Corporation tax

Court of Appeal allows HMRC appeal on the meaning of “more than incidental”

The Court of Appeal has unanimously allowed HMRC’s appeal in the corporation tax case Dolphin Drilling Ltd. The judgement concerns the ‘hire cap’ rules within Finance Act 2014, applicable to contractors in the offshore oil industry. The dispute centred on whether it was “reasonable to suppose” that the use of a leased converted oil rig (the Borgsten) for accommodation purposes was “unlikely to be more than incidental to another use, or other uses” to which the Borgsten was likely to be put. 

The Court of Appeal agreed with HMRC that the First-tier Tribunal had misdirected itself when analysing the statutory test, by focusing on whether the accommodation use was in some way lesser than other uses. Reflecting the ordinary language, Lord Justice Peter Jackson considered that for a use to be “incidental to” another use, it must also arise out of that other use (or be similarly connected). Applying the test to the facts, the Court of Appeal found that, while the accommodation use may have been a “secondary” use of the Borgsten, it was still a significant and independent use and not “incidental to” its other uses, and thus allowed the appeal.

HMRC v Dolphin Drilling Ltd [2024] EWCA Civ 1

From the weekly Business Tax Briefing dated 19 January 2024, published by Deloitte

 

Employment taxes

IR35 win for taxpayer

Kaye Adams has won the latest stage of her long-running tax dispute over whether or not her relationship with the BBC was one of employment. The case was remitted to the First-tier Tribunal (FTT) by the Court of Appeal for the decision to be remade, which the FTT has done in her favour.

The personal service company of a TV presenter was assessed by HMRC to PAYE and national insurance contributions on the grounds that the presenter’s relationship with the BBC should be one of employment. After hearings going up to the Court of Appeal, the case was remitted back to the FTT for the decision to be remade in light of the findings.

The FTT upheld the taxpayer’s appeal. It looked at the hypothetical contract that would reflect the real relationship, and found that it was not one of employment. The presenter had her own distinctive approach and the BBC did not control her other work. Although she had worked for the BBC for a long time, she also had considerable other engagements, reflecting her self-employment.

Atholl House Productions Ltd v HMRC [2024] UKFTT 37 (TC)

From Tax Update January 2024, published by Evelyn Partners LLP

IR35 win for HMRC

The First-tier Tribunal (FTT) has found that a football pundit was in an employment relationship with Sky. His personal service company was assessed for almost £300,000 of PAYE and national insurance contributions (NIC).

An ex-footballer began appearing on football programmes in the 1990s, as a panellist. He took a break, and returned to the show in 2004. In 2013 he set up a personal service company, and thereafter his work at the broadcaster was contracted for through this company. The contract provided for work as needed on any programme, and the exclusive use of his services in the UK. HMRC challenged this on the basis that this was an employment relationship, and assessed the company to PAYE and NIC.

The FTT followed the standard practice in these cases of determining what a hypothetical contract that reflected the relationship as it actually was would have said. It found that there would be mutuality of obligation, as the taxpayer was required to provide services and the broadcaster to pay him. It found that the broadcaster had enough control to amount to that of an employer. It determined when services were provided, without the taxpayer having the right of refusal, nor the right to work for competitors. The fact that the taxpayer expressed his own opinions on the show was in the nature of the service, rather than having control over the service.

The FTT therefore found that the relationship should have been one of employment, and dismissed the personal service company’s appeal. Although the taxpayer’s work for the company did not take up much of his time, the vast majority of the company’s earnings derived from it, and it was the main source of his own income.

PD & MJ Ltd v HMRC [2024] UKFTT 38 (TC)

From Tax Update January 2024, published by Evelyn Partners LLP

 

Partnership taxation

Court of Appeal dismisses HMRC’s and taxpayers’ partner incentivisation plan appeals

The Court of Appeal has dismissed the appeals of HMRC and the taxpayers in BlueCrest Capital Management LP and others. 

The judgement focuses on the income tax treatment of payments made by partnerships to individual partners via a partner incentivisation plan (PIP). The PIP involved an initial allocation of partnership profits to a new corporate partner, followed later by awards of special capital by the corporate to individual partners. 

The Court of Appeal dismissed HMRC’s arguments that the profits initially allocated to the corporate partner should be immediately chargeable to income tax as profit shares of the individual partners. However, the court also dismissed the taxpayers’ arguments that the later awards of special capital were not subject to income tax, holding that they were in scope of the ‘miscellaneous income’ rules of the Income Tax (Trading and Other Income) Act 2005.

HMRC v Bluecrest Capital Management LP & Ors [2023] EWCA Civ 1481

From the weekly Business Tax Briefing dated 5 January 2024, published by Deloitte

 

VAT

Whether zero-rating applies to Sensations Poppadoms

Walkers’ Sensations Poppadoms are made of potato granules (18%), potato starch (18%), and modified potato starch (4%). They also contain gram flour (14%) and rice flour (14%). They are not potato crisps (which are excepted from the zero-rating), but they are subject to VAT if they are “similar products made from the potato, or from potato flour, or from potato starch”. 

The First-tier Tribunal (FTT) has ruled that potato granules were a form of potato (cooked and dried), and that when combining all the potato ingredients there was sufficient potato content for the Poppadoms potentially to be subject to VAT. The FTT then considered that Poppadoms were marketed like crisps, would be found in the snack food aisle next to crisps, would be eaten like crisps, and had a similar texture and ingredients to crisps. Applying a multifactorial assessment, the FTT concluded that they were similar to crisps even though they might be called ‘poppadoms’ and despite a market survey produced by Walkers (which the FTT concluded was not particularly helpful). 

Walkers initially put forward an alternative argument that Poppadoms are designed for dipping and therefore require “further preparation”, and so would qualify for zero-rating. However, Walkers’ marketing material, including packaging, suggested that no preparation was necessary. Accordingly, Walkers did not rely on this argument at the hearing. Sensations Poppadoms are therefore subject to VAT. 

Walkers Snack Foods Limited v HMRC [2024] UKFTT 31 (TC)

From the Weekly VAT news dated 22 January 2024, published by Deloitte

Freemasonry subscriptions not VAT exempt

Relief (alongside Brotherly Love and Truth) is one of the three Grand Principles of Freemasonry and involves Freemasons supporting charities, as well as other Freemasons in need. In 2021, the First-tier Tribunal (FTT) ruled that the support of other Freemasons (which it saw as one of the main aims of Freemasonry) was a form of self-insurance and was not ‘philanthropic’, meaning that VAT was due on subscriptions. The Upper Tribunal (UT) has confirmed that decision. 

The UT rejected the United Grand Lodge of England’s argument that the provision of Relief was an expression of the philosophy of Freemasonry (a philosophical aim, like a philanthropic one, would potentially qualify for VAT exemption), observing that an “organisation with a philosophical aim does not require, in addition, a practical physical manifestation of any or all of the philosophical principles it promotes” (emphasis in original). The UT endorsed the FTT’s decision that Relief was a separate and equally important ‘main aim’ of Freemasonry, and also considered that supporting other Freemasons was “not philanthropic as it is inward looking, lacking benevolence towards mankind at large or in general”. Although the UT considered that the FTT had not provided full reasons for deciding that Relief was not merely part of a wider philosophical aim, it remade the FTT’s decision to the same effect. VAT was accordingly due on membership fees. 

United Grand Lodge of England v HMRC [2023] UKUT 307 (TCC)

From the Weekly VAT news dated 15 January 2024, published by Deloitte

VAT and serviced accommodation

Realreed Ltd owns Chelsea Cloisters, which includes over 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 (CCSL), an affiliated company, and Realreed treated its supplies of the flats, in isolation, as exempt from VAT. 

The First-tier Tribunal (FTT) has accepted that the services had been carved out: Realreed promised occupants that ancillary services would be provided, but they were supplied by CCSL. Realreed was therefore (applying the decision in Telewest) supplying property. However, the services (even though provided by a third party) should be taken into account when considering whether Chelsea Cloisters was similar to a hotel, and therefore excluded from the exemption. The FTT concluded that Realreed’s supply of short-term accommodation (most people stayed less than 28 days), coupled with CCSL’s additional services, meant that Chelsea Cloisters was an establishment in potential competition with the hotel sector. Consequently, Realreed’s supplies of the flats were subject to VAT, and its appeal against an assessment for £4.8m was dismissed. 

Realreed Limited v HMRC [2023] UKFTT 1042 (TC)

From the Weekly VAT news dated 15 January 2024, published by Deloitte

Repayment supplement following assignment of input tax credit 

In 2018, Acepark Ltd bought Toys “R” Us Properties Ltd (TRUP) and transferred its properties to a new company, Bollinway Properties Ltd, for £355m. Bollinway included an input tax credit of £71m in its 10/18 VAT return which it filed on 2 November 2018, and suggested to HMRC that this should be offset against TRUP’s corresponding output tax liability. HMRC requested a full set of backing documents, and were provided with various invoices, option agreements, and notices. However, Bollinway did not send copies of the property transfer forms (TR1) until 18 December 2018, whereupon HMRC promptly offset the input tax as requested. 

The Upper Tribunal considered that the TR1s were important documents as they proved that the transfers of the properties had in fact taken place, although the VAT invoices might have established the time of supply. In its judgement, especially given the high barrier to interfering with the First-tier Tribunal’s (FTT’s) findings of fact, the FTT had been entitled to conclude that TR1s should have been provided as part of the full set of backing documents, and HMRC had been entitled to wait for them before processing Bollinway’s repayment. Consequently, HMRC had not delayed the repayment for over 30 days, and Bollinway was not entitled to repayment supplement (which applied for the period in question) of £3.5m. 

Bollinway Properties Limited v HMRC [2023] UKUT 295 (TCC)

From the Weekly VAT news dated 8 January 2024, published by Deloitte