could see no reasonable prospect of BT’s appeal succeeding, and BT was estopped from pursuing the matter further. BT’s appeal was therefore dismissed.

From the weekly Business Tax Briefing dated 2 June 2023, published by Deloitte

VAT and alternative providers of higher education

St Patrick’s International College Ltd is a commercial college in London offering a range of higher national certificates and diplomas. It is neither a university nor a college of a university, has not been authorised to call itself a university, and does not have degree-awarding powers. It is therefore classified as an alternative provider (AP) of higher education. 

APs do not appear on the list of eligible bodies that are entitled to exempt their services from VAT and the College therefore had to charge VAT to its students. However, it argued that it should be entitled to exempt its courses from VAT because of the similarities (from the student’s perspective) of how APs and universities offered higher education. In its view, the exemption in the EU Principal VAT Directive was directly effective, and the principle of fiscal neutrality should allow the College to exempt its services if a university’s courses were exempt. 

The First-tier Tribunal (FTT) has rejected this argument. Although APs are subject to a regulatory regime directed at ensuring the quality of their education and their financial sustainability, it was not as extensive as that which applied to universities. This difference justified the UK’s decision not to extend VAT exemption to APs. Finally, an AP associated with the College had argued that it was a college of a university. The FTT held that it was not. Accordingly, VAT exemption would only apply to its courses teaching English as a foreign language.

From the weekly Business Tax Briefing dated 12 May 2023, published by Deloitte 

Fundraising events

The Great Yorkshire Show, which attracts around 135,000 visitors each year, is both the principal charitable activity and the main source of funding for the Yorkshire Agricultural Society. For the VAT exemption for charitable fundraising events to apply, the show’s primary purpose must be to raise money. 

In the opinion of the First-tier Tribunal, this meant that fundraising had to be ‘a’ primary (ie, an important) objective, rather than ‘the’ primary (ie, almost exclusive) purpose. Accordingly, the fact that the show was both an educational activity and a fundraiser should not prevent the exemption from applying. 

Furthermore, the Tribunal considered that the other legislative condition in point (that the show should be “promoted as being primarily for the raising of money”) went beyond the requirement in the EU Principal VAT Directive that the fundraising exemption should not distort competition. Therefore, applying a conforming interpretation (the Marleasing principle), that condition should be deleted, or the word ‘primarily’ removed. On either approach, the society’s ticket sales qualified for exemption, and its appeal was allowed.

From the weekly Business Tax Briefing dated 5 May 2023, published by Deloitte

To whom were services supplied?

In 2016, footballer João Mário Naval da Costa Eduardo was transferred from Sporting Lisbon to Inter Milan. Sports Invest UK Ltd (Sports Invest), which helped negotiate the deal, received €4m from Inter Milan for its services. To whom was it supplying its services? Sports Invest had signed a player representation agreement with Eduardo which entitled it to a €3m commission, and a separate contract with Inter Milan entitling it to the €4m it eventually received because the player was permanently transferred. 

HMRC concluded that Inter Milan had paid €3m on Eduardo’s behalf, and €1m for services received under its own contract. Pre-Brexit, a supply of services by a UK agent to an individual in Portugal or Italy would normally have been subject to UK VAT, and HMRC therefore assessed Sports Invest for VAT on the €3m. 

The First-tier Tribunal has held that the payment was consideration for services supplied by Sports Invest to Inter Milan (and the place of supply was accordingly Italy), and not for services supplied to Eduardo. Under the contracts and as a matter of commercial and economic reality, Sports Invest had agreed the potential €3m commission with Eduardo in case it was excluded from the deal (for example he went with another agent); but as the deal went ahead as expected, that fee was waived, and the player did not owe Sports Invest anything. 

From the weekly Business Tax Briefing dated 28 April 2023, published by Deloitte

Whether turmeric shots were beverages

The Turmeric Co sells shots of freshly ground turmeric (mixed with other fresh ingredients) in 60ml bottles, promoting them on the basis of long-term health and wellbeing benefits of regular turmeric consumption. HMRC considered that these were beverages, and therefore excluded from VAT zero-rating. 

The First-tier Tribunal (FTT) disagreed. The definition of ‘beverage’ has been considered by various courts over the years, and although the FTT noted that it was “a short practical question calling for a short practical answer”, it nevertheless had to address nine distinct tests as part of a multi-factorial assessment. The shots might be a “drinkable liquid commonly consumed”, but they were not, in the FTT’s judgement, drunk to increase bodily liquid levels, slake thirst, fortify, or give pleasure. They would not be offered as a drink to an unexpected guest, nor substituted at lunchtime for a beer. They were not marketed as beverages, and the reason for drinking them was their long-term health benefits. Overall, the FTT concluded that the shots were not beverages, and accordingly qualified for zero-rating.

From the weekly Business Tax Briefing dated 28 April 2023, published by Deloitte

DIY housebuilders scheme: items qualifying as goods

HMRC’s actions in pursuing this case to a hearing were described as unsatisfactory by the First-tier Tribunal (FTT). Despite HMRC potentially gaining a windfall, the FTT only has jurisdiction to address the appeal presented to it.

The taxpayer built a new dwelling, otherwise than in the course of business, and submitted a request for repayment to HMRC in relation to the goods incorporated into the building under the VAT DIY scheme. HMRC rejected some of the claim, about £37,000, on the basis that some of the suppliers should not have charged VAT on associated services provided to the taxpayer.

The FTT considered each individual invoice and the items within them to determine whether there was a supply of goods or services. It then allowed the reclaim on the items held to be goods under settled case law precedent, but disallowed the VAT on the services that under the VAT legislation should have been zero-rated by the supplier.

Technically, where VAT is incorrectly charged, that VAT is not properly recoverable by the recipient of the invoice even though that VAT may have been declared by the supplier. Usually, HMRC only assesses in these circumstances where the supplier has not declared and paid the incorrectly charged VAT. This led the FTT to criticise HMRC.

Mort v HMRC [2023] UKFTT 387 (TC)

From Tax Update May 2023, published by Evelyn Partners LLP

Whether electric vehicle charging activities are goods or services

Drivers recharging their electric vehicles at public charging points need electricity, delivered quickly and efficiently. They therefore like charging points to offer the best types of connectors, to be available, and to recharge their cars quickly. In Poland, ‘P in W’ is planning to install and operate public charging points that have all the correct connectors, that can provide fast charging, and that can be reserved via an app (which will also enable payment for charging). 

The Court of Justice of the European Union (CJEU) has now considered the VAT treatment of P in W’s proposed supplies. It accepted that P in W would be making a single supply, and concluded that it should be treated as a supply of goods (ie, the electricity). The Court observed that supplies of goods are generally accompanied by some element of service. In this case, the existence of the correct connectors was a prerequisite for any electricity to be delivered to the car, and the ability to access technical support or reserve a charging point via an app were similarly a means to an end, and should just be viewed as a minimum service that accompanied the supply of electricity. The fact that drivers were also given a parking space while recharging, and the price took into account not just the kWh provided but also the time taken to recharge, did not change the fact that P in W would essentially be providing electricity. P in W should be seen as providing goods, rather than services, for VAT purposes. 

It seems that the main reason for referring the matter to the CJEU was the different rules for determining the place of supply of goods and services. On a purely domestic level, it might make little difference whether P in W’s supply was treated as goods or services (although the time of supply might be different).

From the weekly Business Tax Briefing dated 21 April 2023, published by Deloitte

VAT treatment of gaming machines 2005-2013

In August 2021, HMRC issued Revenue & Customs Brief 12(2021) confirming that it was not appealing the First-tier Tribunal (FTT) decision in The Rank Group Plc and 2016 G1 Ltd, which held that (applying fiscal neutrality) the operation of certain gaming machines in venues such as casinos, bingo clubs, arcades and pubs should have been exempt from VAT between 6 December 2005 and 31 January 2013. The Brief stated that HMRC would repay overpaid VAT to businesses with valid claims related to the decision. HMRC has now updated Revenue & Customs Brief 12(2021) to state that it is not paying claim elements that relate to games played on crane grab, coin pusher and penny fall machines as these did not form part of the FTT decision.

From the weekly Business Tax Briefing dated 14 April 2023, published by Deloitte 

Whether Polish municipalities need to charge VAT

Gmina L procured asbestos removal services for homeowners in its municipality and received 40%-100% of the costs from the Polish Environmental Protection Fund. In a judgement published on 30 March 2023, the Court of Justice of the European Union (CJEU) has observed that, even though the homeowner paid nothing for the service, the grant funding might be treated as third-party consideration for a supply. However, even if it was, VAT would only be chargeable if the municipality was carrying on an economic activity. The municipality did not employ staff or seek customers in connection with the asbestos removal programme, had no prospect of turning a profit, and had to fund contractors’ charges while waiting to be reimbursed by the fund. In those circumstances, the municipality should not be treated as carrying on an economic activity and should not charge VAT on the subsidy that it received from the fund.

The CJEU has reached a similar conclusion in a separate judgement, Gmina O, also published on 30 March 2023, in relation to the provision of solar panels and air source heat pumps. The difference in that case was that the property owner paid 25% of the cost of the system (which would be legally transferred to them after five years). Nevertheless, the CJEU again noted that the municipality did not intend to install systems on a regular basis, could not make a profit and had to fund the contractors’ costs while waiting for its funding applications to be processed. As in Gmina L, the municipality was not carrying on an economic activity and should not charge VAT to property owners.

From the weekly Business Tax Briefing dated 31 March 2023, published by Deloitte 

Disapplication of the VAT option to tax

In Moulsdale Properties, the Supreme Court has addressed a circularity in the VAT option to tax disapplication provisions. The issue was whether Mr Moulsdale should disapply his option to tax when selling a property (which was leased to one of his companies) to a third party that had not opted to tax (Cumbernauld). The answer hinged on whether Mr Moulsdale intended that Cumbernauld would have a capital goods scheme (CGS) item. If Cumbernauld incurred VAT (and therefore had a CGS item) then the disapplication provisions applied and Mr Moulsdale should not charge VAT. Conversely, if Cumbernauld did not incur VAT (and did not have a CGS item) then the disapplication provisions did not apply and VAT should be charged.

The Supreme Court resolved this conundrum by concluding that the question of whether Cumbernauld incurred VAT or not, and therefore had a CGS item, fell to be determined by reference to other expenditure on the property, rather than on the cost of purchasing the property itself. Based on this approach, the question of how Mr Moulsdale might have thought the disapplication provisions would apply became irrelevant. Cumbernauld had not planned any further capital expenditure on the building. Consequently, Mr Moulsdale’s option to tax was not disapplied, and he should have charged VAT on the sale. His appeal was dismissed. 

From the weekly Business Tax Briefing dated 24 March 2023, published by Deloitte

Further education and input tax recovery

In 2021, Kingston Maurward College persuaded the First-tier Tribunal (FTT) that its supplies of fully-funded further education courses were exempt from VAT, and that its partial exemption special method (which assumed that such courses were not a business activity) should largely exclude the courses, resulting in improved residual input tax recovery. What the college failed to do, however, was prove how much residual input tax it had incurred. The FTT ruled that it was insufficient for the college simply to assert that it was running a single interlinked and integrated business as a rural studies college. That did not prove that all input tax should be treated as residual, and the FTT dismissed the college’s appeal.

The Upper Tribunal (UT) has now endorsed the FTT’s approach. The UT rejected the college’s complaint that HMRC had failed to provide a fully-reasoned statement of case in the FTT proceedings. A ‘bare denial’ by HMRC might have been insufficient to deal with a fully reasoned argument put forward by the college, but there was little more that HMRC could have done to counter a bare assertion by the college that all its input tax was residual. The UT also agreed with the FTT’s decision to reject the college’s appeal, rather than instruct the parties to agree what proportion of input tax should be treated as residual. The college may have wanted the FTT to determine points of principle and leave details to the parties to resolve in negotiation. However, the FTT was not obliged to consent to such an application and was entitled to dispose of the appeal fully.

From the weekly Business Tax Briefing dated 24 March 2023, published by Deloitte

Supplies between VAT group members

The Upper Tribunal (UT) has ruled that supplies between VAT group members did not take place for VAT purposes while both entities were in the VAT group and were therefore subject to VAT.

The taxpayer provided investment management services to a fellow VAT group member. However, some payments for the services were made and invoiced after the taxpayer had left the VAT group.

The taxpayer argued that the time of supply was when both members were part of the VAT group, rather than when the payments were made, or invoices raised.

The First-tier Tribunal (FTT) initially found in the taxpayer’s favour. The UT found, however, that the FTT had erred in law and remade the decision in favour of HMRC, citing that case law relied upon by the FTT was not directly applicable to the taxpayer’s circumstances. The UT ruled that the relevant legislation determined that the time of supply was when the invoices were raised or paid.

HMRC v The Prudential Assurance Company Ltd [2023] UKUT 54 (TCC)

From the weekly Tax Update dated 22 March 2023, published by Evelyn Partners LLP

Supplies found to be closely related to education

The First-tier Tribunal (FTT) issued a split decision on whether or not services provided by a further education college were exempt.

The college operated a restaurant, performing arts centre and beauty salon, which were staffed by students to gain practical experience as part of their courses. The issue was whether or not the supplies made by the college to the public from these activities were exempt from VAT.

VAT exemption may be available on supplies closely related to education; however, where the basic purpose of the onward supplies is to obtain additional income through transactions that are in direct competition with other commercial businesses, VAT exemption does not apply.

The FTT ruled that the restaurant, which operated at a loss, could benefit from exemption, but the other activities in relation to the training salon and supplies from the performing arts centre were found to be subject to VAT. The basic purpose of these supplies is to obtain additional income from activities that are in direct competition with commercial enterprises.

Fareham College v HMRC [2023] UKFTT 00214 (TC)

From the weekly Tax Update dated 9 March 2023, published by Evelyn Partners LLP 

Online platform deemed to be acting as principal

Fenix International Ltd operates the OnlyFans social media platform where creators upload and publish content, such as photos, videos and messages, which fans can pay to access. Fenix retained 20% of the payments and accounted for VAT on its commission element only. However, HMRC considered that Fenix should have treated itself as both recipient and supplier of the creators’ content and, as such, should have accounted for VAT on the full amount received from fans. Article 28 of the EU Principal VAT Directive sets out that an agent ‘acting in his own name but on behalf of another person’ is deemed to receive and make a supply. Article 9a of Implementing Regulation 282/2011 then introduces a presumption that a taxable person (eg, the operator of a platform) taking part in a supply of digital services is acting in their own name for the purposes of Article 28. A platform cannot rebut this presumption if it authorises payment or the delivery of the services, or if it sets the general terms and conditions for the supplies.

Fenix argued that Art 9a was invalid in that it supplemented or amended Art 28, and as such went beyond the implementing powers of the Council of the European Union. The Court of Justice of the European Union (CJEU) has ruled that Art 9a is valid. The CJEU held that Art 9a merely clarified Art 28; where a taxable person taking part in the supply of digital services has the power to unilaterally define essential elements of the supply in the manner specified by Art 9a, that person must be regarded as the supplier of the services, pursuant to Art 28 of the VAT Directive. A CJEU press release summarising the judgement is available.

From the weekly Business Tax Briefing dated 3 March 2023, published by Deloitte

Digital newspapers subject to VAT

The Supreme Court has ruled that the VAT zero rate did not apply to digital editions of newspapers published by News Corp UK & Ireland Limited prior to May 2020 (when the law changed to allow zero-rating). The ‘always speaking’ principle means that, as a general rule, a statute should be interpreted taking into account changes that have occurred since the statute was enacted; in this case, when the VAT zero rate for newspapers was enacted in 1972, digital editions did not exist. However, this principle must be applied with regard to the standstill provision, which meant that under EU law (which applied for the period in question) zero-rates must be strictly construed and could not be extended beyond those in force in 1975. 

The Supreme Court found that there was a conceptual difference between newspapers in 1975 and digital editions, based on the physical form of a print newspaper (being a good) and the digital editions requiring a separate device (being a service). The majority held that this difference was one of kind not just degree, meaning that “having regard to the constraints of EU law, the ‘always speaking’ principle cannot be applied so as to interpret newspapers as covering digital editions’’ as they were not in the same ‘genus of fact’. The principle of ‘fiscal neutrality’ (which requires similar supplies to be taxed in the same way) could not apply to alter this position. Lord Leggatt agreed with the conclusion of the majority, but for different reasons, giving very detailed views on the operation of the ‘always speaking’ principle.

From the weekly Business Tax Briefing dated 24 February 2023, published by Deloitte 

VAT relevant charitable purpose

Paradise Wildlife Park Limited (PWP) constructed a lion enclosure and an outside exhibition called World of Dinosaurs for the Zoological Society of Hertfordshire (ZSH), which was a charity. The lion enclosure and World of Dinosaurs were part of Paradise Wildlife Park. PWP zero-rated the construction work on the basis that the buildings were intended for use solely for a relevant charitable purpose (which includes use by a charity ‘otherwise than in the course or furtherance of a business’). 

The First-tier Tribunal (FTT) has held that zero-rating did not apply. ZSH charged admission to the park, which was based on costs; operated like other participants in the attractions market, including commercial operators; and carried out its activity in a regular, organised, business-like manner. Accordingly, the FTT found that ZSH was carrying on a business, and the lion enclosure and World of Dinosaurs were intended for use, at least in part, for the purposes of the business. The Tribunal also found that World of Dinosaurs, which involved a walkway through a wooded area with models of dinosaurs at intervals along the path, was not a ‘building’.

From the weekly Business Tax Briefing dated 24 February 2023, published by Deloitte

New late payment interest rules for VAT and the concept of commercial restitution

HMRC’s guidance on default interest states that it is “intended to provide commercial restitution for the loss of understated or overclaimed VAT and should not be considered a penalty”. 

The guidance goes on to say that commercial restitution means “compensation for the loss of use of any underdeclared or overclaimed VAT”.

In short, historically, HMRC has generally not charged interest where an underdeclared amount of output VAT by party A would have been immediately reclaimable as input tax by party B, as HMRC has not lost out on the use of that VAT.

However, under the new late payment interest rules, HMRC does not have discretion as to whether late payment interest is charged or not. Therefore, for VAT periods starting on or after 1 January 2023, late payment interest will be charged even if another party could claim the underdeclared output VAT as input tax.

Contributed by Ed Saltmarsh, Technical Manager, VAT and Customs, ICAEW

VAT: whose risk?

If services are contracted to be provided over a period and the rate of VAT changes in the course of that period, who bears the burden of the increased VAT (or, less likely in the present climate, enjoys the benefit of the reduced VAT)?

It depends.

If a contract is silent as to VAT, any consideration specified in the contract is generally taken to be inclusive of VAT. If VAT is to be payable by the customer in addition to the stated consideration, the contract must say so.

Thus, if the contract specifies a price of £X with VAT payable in addition, and the rate of VAT increases, so does the price payable by the customer.

On the other hand, if the contract specifies a price of £X inclusive of VAT (or, more to the point, simply £X with no mention of VAT) – as is the case, for example, in some standard domestic building contracts – and the rate of VAT increases, it’s the supplier who bears the additional cost.

There is, as far as we know, no general increase in VAT rates on the horizon; so this is unlikely to be an issue of immediate concern. But it’s a point worth bearing in mind when drafting contractual provisions.

Contributed by David Whiscombe writing for BrassTax, published by BKL

Scottish deposit return scheme – VAT consequences

The deposit return scheme (DRS) will apply in Scotland from 16 August 2023. Under the DRS, a 20p deposit will be paid on the sale of a drink in certain single-use containers. When an end-consumer returns a container to a return point, the deposit will be repaid to them. 

The Scottish Government has published a letter in response to a factsheet issued by HM Treasury, setting out how VAT will apply to the DRS. VAT will not be accounted for on a deposit at the point of sale, and will only be due on unredeemed deposits (associated with unreturned containers). 

Only the first person in the supply chain (referred to as the Producer) charging a DRS deposit will be required to account for VAT on unredeemed deposits, provided the supply of the drink was subject to the standard rate of VAT. Producers will calculate the VAT due on unreturned deposits based on their total DRS sales less DRS returns on a rolling basis. Draft legislation with further detail will be published for consultation following the Spring Budget on 15 March 2023.

From the Weekly VAT News dated 20 February 2023, published by Deloitte 

VAT on international matchmaking services

Gray & Farrar International LLP (G&F) ran an exclusive matchmaking business for an international clientele. G&F interviewed clients, established a dating profile, and connected clients with possible matches. Under Article 59(c) of the EU Principal VAT Directive, ‘consultancy’ (and similar services including data processing and the provision of information) would not be subject to UK VAT if supplied to overseas clients (non-EU for the services under consideration in this appeal, now non-UK). 

In November 2019, the First-tier Tribunal (FTT) held that G&F provided a level of support and advice which went beyond information and expert advice, and its services could not be categorised as consultancy. In November 2021, the Upper Tribunal (UT) found that the FTT had erred in law by failing to apply the correct ‘predominant element test’ for characterising the single service supplied. The service was the provision of introductions, which involved the provision of expert advice (establishing the client’s ideal match) and information (putting clients in touch with prospective dates). In the UT’s opinion, this service, judged from the point of view of the ‘typical’ consumer by reference to objective factors, should be categorised as consultancy, and it allowed G&F’s appeal.

The Court of Appeal has now allowed HMRC’s appeal and has reinstated the FTT’s decision. While the Court agreed with the UT that the ‘predominant element test’ is the primary test to be applied in characterising a supply for VAT purposes, it held that the single supply in this case was of introductory services. This was G&F’s only identifiable contractual obligation. The services were not those habitually supplied by consultants or consultancy firms giving expert advice, nor were they services of data processing or the supply of information. Accordingly, the services supplied to overseas clients did not fall within Article 59(c) and therefore they were within the scope of UK VAT. 

From the weekly Business Tax Briefing dated 17 February 2023, published by Deloitte

Are conservatory roofing panels subject to VAT reduced rate?

Greenspace (UK) Ltd supplied and installed insulated roof panels to residential customers, which were fitted onto existing conservatory roofs. The panels comprised polystyrene foam covered with a thin aluminium layer and a protective powder coating. The panels were manufactured to fit the existing frame, and were slotted into place. The reduced rate of VAT applied to the installation of ‘energy-saving materials’, which includes ‘insulation for … roofs’. The First-tier Tribunal (FTT) and Upper Tribunal (UT) ruled that the panels installed by Greenspace were not insulation for a roof but were a new roof in their own right, and that Greenspace’s supplies did not therefore qualify for the reduced rate of VAT.

The Court of Appeal has dismissed Greenspace’s appeal. The Court of Appeal considered that the FTT’s and UT’s approach to the issue was not correct. The issue was not whether something was ‘for a roof’ or was a roof. The correct approach was simply to ask whether Greenspace was supplying insulation for roofs, using the ordinary meaning of those words. The Court found that Greenspace was not supplying insulation for roofs (although the panels have insulating properties, they also have other characteristics), and accordingly the reduced rate of VAT did not apply.

From the weekly Business Tax Briefing dated 17 February 2023, published by Deloitte

VAT reclaim on healthcare facility services

Under the Contracted-Out Services (COS) regime, certain public bodies, including NHS trusts, carrying out non-economic activities can recover the VAT incurred on purchases of certain types of services that they would be otherwise unable to recover. Gloucestershire Hospitals NHS Foundation Trust claimed a refund of VAT under the COS regime for what it considered to be a single supply of healthcare facility services. HMRC refused the refund with respect to the VAT incurred on ‘consumables’ (ie, single-use goods and prostheses) supplied as part of the contract on the basis that they were a separate supply of goods. As there is no right of appeal against a decision regarding a non-statutory clearance under the COS regime, the Trust’s only remedy, in the absence of HMRC making an assessment, was to challenge the decision by way of judicial review.

The Trust’s judicial review application was successful, and the Upper Tribunal (UT) has held that the Trust was entitled to a refund under the regime. The UT agreed with HMRC that the concept of ‘supply’ for VAT purposes, including case law on whether there was a single or multiple supply, was relevant. This was in contrast to the Trust’s argument that whether a transaction fell within the relevant COS provisions should be determined as a matter of simple language or classification and that it was only necessary to establish that the combined services corresponded to the description in COS. Having analysed the supply on this basis, the Tribunal found that “the supply of the services and consumables are so closely linked that they form a single, indivisible economic supply which it would be artificial to split.” 

From the weekly Business Tax Briefing dated 10 February 2023, published by Deloitte

Application of VAT to horse training stable

‘A’ operated a horse training stable in Germany, where he trained horses to compete in races in Germany and abroad. Under A’s contracts with horse owners, costs such as maintenance, veterinary care and transportation were borne by the owners, and 50% of any winnings were paid by the owners to A. 

Distinguishing Baštová (C-432/15), where it was held that there was not a supply of a horse to the organiser of a race where the only payment received was prize money if the horse was placed, the CJEU has held that A was making a supply of services (housing, training, and racing) for consideration, being the 50% of the winnings. Although there was uncertainty as to the actual amount of remuneration to be received, based on performance, there was a transfer of the right to receive that amount, which had an economic value in and of itself. Accordingly, there was a direct link between the services supplied by A and the transfer of that right, which constituted consideration paid by the horse owners.

From the weekly Business Tax Briefing dated 10 February 2023, published by Deloitte

Negative margins and the VAT tour operators’ margin scheme

Given the difficulties of applying VAT to the activities of travel agents, which involve making supplies in numerous jurisdictions, the tour operators’ margin scheme (TOMS) essentially applies VAT to the profit margins of applicable travel services. The Squa.re provided serviced apartments to business and leisure travellers. In the period in question, The Squa.re bought in accommodation that it could not on-supply profitably, or in some cases at all, so the value of direct costs exceeded the value of supplies made under the margin scheme. The Squa.re argued that a negative margin should result in a repayment of VAT from HMRC.

The First-tier Tribunal has held that the output tax due when there was a negative margin can never be a negative amount, but rather effectively becomes £0. Accordingly, there was no basis for a repayment. The Tribunal noted that the UK TOMS provides for a global calculation on an annual basis and that it is permissible to include a negative margin in respect of discrete supplies as part of that calculation, but there cannot be an overall negative margin.

From the weekly Business Tax Briefing dated 3 February 2023, published by Deloitte

Are Organix and Nakd bars confectionery?

The Upper Tribunal (UT) has released its decision in WM Morrison Supermarkets plc regarding the VAT liability of Organix and Nakd bars. The First-tier Tribunal (FTT) had concluded that these products fell within Item 2, Group 1, Schedule 8, Value Added Tax Act 1994 as confectionery and therefore were excluded from the zero-rating. Morrisons appealed against the decision on the grounds that the FTT, in analysing whether the products were confectionery, wrongly treated certain factors as irrelevant. 

The UT has agreed and allowed Morrisons’ appeal: the FTT wrongly treated the actual or perceived healthiness of the products and/or the products’ marketing, and the absence of cane sugar, butter and flour, as irrelevant in the multi-factorial assessment of whether the products were confectionery. The UT also found that the FTT was correct to reject HMRC’s argument that ‘sweetened’ included inherent sweetness, as per the decision in Premier Foods – the legislation could simply have referred to ‘sweet’ if that was what was intended. The UT has now remitted the decision back to the FTT for a new hearing.

From the weekly Business Tax Briefing dated 27 January 2023, published by Deloitte

Motor retail: value manipulation

HMRC states in its internal manuals that it is common practice in the motor trade to manipulate the value of part-exchange vehicles to satisfy the requirements of a finance company. This practice is known as ‘bumping’. Bumping may take place to meet minimum deposit requirements of the finance company, or to disguise negative equity.

When bumping takes place, VAT errors can occur where there are differences between the value used in the Dealer Management System and the value used in the Vehicle Finance Proposal System. The vehicle values shown on any documentation raised to the finance company must be the same as the values declared to HMRC. Therefore, where these systems are not reconciled, an under-declaration of output VAT may occur.

Motor retailers should check their processes and ensure the correct amount of output VAT is being accounted for. If it is not, the error should be corrected, both historically and going forward.

Contributed by Ed Saltmarsh, Technical Manager, VAT and Customs, ICAEW

Interest on historical VAT bad debt relief

In 2019, HMRC paid bad debt relief (BDR) to HBOS plc and Lloyds Banking Group plc, accepting that there had been a defect in the BDR scheme between 1989 and 1997. In 2021, the First-tier Tribunal (FTT) ruled that HMRC need only pay interest on this amount from when the historical claims were submitted and not from the date that the taxpayers should, but for the defective law, have been able to claim BDR. The FTT had concluded that the defect in the BDR legislation was, as an Act of Parliament, not an “error on the part of the Commissioners” giving rise to interest payable to a taxpayer under s78(1)(d), Value Added Tax Act 1994. Instead, the FTT concluded that the taxpayer did not make a claim at an earlier point because of their own belief that this was legally invalid (due to the law and HMRC’s guidance at the time).

The Upper Tribunal (UT) has allowed the HBOS/Lloyds appeal, ruling that the payment of interest should run from an earlier date (at the earliest, from 1 April 1990 given the BDR provisions at the time). The UT held that statutes concerning matters of VAT are the responsibility of HMRC, as the relevant responsible state body and, as such, the behaviour of HMRC that is derived from an erroneous statutory provision does constitute an “error on the part of the Commissioners”. As a result, the UT has concluded that the taxpayers should be entitled to the payment of interest with effect from the date at which they could have made a claim, notwithstanding the defect in the statutory provision that precluded them from doing so at the time.

From the weekly Business Tax Briefing dated 20 January 2023, published by Deloitte

Was consideration reduced by speedy payment discount?

Between 1 January and 30 April 2014, TalkTalk Telecom Limited offered most of its retail customers the option of receiving a 15% ‘speedy payment discount’ (SPD) on its services if their monthly bills were paid within 24 hours. Based on its interpretation of the legislation for prompt payment discounts in place at that time, TalkTalk accounted for VAT on the basis that the consideration received for VAT purposes was reduced by the discount, irrespective of whether the discount had been applied. 

The First-tier Tribunal has disagreed with this approach. It found that while UK law was clear in allowing for consideration to be reduced by the amount of a discount whether or not the customer obtained the discount as the result of paying promptly (even though it was not possible to construe UK law in a way that was consistent with EU law), the SPD was not eligible for such treatment. For services billed in advance, there were no terms “allowing a discount for prompt payment” because the contract was only varied (so that the customer paid a lower amount for a particular month) if the customer accepted the offer for an SPD for that month by making the payment within 24 hours. The variation of the terms happened simultaneously with the payment and there was no term allowing for a discounted payment to be made on a future date. For services billed in arrears, the offer by TalkTalk was to accept a lower sum with an earlier payment date to discharge a pre-existing contractual obligation and was thus a post-supply rebate of the consideration already due.

From the weekly Business Tax Briefing dated 13 January 2023, published by Deloitte

Supplies of temporary medical staff not VAT exempt

Mainpay Limited provided medical consultants and GPs to Accident and Emergency Agency Ltd (A&E), an agency, which in turn contracted with NHS Trusts to provide doctors to work in hospitals run by the NHS Trusts. Mainpay argued that the services it supplied to A&E were medical care and VAT exempt.

Both the First-tier Tribunal and Upper Tribunal held that the services were supplies of staff subject to VAT at the standard rate. The Court of Appeal (CA) has now also held that Mainpay provided taxable supplies of staff, not exempt supplies of medical care.

The CA considered a number of Court of Justice of the European Union cases on the meaning of ‘medical care’ and concluded that none of them “carries Mainpay home”; it is the facts of each case that are determinative. In this case, the doctors were under the control, direction and supervision of the NHS Trusts. As a matter of commercial and economic reality, Mainpay provided doctors to A&E, which were on-supplied by A&E to the NHS Trusts, which then used the doctors to provide medical care to their patients. In other words, Mainpay was making supplies of staff, and not medical care, to A&E.

From the weekly Business Tax Briefing dated 16 December 2022, published by Deloitte

Excess parking charges

In 2012, the First-tier Tribunal (FTT) ruled that overpayments received by the Borough Council of King’s Lynn and West Norfolk (the Council) at its pay and display car parks were not consideration for a supply of parking for VAT purposes. HMRC did not appeal that decision, but successfully contested a similar argument run by NCP at the Court of Appeal (CA) in 2018.

The CA ruled that NCP was offering an hour’s car parking for at least £1.40, so if someone inserted £1 and 50p coins knowing that they would get no change, then the consideration for VAT purposes was £1.50. The Council subsequently submitted a follow-up claim, which the FTT dismissed in 2021, trying to distinguish NCP on the basis that the amount that it could charge was fixed by statutory provisions: it was not able to vary from the specified tariff or accept a counter-offer from the customer at a higher rate, so the overpayment was not consideration for any supply.

On analysing the contract in line with NCP, the Upper Tribunal has now dismissed the Council’s appeal. The board showing the advertised tariff, and the statement that overpayments were accepted and that no change was given, together comprised an offer to provide parking in exchange for coins worth at least £1.40, which was accepted by the customer. The Council had not sought to impose a charge that was higher than the advertised tariff, but the statutory provisions did not prohibit the collection of the overpayments, which were accordingly consideration for the supply.

From the weekly Business Tax Briefing dated 16 December 2022, published by Deloitte

Provision of international health insurance services

CIG Pannónia Életbiztosító Nyrt is a Hungarian health insurer, which offered a policy providing insured persons with medical care abroad for five serious illnesses. CIG entered into a contract with Best Doctors España SAU (Best Doctors), a Spanish company, under which Best Doctors, based on the documentation sent to them, provided a review of the insured person’s medical information to validate the individual’s diagnosis and therefore their entitlement to the insurance services (the InterConsultation Service). If so entitled, it then undertook the arrangements for the care to be provided abroad, such as making appointments, organising treatment and arranging accommodation and travel (the FindBestCare Service).

The Court of Justice of the European Union has ruled that the services supplied by Best Doctors were not VAT-exempt medical services. The purpose of the InterConsultation Service was to provide an expert report to enable the insurer to make a decision as to whether the individual was covered by the policy, the therapeutic aspects of this service were indirect. Similarly, the FindBestCare Service involved organising the logistical aspects of providing the medical care abroad and was of an administrative nature. Accordingly, neither service involved the provision of medical care within the meaning of the EU Principal VAT Directive.

From the weekly Business Tax Briefing dated 2 December 2022, published by Deloitte

To whom was supply of leases made?

Ashtons Legal (the firm) is a firm of solicitors and a trading partnership. Ashtons Legal Limited (the company) is a shell company acting as the Firm’s nominee. Under the Law of Property Act 1925, a partnership can only enter into a lease in the name of no more than four partners. Accordingly, when the firm entered into leases for new premises, the leases were in the name of the company. The firm was in sole occupation of the premises, solely for the purpose of its business, and the rental invoices, although addressed to the company, were sent to the firm, which processed and paid them, reclaiming the VAT incurred.

On responding to a non-statutory clearance request, HMRC decided that there was a supply made by the Landlord to the company and a second supply made by the company to the firm, which would be an exempt supply, given the company had not opted to tax its interests in the properties.

The First-tier Tribunal has ruled that the firm could be regarded as receiving a taxable supply that was used for the purposes of carrying on its business and the VAT charged on the rent was recoverable as input tax by the firm. The economic and commercial reality was that the firm paid the rent in return for which it secured the premises from which it carried out its business, with the Company a “mere cipher” inserted into the leases to deal with the 1925 Act.

From the weekly Business Tax Briefing dated 25 November 2022, published by Deloitte

VAT on employee reward scheme vouchers

When a business puts bought-in services to any private use, or for a purpose other than the purpose of the business, there is a deemed supply that can be subject to VAT. GE Aircraft Engine Services Ltd (GEAES) awarded retail vouchers to its employees through its ‘Above and Beyond’ employee reward scheme. In January 2022, Advocate General Capeta opined that the supply of the vouchers could constitute a deemed supply, as it was not necessary for GEAES’s business. However, as the vouchers appeared to be a ‘right to a future supply’ (equivalent to a multi-purpose voucher), rather than a ‘right as such’ to a supply (ie, a single-purpose voucher), the transfer of the vouchers to the employees was not an independent chargeable event and GEAES would not be required to account for VAT. The case is a referral from the UK, which was made before the end of the Brexit transition period.

The CJEU has now concluded that the reward of the vouchers by GEAES “is intended to increase the performance of its employees and, therefore, leads to the proper functioning and profitability of the business”. Accordingly, the supply of services is not carried out for purposes other than those of the business and is therefore not a deemed supply subject to VAT. The Court noted that VAT will be accounted for by retailers when the vouchers are redeemed and therefore the principle of fiscal neutrality is not infringed.

From the weekly Business Tax Briefing dated 18 November 2022, published by Deloitte

Whether municipality carrying out economic activity – installation of renewable energy source systems

Gmina O, a municipality in Poland, undertook a project to install renewable energy source (RES) systems in properties. It obtained co-financing from an EU fund that would cover 75% of the installation costs. The remaining 25% was funded by the property owners in which the systems were installed. The RES systems were owned by the municipality for five years and ownership was then transferred to the property owners. The municipality selected the contractor to undertake the work, supervised the work and settled payment.

The municipality sought an advance tax ruling that its services were not subject to VAT because they were performed under provisions of public law and not as part of an economic activity. Consequently, the payment by the property owners and the co-financing amount did not constitute consideration for taxable services. The Polish tax authorities disagreed.

However, in the opinion of Advocate General Kokott, the circumstances “give rise to doubts about the Municipality performing an economic activity” (the final decision being for the referring court): the municipality did not engage in any activity of its own to provide the services and its activity was not undertaken to generate revenue, but was rather based on environmental and energy security interests. Its activities were limited to arranging the financing and construction, with the property owners contributing only a relatively small amount of the cost. AG Kokott also considered that there was no distortion of competition, which would be relevant if the municipality was held to be carrying out an economic activity. Given her conclusions, AG Kokott did not consider it necessary to consider a second issue regarding whether the co-financing amount received should be included in the taxable amount for VAT purposes.

From the weekly Business Tax Briefing dated 11 November 2022, published by Deloitte

Whether municipality carrying out economic activity – removal of asbestos

Gmina L, a municipality in Poland, implemented a project for the removal of asbestos from residential properties, following applications from property owners. The contractors undertaking the removal invoiced the municipality for the removal services, which the municipality paid and then applied for reimbursement in the form of a subsidy from a fund, which covered 40% to 100% of the costs. The property owners did not incur any charge for the removal service. Similar to Gmina O (above), a dispute arose with the tax authorities as to whether the municipality’s activities were subject to VAT.

Covering similar issues to those analysed in Gmina O, AG Kokott doubted that the municipality was carrying out an economic activity: the municipality did not engage in activity of its own to provide the removal services, rather it arranged for the removal by a private contractor, with no remuneration for its organisational services. Also, the municipality was not seeking to generate revenue, but was acting in the public interest. AG Kokott also considered that there was no distortion of competition in this case.

From the weekly Business Tax Briefing dated 11 November 2022, published by Deloitte

Customs duty on importation of aircraft

In November 2016, an aircraft was flown from Bulgaria to Wales, where Caerdav Ltd carried out maintenance work, and then on to Ireland and ultimately to the United States. Caerdav had previously imported aircraft for maintenance under an end-use authorisation (EUA), relieving the imposition of duty, but it had allowed its authorisation to lapse. 

HMRC issued a post-clearance demand for £330,633, including customs duty of £275,547. Caerdav appealed, arguing, as an alternative to EUA, that inward processing relief (IPR) applied. However, IPR depended on the export from Bulgaria being categorised as indirect (via the UK and Ireland) rather than direct. The First-tier Tribunal (FTT) ruled that the export was direct, and that there was accordingly no entitlement to IPR. The Upper Tribunal (UT) has now confirmed the FTT’s decision.

Caerdav submitted to the UT that “it would make no sense” to export the aircraft direct when it was known to be stopping in the UK. However, in the UT’s judgement, this fell below the high threshold required to overturn the FTT’s finding of fact. The FTT had been entitled to conclude that the export from Bulgaria was direct. 

Caerdav also advanced a number of other arguments, including legitimate expectation, with the common theme that Caerdav was facing a demand for more than £330,000 in relation to maintenance work for less than £1,500. However, in the UT’s judgement, these arguments amounted to a request by Caerdav for remission of duty, which had to be based on special circumstances and which would only apply if Caerdav had not been obviously negligent. The UT dismissed Caerdav’s appeal.

From the weekly Business Tax Briefing dated 4 August 2023, published by Deloitte

EU customs reform

The European Commission has announced proposals for reform of the EU Customs Union. Under the proposals a new EU Customs Authority will oversee an EU Customs Data Hub, a single online environment which over time will replace the existing customs IT infrastructure in EU Member States. The Hub will provide an enhanced level of information (and reduce costs) for customs authorities and means that businesses will only need to interact with one interface for EU customs purposes. The most trusted traders (‘Trust and Check’ traders) may be able to release goods into EU circulation without any active customs intervention. Online platforms will be responsible for ensuring that goods sold online comply with customs obligations, including payment of customs duty and VAT. The customs duty exemption for goods valued at less than €150 will be abolished. A simplified duty classification method will be available for low-value goods, with just four customs duty categories. It is proposed that the Data Hub will be open for e-commerce consignments in 2028, with use of the Hub becoming mandatory in 2038.

From the weekly Business Tax Briefing dated 19 May 2023, published by Deloitte

Film LLP found not to be trading

In a lengthy decision, the First-tier Tribunal (FTT) rejected a film LLP’s appeal against HMRC’s decision to disallow losses. The FTT found that the LLP was not trading, and if it had been it was not doing so with a view to profit. LLP expenditure was found to be capital, and the members were not permitted relief on loans taken out to finance their investments.

The LLP was set up as a vehicle for individuals to invest in arrangements devised by a company. Each individual member would borrow to loan a sum to the LLP, which the LLP would use in its film-related business. Members would receive annual royalties from film rights owned by the LLP, and the loans would be repaid after a set period. In 2003/04, the LLP filed a return showing over £110m in losses. It claimed that these arose in the course of its trade of film distribution.

The FTT found that the LLP was not trading after a lengthy analysis of its activities. There was no reasonable expectation of profit, it did not supply goods nor services for reward. Information given to potential investors was just about the tax advantages, not the potential profits. The business was not run on a commercial basis with a view to profit. Loss relief for the members was therefore denied.

The FTT also found that the members could not claim tax relief for interest paid on the loans they took out to fund their investments, as there was no trade, and even if a trade had existed then the monies were not used wholly and exclusively for its purposes.

The FTT also found that the LLP accounts were not computed correctly in accordance with generally accepted accounting practice (GAAP).

The Gala Film Partners LLP v HMRC [2023] UKFTT 699 (TC)

From Tax Update September 2023, published by Evelyn Partners LLP

Redress payment taxable on partners

A redress payment has been found to be taxable on three individuals, despite the fact they had transferred the business of their partnership into a company.

The three taxpayers had traded as an unincorporated Scottish partnership. The partnership took out loans, along with an interest rate hedging product that was later found to have been missold. In 2012, the business of the partnership was transferred to a limited company, leaving just properties in the partnership.

A redress payment in respect of the product was made in 2014. It was paid to the taxpayers in their names, and not declared in their personal returns nor the company return. The company later paid the tax to HMRC when the accountants identified the payment as taxable. It was agreed that it was taxable, but the taxpayers argued that it was taxable on the company.

The First-tier Tribunal agreed with HMRC that this was taxable on the individuals. The legal right to redress had arisen at the point that the Financial Services Authority notified the bank that compensation was due. This was after the date of transfer to the company, so the right was not transferred under that agreement, and the payment was due to the partnership.

Penalties for carelessness were upheld against one of the three taxpayers.

O’Neil & Ors v HMRC [2023] UKFTT 00290 (TC)

From the weekly Tax Update dated 29 March 2023, published by Evelyn Partners LLP

Deferred remuneration taxable on members of LLP as miscellaneous income

The First-tier Tribunal (FTT) has found that amounts reallocated to limited liability partnership (LLP) members were taxable as miscellaneous income. The tax at stake was £22.5m.

Individual members of an LLP were paid a proportion of profits upfront. There was also a corporate member in the structure, of which the individual members were shareholders. A proportion of the profits were allocated to a corporate member, who then reallocated the sums to the individual members over the next three years. The individuals argued that they should pay income tax just on their initial allocation, and that the later payments were tax free transfers of a capital asset from the corporate partner. Corporation tax had been paid by the corporate member.

The FTT had found that the payments from the corporate member were taxable on the individual members as miscellaneous income, rejecting HMRC’s alternative argument that they were partnership income on reallocation. The Upper Tribunal (UT) agreed on both these points, dismissing appeals from both HMRC and the taxpayers. The individuals received reward for their activities in the LLP. The fact that some of this came from a fellow LLP member did not mean that it was non-taxable, but it was miscellaneous income rather than partnership income.

This decision is in line with two other recent cases concerning mixed membership partnerships and deferred remuneration arrangements, one of which, HMRC v Bluecrest Capital Management LP and others and (2) Andrew Dodd and others v HMRC [2022] UKUT 200 (TCC), has been appealed to the Court of Appeal.

HFFX LLP, Christopher Shucksmith & Ors v HMRC [2023] UKUT 73 (TCC)

From the weekly Tax Update dated 29 March 2023, published by Evelyn Partners LLP

Partnership returns and profit share

What happens if a partnership return allocates to you a share of taxable profit which you think (or even know for sure) is wrong?

For tax years up 2017/18 the answer was that you included on your self assessment tax return the figure that you believed to be correct, but also indicated (in the ‘white space’) the disputed figure shown on the partnership return.

For 2018/19 onwards the position changed: now the figure on the partnership return is conclusive for tax purposes not only as to what your share of profit is, but even as to whether you are a partner at all. If you disagree, your only recourse is to refer the dispute to the First-tier Tribunal (FTT).

But there’s an important limitation: no referral may be made to the extent that the dispute “is in substance about the amount (before sharing) of the partnership’s profits or losses for the period”.

In Anderson [2022] UKFTT 457, the first referral under the new legislation to be reported, one of the issues was the scope of that limitation.

Mr Anderson had been a partner in PricewaterhouseCoopers (PwC). He had claimed that in requiring him to retire from the partnership, PwC had unlawfully discriminated against him. The claim had been settled by PwC’s paying him (in addition to the share of profit to which he was entitled under the partnership agreement) an ‘Additional Payment’.

In the relevant partnership return, PwC had shown the ‘Additional Payment’ as a share of profit. Mr Anderson said that that was incorrect: it was not as a matter of fact a share of profit, but a (non-taxable) payment of compensation paid in settlement of his damages claim.

Mr Anderson accepted that, if not a share of profit, the Additional Payment would quite probably be deductible in computing PwC’s profit. But that did not mean, he said, that the dispute was ‘in substance’ about quantifying PwC’s profit: it was ‘in substance’ about the character of the Additional Payment and any effect that the outcome of the dispute might have on the partnership’s taxable profit was simply a knock-on effect rather than what the dispute was ‘in substance’ about.

PwC, supported by HMRC, argued that if the outcome of a dispute would affect (or even, perhaps, might affect) the amount of the partnership’s taxable profit, that dispute was inevitably ‘in substance’ about the amount of the profit such that no referral to the FTT was competent.

On the face of it, that was a startling assertion. It would mean that if a partnership return characterises as a share of profit a payment made to you for services rendered, you are obliged so to treat it on your own tax return – even if you insist (or even if you could conclusively demonstrate) that you were never a partner.

Nonetheless, startling or not, the FTT accepted the proposition: the dispute between PwC and Mr Anderson was ‘in substance’ about the quantum of PwC’s profits and no referral was competent.

Contributed by David Whiscombe writing for BrassTax, published by BKL

Online sales found to be a trade

The evidence confirmed HMRC’s view that the taxpayer’s many sales of items online amounted to self-employment.

The taxpayer had not declared any income from self-employment, but HMRC identified an active eBay account in his name. A range of items was available for sale, and the account had received almost 800 items of feedback in the previous year. He also had an account on another trading platform.

The First-tier Tribunal rejected his contention that his accounts had been hacked over the four-year period for which HMRC had raised discovery assessments. His bank statements backed up HMRC’s position that he was trading, due to the deposits from websites and his payments to delivery companies that implied he was shipping the items. It upheld the assessments and penalties for deliberate behaviour.

The rise of online marketplaces in recent years has made it easier to make some extra cash by having a ‘side hustle’ selling unwanted items to buyers across the world. In this case the taxpayer was selling items on eBay and Amazon, but other platforms are available. Aside from online marketplaces, others make money through being an influencer on platforms such as TikTok, Instagram or YouTube. Many individuals may not be aware that they might have to pay tax on this income. HMRC is taking an interest in this area and sent a ‘nudge letter’ in January to those it believed might have these types of income using information gleaned from third-party sources, including records from online marketplaces.

Milasenco v HMRC [2023] UKFTT 620 (TC)

From Tax Update August 2023, published by Evelyn Partners LLP

COVID self-employment support payment misclaimed in two cases

The First-tier Tribunal (FTT) has found in two cases that taxpayers who misunderstood the COVID self-employment income support scheme (SEISS) eligibility criteria must repay grants.

The first taxpayer worked through a company, but had until recently been self-employed. The second taxpayer had not traded in 2019/20, which was a requirement for eligibility. He was self-employed in 2018/19, and submitted a return for that year, but after failing to secure work he had claimed universal credit. He had alerted HMRC to the issue after receiving a later email from it about eligibility criteria.

Both claimed grants under the SEISS in the early days of the pandemic. HMRC sought to recover the grants paid in error, and the taxpayers appealed. They both pointed out that they had been invited to apply, the first sought to make a legitimate expectation argument, though accepting he was ineligible, and the other that he might actually have been trading.

Both appeals were dismissed. The FTT considered the claims process, including looking at screenshots of the online forms. Although the taxpayers’ changes in circumstance had led to HMRC sending them emails to make a claim in error, eligibility was clearly explained online before the incorrect claims were made, including that they must still be trading. The FTT had no room to consider whether or not the law is fair. The second taxpayer had told HMRC during the investigation that he had stopped trading in November 2018, so was not eligible.

Ash v HMRC [2023] UKFTT 272 (TC)

Hamill v HMRC [2023] UKFTT 451 (TC)

From Tax Update July 2023, published by Evelyn Partners LLP

NIC on car allowances

The Upper Tribunal (UT) heard two separate appeals from First-tier Tribunal (FTT) decisions on car allowance schemes in one sitting. One case was appealed by HMRC and the other case appealed by the taxpayer. The UT found for the taxpayer in both appeals and national insurance contributions (NIC) refunds were allowed.

The taxpayers paid car allowances to support their employees with running their personal cars. If the allowances were made in respect of the use of a qualifying vehicle, they would be ‘relevant motoring expenses’ (RME). Where allowances are RMEs, no NIC are due on the allowances, although relief is restricted to the qualifying amount (business miles x 45p for the first 10,000 miles). The taxpayers later tried to reclaim class 1 NIC on these car allowances having realised NIC might not have been due, but HMRC denied the claims.

The UT interpreted RME more widely, as had the FTT in the earlier Wilmott Dixon case, than the original interpretation found in the Laing O’Rourke FTT case. The UT pointed out that the provisions were not about how employees spent RME payments or how the allowances were calculated, but the fact that the payments were made to ensure that the employees had suitable vehicles available for business use. HMRC has been granted an extension to 4 September 2023 to appeal the decision.

Irrespective of HMRC’s decision to appeal, affected taxpayers may wish to submit protective claims to prevent periods falling out of time. 

Laing O'Rourke Services Ltd v HMRC [2023] UKUT 155 (TCC)

From Tax Update August 2023, published by Evelyn Partners LLP

It has been reported that HMRC has decided not to appeal the UT decision.

Refund of voluntary NIC refused for deceased taxpayer

A taxpayer made voluntary national insurance contributions (NIC) to increase her state pension, but died nine days after reaching state pension age. The First-tier Tribunal (FTT) has refused a refund to her estate, finding that advice given by the department for work and pensions (DWP) was technically correct, so had not led her to make an error or mistake.

The taxpayer made three years’ worth of voluntary class 3 NIC to protect her state pension entitlement, following advice from DWP. Subsequently, her illness became terminal and she died nine days after becoming entitled to claim the state pension.

Her husband, as executor, applied for a refund of the voluntary contributions. He had listened to his wife’s conversation with DWP at her request due to her illness, though at the time she had a good prognosis and had not told DWP she was ill. He stated that she was not told that the contributions were non-refundable, and that the deadline was some time away. The news that her illness was terminal came before the deadline for payment, so had she waited until nearer the deadline she would likely not have paid.

The FTT refused the claim for a refund. The advice given by DWP had not contained an error or a mistake, so the deceased had made no error at the time she paid the contributions. Subsequent happenings cannot create an error. She had neither asked if the payments were refundable nor asked for the deadline, but the fact that DWP had not volunteered the information was not an error. It was mere speculation that she might have deferred making payments, so despite the unfortunate circumstances no refund was possible.

Stephen Garwood as executor of Rosemary Garwood v HMRC [2023] UKFTT 00075 (TC)

From the weekly Tax Update dated 2 February 2023, published by Evelyn Partners LLP

Course fees paid by employer not exempt from NIC

The First-tier Tribunal (FTT) has found that course fees paid by an employer did not meet the requirements to be an exempt bursary.

The taxpayer worked as a volunteer counsellor at a charity for four years, and was then issued with a fixed-term employment agreement. He undertook a relevant course in 2012/13, for which the charity paid. In March 2017, he attempted to reclaim income tax (IT) and national insurance contributions (NIC) deducted on the basis that the course fees were a bursary rather than part of his salary. HMRC found that he was out of time to claim an IT refund and refused NIC refunds.

The FTT found that the NIC exemption did not apply. During the period he spent one day a week studying at a university, and four days working at GP surgeries. The FTT disagreed that the GP days were part of the course, partly as after the course he continued working at GP surgeries five days a week. The exemption only applies to full-time students. The course also ran for less than the minimum time to qualify and the fees exceeded the maximum allowed under the exemption.

The FTT agreed that the IT refund claim was out of time and found it had no jurisdiction to admit it late. Had it admitted the claim, it found it would have been refused.

Phelan v HMRC [2023] UKFTT 29 (TC)

From the weekly Tax Update dated 25 January 2023, published by Evelyn Partners LLP

Annual year-end country-by-country reporting notification obligations largely repealed

On 4 July 2023, HM Treasury made the Taxes (Base Erosion and Profit Shifting) (Country-by-Country Reporting) (Amendment) Regulations 2023, SI 2023/752. The new regulations, which come into force on 26 July 2023, amend the notification requirements within the UK’s implementation of the OECD Inclusive Framework’s minimum standard on country-by-country reporting (CbCR) by large multinational businesses to tax authorities. They remove two existing requirements for the ultimate parent entities of UK-headed groups, and certain UK entities of groups headed outside of the UK, to send HMRC annual CbCR notifications containing basic information on the groups. 

In the accompanying explanatory memorandum, HMRC notes that such notifications are not mandatory under the OECD’s model CbCR rules and that their removal will allow HMRC staff to focus on the data contained within country-by-country reports.

From the weekly Business Tax Briefing dated 7 July 2023, published by Deloitte 

HMRC publishes guidance on fixed place of business permanent establishment and employees

In June, HMRC updated its International Manual to include a new page with additional guidance on the meaning of fixed place of business for the purposes of the UK corporation tax permanent establishment rules. The page sets out examples where employees of overseas resident companies spend blocks of time working in the UK and considerations of what this may mean in terms of fixed place of business permanent establishments.

From the weekly Business Tax Briefing dated 30 June 2023, published by Deloitte

Court of Appeal allows appeal on the treatment of oil payments under UK-Canada treaty

The Court of Appeal (CA) has unanimously allowed a taxpayer’s appeal in the tax treaty case of Royal Bank of Canada (RBC). The case concerned the right to tax contractual payments received by RBC – a Canadian resident company – pursuant to rights it acquired following the receivership of an oil and gas corporation. That earlier corporation had obtained the rights, comprising payments based on subsequent production from the field, following the disposal of its interests in the Buchan oil field in the UK continental shelf.

The taxpayer argued that the Canada-UK Double Taxation Convention gave exclusive rights to taxation of the payments to Canada. However, HMRC argued Article 6 (Income from immovable property) applied, and in particular the fifth limb of Article 6(2), which referred to consideration for “the right to work, mineral deposits, sources and other natural resources”, giving the UK the right to tax. The CA disagreed with the Upper Tribunal’s analysis of Article 6 and preferred the taxpayer’s interpretation. The CA, inter alia, considered that the fifth limb was confined to situations where a person had a continuing interest in the underlying land, and RBC itself had never held an interest in the Buchan field. The CA’s treaty law conclusions meant it was unnecessary to consider whether, in the absence of the treaty, the payments would have been within the scope of UK corporation tax under domestic law.

From the weekly Business Tax Briefing dated 30 June 2023, published by Deloitte

Upper Tribunal dismisses taxpayer’s withholding tax appeal

The Upper Tribunal (UT) has dismissed the taxpayer’s appeal in Hargreaves Property Holdings Limited v HMRC concerning the obligation to withhold tax on payments of interest overseas. The taxpayer was the parent company of a UK property development group, which financed its activities with loans from various lenders. Following advice, the loan terms were changed with a view to ensuring that the loan interest would not be subject to UK tax. In addition, the funding arrangements involved regular cycles of assignment, repayment and re-advance of individual short-term loans. HMRC considered that Hargreaves should have withheld tax at 20% under s874, Income Tax Act 2007 on the basis the amounts were “payments of yearly interest arising in the United Kingdom” and issued tax assessments accordingly.

In its decision of November 2021, the First-tier Tribunal (FTT) dismissed four key grounds of appeal raised by the taxpayer. The same four grounds were raised before the UT and were each dismissed for largely the same reasons. On whether the amounts paid arose in the UK, the UT held that the FTT had applied the correct approach (ie, a multi-factorial analysis based on case law such as Ardmore) and was plainly entitled on the facts before it to reach the conclusion that the interest arose in the UK. On whether the interest was ‘yearly’, the UT again agreed with the FTT’s application of general principles deriving from case law when it found that the financing “had a permanency which belied the apparent short-term nature of each loan”. The UT agreed with the FTT that the UK-Guernsey double taxation agreement could not have applied directly to relieve the company of its withholding obligations: a claim and an HMRC direction needed to have been in place before interest could have been paid gross. The UT also agreed that later arrangements to assign the interest to another UK resident company shortly prior to payment did not satisfy a statutory exception from the withholding obligation, on the basis that, under the particular circumstances, the UK company receiving the interest was not ‘beneficially entitled’ to the income.

From the weekly Business Tax Briefing dated 2 June 2023, published by Deloitte 

Crown Dependencies issue joint statement on pillar two global minimum tax implementation

On 19 May 2023, the governments of Guernsey, Jersey and the Isle of Man released statements announcing that they are adopting a common approach to implementation of the OECD’s pillar two framework regarding the global minimum tax. The press releases confirm the Crown Dependencies’ intention to implement an income inclusion rule and a domestic minimum tax for entities in multinational businesses within the scope of pillar two. A number of countries (including the UK) will apply pillar two rules in 2024; however, the statements confirm that implementation in the Crown Dependencies will not take effect until 2025.

From the weekly Business Tax Briefing dated 26 May 2023, published by Deloitte

Interest on late paid withholding tax – change to HMRC’s approach

HMRC sets out in its manuals its position on the consequences of applying a reduced treaty rate of withholding tax to UK source interest payments before treaty clearance is granted. In such circumstances HMRC notes that, inter alia, late payment interest can accrue under s87, Taxes Management Act 1970 (TMA 1970) on any tax unpaid. Where the treaty rate is nil, HMRC may, by concession, only look to assess any s87, TMA 1970 late payment interest. 

Following the Court of Justice of the European Union decision TTL EOOD, HMRC stated that it would no longer assess such s87, TMA 1970 late payment interest amounts on interest and royalty payments made to persons taxable in an EU member state. HMRC has now updated its International Manual (INTM413230) in respect of such payments, stating that: “Since the UK’s exit from the European Union … HMRC is no longer bound by the decision in TTL EOOD and will now seek to raise charges for TMA70/s87 late payment interest”. HMRC says that its updated approach will apply “with immediate effect from 4 May 2023”.

From the weekly Business Tax Briefing dated 12 May 2023, published by Deloitte

OECD manual on multilateral Mutual Agreement Procedures and Advance Pricing Arrangements

On 1 February 2023, the Organisation for Economic Co-operation and Development (OECD) Forum on Tax Administration (FTA) released a new manual on the handling of multilateral Mutual Agreement Procedures (MAPs) and multilateral Advance Pricing Arrangements (APAs). The FTA notes that multilateral MAP and APA processes can offer greater tax certainty to multinational businesses and tax authorities where different parts of the same arrangement are covered by multiple bilateral tax treaties. It considers, however, that most countries have only limited experience in coordinating cases to offer this multilateral certainty. The FTA’s manual is intended as a guide, from both a legal and a procedural perspective, to performing MAPs and APAs multilaterally. It suggests different approaches, based on countries’ existing practices, for tax authorities to consider incorporating within their own MAP and APA programmes and guidance.

From the weekly Business Tax Briefing dated 3 February 2023, published by Deloitte 

Romania implements public country-by-country reporting

In December 2021, the European Union formally adopted its Directive for public country-by-country reporting in the EU. The Directive requires multinationals with worldwide revenues of more than €750m to disclose publicly, on a country-by-country (CbC) basis, corporate income tax information relating to their operations in each of the 27 member states, as well as information for certain third countries on the EU list of non-cooperative jurisdictions. Data relating to operations in all other non-EU countries would be combined on one aggregated ‘rest of world’ line. Both EU-parented groups, and non-EU parented groups with large or medium-sized EU subsidiaries or branches, will have reporting obligations, and the reporting would take place within 12 months from the date of the balance sheet of the financial year in question.

The Directive requires member states to implement public reporting to begin at the latest with effect for fiscal years commencing on or after 22 June 2024. However individual member states are able to implement the Directive sooner, and Romania has opted to implement the rules with effect from businesses’ first fiscal years beginning on or after 1 January 2023. Among other matters, this will mean that large UK-headed groups with medium-sized or large subsidiary undertakings or branches located in Romania will need to determine whether they are within the scope of Romania’s rules, with in-scope Romanian subsidiaries and branches of multinationals with calendar year ends needing to request the required data and publish a CbC report for 2023 by 31 December 2024.

From the weekly Business Tax Briefing dated 2 December 2022, published by Deloitte

UK signs information sharing agreements

Two new Organisation for Economic Co-operation and Development (OECD) multilateral agreements on exchange of information have been signed by the UK, on data from digital platforms and common reporting standard (CRS) avoidance arrangements.

Twenty-two jurisdictions, including the UK, have signed the agreement, which allows automatic exchange of information collected by operators of digital platforms. This is in respect of transactions made and income received by the sellers using these platforms.

Fifteen jurisdictions, including the UK, have signed a separate agreement supporting the OECD model mandatory disclosure rules on CRS avoidance arrangements and opaque offshore structures. This facilitates an annual automatic exchange of information from intermediaries that have identified arrangements that disguise the beneficial ownership of assets held offshore.

OECD agreement sees 28 jurisdictions sign international tax agreements
Jurisdictions agree to exchange information on digital platforms and CRS avoidance

From the weekly Tax Update dated 22 November 2022, published by Evelyn Partners LLP

Processes for requesting certificates of residence

HMRC has updated its guidance page How to apply for a certificate of residence to claim tax relief abroad with updated instructions for how companies whose tax affairs are dealt with by HMRC’s Large Business Service (LBS) should request a certificate of UK tax residence. Since April 2022, companies outside of the LBS have been instructed to use HMRC’s RES1 online service for submitting requests, whereas LBS taxpayers were able to continue sending requests directly to their Customer Compliance Manager (CCM). Now all companies are instructed to use the same RES1 online process.

Historically, LBS has accepted early requests, known as pre-orders, for certificates of residence made earlier than the end of the accounting period: for example, a request made in November, for an accounting period ending in December, with a view to HMRC issuing a residence certificate in January. The updated guidance confirms that this pre-order service will continue for LBS taxpayers, but it will only be available for those with December accounting periods. A mailbox address for pre-order requests is provided.

From the weekly Business Tax Briefing dated 18 November 2022, published by Deloitte

2022 OECD Transfer Pricing Guidelines incorporated into UK tax legislation

The UK’s transfer pricing legislation includes a requirement that sections be read in such a manner that “best secures consistency” with transfer pricing guidelines produced by the Organisation for Economic Co-operation and Development (OECD). The Treasury has made a new statutory instrument – The Taxation (International and Other Provisions) Act 2010 Transfer Pricing Guidelines Designation Order 2022, SI 2022/1147 – which will update the applicable definition of ‘transfer pricing guidelines’ in the UK legislation to refer to the latest version of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published in January 2022. This will replace the current statutory definition referring to the previous 2017 edition of the OECD Transfer Pricing Guidelines.

The 2022 edition of the guidelines consolidated into a single publication a number of previously-agreed changes released by the OECD since the 2017 edition, including: revised guidance on the transactional profit split method (originally released in 2018); guidance on the application of the approach to hard-to-value intangibles (also released in 2018); and transfer pricing guidance on financial transactions (released in 2020). The statutory instrument entered into force on 1 January 2023 and will have effect for accounting periods beginning on or after 1 January 2023 for corporation tax purposes, and from tax year 2023/24 onwards for income tax purposes.

From the weekly Business Tax Briefing dated 11 November 2022, published by Deloitte