Corporation tax

Loan relationship debit denied as it did not fairly represent the true position

The First-tier Tribunal (FTT) has denied a loan relationship deduction in respect of a discount shown as accruing on a debt instrument as it did not fairly represent the position of the individual company, which was just one part of a larger group transaction.

The taxpayer issued interest-bearing debt instruments called reserve capital instruments (RCIs) with a face value of £3bn. At the same time, its parent company issued warrants over its own shares. The taxpayer received £3bn, but accounted for the transaction as if £800m was paid by the investors for the warrants, and recorded £2.2bn as paid for the RCIs and £800m as a capital contribution from the parent company. The difference between the £3bn face value and the £2.2bn deemed as received for the RCIs was treated as an accruing discount, and a deduction claimed under the loan relationship rules.

The hearing pack and supporting evidence presented to the FTT ran to nearly 7,000 pages, but the FTT focused on whether the company’s accounts gave a ‘true and fair view’ and if they did, did they ‘fairly represent’ the substance of the transaction for tax purposes.

On the first point, the FTT found that the taxpayer was paid £3bn for the RCIs, not a package of RCIs and warrants, and relying upon expert accounting evidence concluded that the accounts should have recognised £3bn as the amount received for the RCIs. As a result, there would be no discount and no loan relationship debit.

It went on to consider the position had it concluded that the £3bn should have (or could have) been presented as payment for a package of RCIs and warrants under GAAP. Although GAAP accounts should be the starting point, a departure from the accounts may be needed if they do not fairly represent the position. The FTT found that although the £800m did represent a real economic loss at a group level, the tax position must be determined based on the individual company alone. Taken in isolation, the taxpayer issued the RCIs at par, received £3bn and then repaid £3bn, therefore no loan relationship debit arose.

Barclays Bank Plc v HMRC [2024] UKFTT 246 (TC)

From Tax Update May 2024, published by Evelyn Partners LLP

Upper Tribunal dismisses ‘wholly and exclusively’ appeal regarding pension scheme

The Upper Tribunal has dismissed the appeal of two taxpayers in AD Bly Groundworks and Civil Engineering Limited and Another v HMRC, on whether large accruals arising following implementation of an ‘unfunded unapproved retirement benefit scheme’ (UURBS) were allowable for corporation tax purposes. 

Under the UURBS, the appellants promised to provide directors and key employees with pension amounts in the future, calculated by reference to the estimated profits for the relevant year – ranging between 80% and 100% of the companies’ estimated profits before tax. Between 2012 and 2014, the companies made accounting provisions for the liability, and claimed deductions to reduce their corporation tax liability significantly. HMRC, however, considered the expenses were not incurred ‘wholly and exclusively’ for the purposes of the trade, and thus were not allowable under s54, Corporation Tax Act 2009.

The First-tier Tribunal (FTT) found that the primary purpose for making the accruals was to reduce the liability to pay corporation tax without incurring any actual expenditure, and after analysing the relevant case law, it agreed that the expenses were not incurred ‘wholly and exclusively’ for the purposes of the trade. While the Upper Tribunal (UT) disagreed on the precise nature of the tax advantage sought by the taxpayers, it agreed that this was a case of a payment being made with the object of artificially reducing their taxable profits, and that the FTT was entitled to conclude that the expense was not incurred wholly and exclusively for trading purposes.

While not necessary to dismiss the appeal, the UT also considered and dismissed a backup argument from HMRC that the expenditure would have otherwise been disallowed as being within scope of s1290, CTA 2009 (‘Employee benefit contributions’).

AD Bly Groundworks and Civil Engineering Limited & Anor v HMRC [2024] UKUT 104 (TCC)

From the Weekly Business Tax Briefing dated 26 April 2024, published by Deloitte

Employment taxes

Appeal dismissed on employment income

The First-tier Tribunal (FTT) has found that an amount paid to a taxpayer after ceasing employment was taxable as employment income. It was earned while the taxpayer was a UK tax resident despite the payment being physically made while non-UK resident. 

A taxpayer received a payment from his former employer for an award of stock appreciation rights (SARs) after employment had ceased. He had claimed split year treatment for the tax year, as he had left the UK. He therefore included the income on his tax return as foreign earnings not taxable in the UK, which resulted in a tax repayment. HMRC issued a closure notice on the basis the payment was taxable in the UK.

The taxpayer argued that HMRC had wrongly concluded that the payment was an income payment, and that the income was earned while he was UK resident. He argued that the SARs were valuable contractual, or property rights and the payment came as a result of this ownership, not as a reward for the performance of his employment duties. The payment was received in the non-resident part of the split year and therefore the payment should be excluded income.

HMRC argued that the payment falls within the meaning of general earnings. It was earned when the taxpayer was UK resident and therefore the payment is taxable in the tax year in which it was received.

The FTT found that the payment was earnings as the SARs had been granted in connection with his employment and was done so to incentivise employees. The conditions of the SARs contained a clause in relation to good and bad leavers where bad leavers forfeited all SARs upon the termination of their employment. As the income was earned when the taxpayer was employed, it was taxable at the point employment ceased and therefore fell within the UK part of the split year. 

Saunders v HMRC [2024] UKFTT 300 (TC)

From Tax Update May 2024, published by Evelyn Partners LLP

VAT

Input tax on iPhones 

When the iPhone 4 was launched in 2010, V-Com (Worldwide) Ltd recruited students and gave them gift cards to go to Apple stores and buy phones for V-Com. V-Com managed to acquire around 6,870 phones in this way (at £499 each), which it was able to resell for a profit. V-Com had records showing amounts paid to Apple for the gift cards, serial numbers for the phones and till receipts from the store. Nevertheless, HMRC decided that, in the absence of full VAT invoices from the Apple stores, V-Com was not entitled to recover input tax, and assessed it for £506,678. V-Com protested that it had provided ample evidence for the purchases and that HMRC should have exercised its discretion to accept this as alternative evidence for input tax recovery.

In light of Scandico (which also related to iPhone 4 purchases), and Zipvit and Tower Bridge GP, HMRC could not see how V-Com’s appeal could succeed and applied to strike it out. The First-tier Tribunal has refused the application. It considered that V-Com’s chances of success were “realistic” rather than “fanciful”, and the evidence that it provided should be properly considered at a full hearing. 

V-Com (Worldwide) Ltd v HMRC [2024] UKFTT 368 (TC)

From the Weekly VAT News dated 13 May 2024, published by Deloitte

Valuing shares for VAT purposes

In 2014 and 2015, W and B agreed to transfer 25 commercial properties and some cash to P. sp. z o.o. (P), in return for an issue of 15,909 shares at €8,123 per share (ie, a total transaction value of approximately €129m). The share valuation was largely based on a third-party market valuation of the properties. 

As a general rule, the value of a transaction for VAT purposes has to be based on the value actually received (a subjective value), rather than a value estimated according to objective criteria. The Polish tax authorities invoked that principle and calculated the consideration received by W and B for the property transfers by reference to the nominal value of the shares (€11.50 each – only £183k). Consequently, they concluded that W and B’s VAT invoices overstated the consideration and denied P input tax recovery on the remainder.

In the Court of Justice of the European Union’s judgement, they were wrong to do so. The nominal price of shares may reflect the value of a company when it is incorporated, but the value of the shares will clearly fluctuate over time. In this case, W, B, and P had all agreed the issue price of the shares at the time of the transaction. The issue price was therefore a subjective value, even though it may have been underpinned by an objective market valuation. On the facts presented to the court, there appeared to be no reason why P should be unable to recover VAT by reference to the £129m valuation. 

sp. z o.o. v Dyrektor Izby Administracji Skarbowej w Warszawie Case C-241/23

From the Weekly VAT News dated 13 May 2024, published by Deloitte

VAT on heat donated to asparagus farmer 

Y KG operated a biogas production facility in Germany and used the biogas to generate electricity, which it sold to the grid. Biogas production generates significant heat and Y agreed to provide any that it did not use to a neighbouring asparagus farmer. Y evidently saw the excess heat as a simple by-product of its electricity production, as the contract only required the farmer to pay for the heat depending on their own economic situation, and in the event, Y was never paid anything. In a tax audit, the German tax authorities identified the absence of payment and assessed Y for VAT on a deemed supply of goods (which heat is treated as) because it had given away the heat free of charge. 

The Court of Justice of the European Union (CJEU) has endorsed this approach. Y had recovered VAT in full on the facility that produced the heat, and was making that heat available free of charge. The only exceptions to the rules on deemed supplies of goods are for samples and small value gifts (and neither applied here). The EU Principal VAT Directive does not extend the exceptions to cases when the recipient is a fully taxable business, and does not take into account the incidental nature of the heat production. Y should have accounted for VAT on a deemed supply. The CJEU provides some further guidance on how to value the heat that Y gave away (observing that a cost-based calculation would need to include financing costs). 

Finanzamt X v Y KG Case C-207/23

From the Weekly VAT News dated 7 May 2024, published by Deloitte

Charging points for electric vehicles

Digital Charging Solutions GmbH (DCS) provided a subscription service that allowed customers to charge their electric vehicles (EVs) at charge points operated by charge-point operators (CPOs). In considering the VAT consequences of this arrangement, Advocate General Ćapeta was satisfied that fixed monthly subscriptions paid to DCS that enabled customers to access the CPO network were separate from the underlying supplies of electricity. Her opinion therefore focuses on the capacity in which DCS was involved in the supply of electricity, which would, in turn, determine the place of supply (given that DCS was established in Germany, but the charging points were located in Sweden). 

The Court of Justice of the European Union has previously ruled that, for VAT purposes, fuel card providers were financing the purchase of diesel by their customers, and were not buying and selling fuel themselves. AG Ćapeta has distinguished EV charging from these precedents on the grounds that a card or app, such as that provided by DCS, was essential for customers to access the charge points, and was more than just a payment instrument. However, she also had misgivings about treating DCS as buying and selling the electricity, as it was the customer who initiated the charging of their vehicle and DCS was not exposed to any entrepreneurial risk (except the risk that the customer might not pay). 

Her solution was to identify DCS as acting as an undisclosed purchasing agent for the customer. By presenting the DCS card at the charging point, the customer was mandating DCS to procure a supply of electricity, and that electricity recharged the customer’s EV. Consequently, DCS should be treated as buying and selling the electricity, without the need to assume that it was taking title to it. 

Digital Charging Solutions GmbH Case C-60/23

From the Weekly VAT News dated 7 May 2024, published by Deloitte

Record-keeping requirements for supplies of investment gold 

In 2019-20, HMRC imposed penalties of £14.8m on Qubic Advisory Services Ltd for failure to issue proper invoices and keep accurate records for its supplies of investment gold. Such obligations arise when gold is delivered or made available to customers, even though the supply of investment gold can, itself, be VAT exempt. The Upper Tribunal (UT) has now ruled that Qubic did not deliver or make gold available to its customers. It purchased gold from BullionVault (an internet-based retail-accessible platform), which it transferred to designated employees of its clients. 

In April 2023, the First-tier Tribunal ruled that the transfer triggered Qubic’s invoicing and record-keeping requirements. However, BullionVault’s service was designed to allow customers to invest in gold efficiently, but was not intended primarily as a service for customers who wanted to take physical possession. For example, the transfer gave the employee a right to a specific quantity of bullion in a specific vault, not to part of a specific gold bar. The UT, on reviewing the contracts, concluded that the employees (and Qubic itself) had waived their rights to withdraw gold from the vault. Consequently, the UT concluded that the employees did not have the right to obtain possession of the gold, and that Qubic was not subject to the invoicing and record-keeping requirements. Its appeal against the penalties was allowed. 

Qubic Advisory Services Limited v HMRC [2024] UKUT 106 (TCC)

From the Weekly VAT News dated 29 April 2024, published by Deloitte