Capital allowances

Supreme Court rules in HMRC’s favour on capital allowances in enterprise zones

The Supreme Court ruled in HMRC’s favour that costs incurred more than 10 years after the cessation of the zone’s tax-favoured status do not qualify for enhanced allowances, even if part of an earlier contract. Significant contractual changes should be treated as new contracts and therefore do not meet the requirements for tax relief.

Expenditure incurred under a contract entered into during the life of an enterprise zone qualifies providing it is incurred within 10 years of the end of the zone’s tax favoured status. The taxpayer had entered into a so-called ‘golden contract’ just before the end of the tax-favoured status period. This contract allowed for significant flexibility, including the right to select and change construction projects.

The question before the Supreme Court was whether costs were incurred under that original ‘golden contract’, or a separate contract entered into at a later date, when the project details were decided. The Supreme Court took a purposive approach, looking at the intent behind the 10-year limit and recognising it as a mechanism to ensure timely investment in areas needing economic regeneration stating that the right to alter contracts should not be able to undermine this. The Supreme Court noted that in this case there were such significant changes to the contract that it could not be considered a variation but a replacement.

It was under this ‘replacement’ contract that the costs were eventually incurred, and so enhanced relief was not available.

Cobalt Data Centre 2 LLP v HMRC [2024] UKSC 40

From Tax Update December 2024, published by Evelyn Partners LLP

Corporation tax

Loan to finance an intra-group acquisition had unallowable purpose

The First-tier Tribunal (FTT) ruled in HMRC’s favour that a loan used to fund a share acquisition had an unallowable purpose of obtaining a tax deduction, and so interest deductions were denied. The FTT focused heavily on the documentary evidence available when reaching its decision.

The taxpayer was involved in an intra-group reorganisation where the sale of a company to another group company was partly funded by debt. The company incurring the debt did not obtain a tax benefit itself, but the group as a whole benefitted as the interest deduction was offset against liabilities in another group company. HMRC challenged the deductibility of the interest on the grounds that the primary purpose of the transaction was to secure a UK interest deduction.

The FTT ruled in favour of HMRC, finding that although the taxpayer company did not receive any tax benefit, its purpose was to ‘play their part’ in a group transaction designed primarily to obtain a loan relationship deduction. There was significant written evidence available that demonstrated that tax was a vital element of the reorganisation, including one spreadsheet titled ‘UK tax projects’.

The case highlights how the courts are increasingly looking at the overall group position when considering whether there is an unallowable purpose, and the importance of documentary evidence.

Syngenta Holdings Ltd v HMRC [2024] UKFTT 998(TC)

From Tax Update December 2024, published by Evelyn Partners LLP

International taxes

Court of Appeal refuses judicial challenge to diverted profits tax notice

The Court of Appeal has dismissed the taxpayers’ appeal in the diverted profits tax (DPT) judicial review case of Refinitiv Limited and others. The taxpayers were challenging the lawfulness of DPT notices for 2018 issued to them in relation to profits arising to an overseas group company on the disposal of intellectual property. HMRC used a ‘profit-split’ transfer pricing method to calculate the amount of profit it considered was subject to DPT on the UK companies owing to their involvement in the enhancement of the intellectual properties. The taxpayers argued that this was unlawful as the calculation was inconsistent with the terms of an earlier advance pricing agreement (APA) agreed with HMRC covering the years 2008 to 2014. This APA used a ‘cost-plus’ method to determine the arm’s length remuneration for the enhancement services provided by the taxpayers. The Court of Appeal agreed with the Upper Tribunal and unanimously dismissed the appeal. In its view, under the UK legislation governing APAs, 2018 was not a period to which the APA ‘related’, and accordingly there could be no objection in public law to the DPT assessments for 2018.

Refinitiv Limited & Ors, R (on the application of) v HMRC [2024] EWCA Civ 1412

From the Business Tax Briefing dated 22 November 2024, published by Deloitte

VAT

CJEU decision on VAT on intra-group services 

In June 2016, Weatherford Atlas Gip, part of the Weatherford group of companies (the group) that specialised in oil services, acquired Foserco SA, a Romanian company, and another member of the group. Prior to its acquisition, Foserco had acquired general administrative services from companies in the group, such as information technology, human resources, marketing, accounting and consultancy services. Other companies in the group also received the services, with each group entity receiving a charge for their share of the cost of the services supplied. The services were supplied by entities established outside Romania and Foserco accounted for VAT under the reverse charge. The Romanian tax authorities considered that Weatherford Atlas Gip (which had taken over Foserco’s obligations) was not entitled to deduct input tax in respect of the administrative services, on the basis that it had not established a link between the services and its taxable transactions. The tax authorities considered that it was not possible to establish such a link, as the services were provided to several companies in the group and therefore benefited other group members or the group as a whole. 

The Court of Justice of the European Union (CJEU) has held that the tax authorities may not deny a taxable person input tax recovery for the acquisition of services from other taxable persons belonging to the same group of companies on the grounds that those services were also supplied to other companies in the group, provided the services were used by the taxable person for the purposes of its own taxable transactions (something for the referring court to establish). It was not relevant that the services were also provided to other group entities, provided the allocation of costs corresponded to the services acquired by each entity for the purposes of its own taxable transactions. The CJEU also considered that, contrary to the argument of the tax authorities, it was not relevant whether the services were necessary or appropriate, as the EU Principal VAT Directive “does not make the exercise of the right of deduction subject to a criterion of the economic profitability of the input transaction”. 

From the Weekly VAT News dated 16 December 2024, published by Deloitte

Weatherford Atlas Gip Case C-527/23

Upper Tribunal VAT decision on further education business activities

Colchester Institute Corporation (the College) reclaimed VAT on its 2008 campus redevelopment, applying the Lennartz mechanism, which (at the time) allowed VAT recovery on costs relating to non-business activities, subject to a balancing output tax charge over the following 10 years. In 2014, the College decided that the provision of fully-funded further education (FE) was actually an exempt business activity and submitted a claim for repayment of the balancing charge. In 2020, the Upper Tribunal (UT) held that the College’s supplies were exempt and it should not have applied Lennartz. However, the UT ruled that the College’s claim should be reduced to nil, applying rules on set-off. Nonetheless, the finding in relation to exemption potentially justified the College’s decision (in 2015) to cease paying any more output tax. HMRC disagreed and assessed the College for underdeclared output tax. The First-tier Tribunal (FTT) upheld the College’s appeal, which HMRC subsequently appealed, on the basis that the 2020 UT decision was wrongly decided.

Unlike the FTT, the UT is not bound by previous decisions of the UT, but would normally follow an earlier UT decision. Accordingly, the UT has rejected HMRC’s subsequent appeal. HMRC recognised that this was a foregone conclusion and did not seek to persuade the UT that the 2020 UT decision was wrong, but rather reserved the right to argue the point in any appeal to the Court of Appeal, which is not bound to follow the UT decision and may, HMRC submits, consider the matter afresh. It now remains to be seen whether HMRC is given leave to appeal to the Court of Appeal and what, if anything, the UT decision means in respect of any adverse effects on the FE sector’s ability to access VAT reliefs such as the zero rate on the construction of relevant charitable buildings, and the reduced rate on supplies of fuel and power.

HMRC v Colchester Institute Corporation [2024] UKUT 397 (TCC)

From the Business Tax Briefing dated 6 December 2024, published by Deloitte