Corporation tax
Validity of corporation tax dividend double tax relief claims following FII GLO, Prudential, etc.
A number of judgments in recent years, such as the Supreme Court’s judgment in July 2021 in FII Group Litigation, clarified the principles in applying EU law to, and conforming interpretations of, the UK’s double tax relief rules to certain dividends received by UK companies prior to July 2009. In December 2021, the First-tier Tribunal (FTT) gave a decision (the Post Prudential Closure Notice Applications/Appeals group litigation case) dealing, inter alia, with follow-up questions of what procedures must have been followed by affected taxpayers, in particular what constituted a valid claim for relief. A wide range of questions was posed to the FTT, reflecting the variety of circumstances of the test claimants, with the taxpayers winning on most points.
Both parties appealed to the Upper Tribunal (UT), and it has now handed down a decision that is largely in favour of HMRC, overturning many of the points the FTT had decided in favour of the taxpayers. The UT, however, has agreed with the FTT in respect of an issue (‘Issue 3’), concerning returns containing claims made by taxpayers for double tax relief for withholding tax only, which HMRC subsequently opened an enquiry into. The UT agreed with the FTT that, in those circumstances, once HMRC’s enquiry into a return is complete, HMRC must also reflect in the closure notices any additional entitlement to double tax relief for underlying tax by way of credit at the ‘foreign nominal rate’ (FNR – the rate established by the courts for the appropriate level of double tax relief under EU law).
The decision will be of particular interest to companies with outstanding claims in connection with the various cases (including FII GLO, CFC/Dividend GLO, BAT or Prudential) and s79, TIOPA 2010, s806(2), ICTA 1988, or para 51, Sch 18, FA 1998 claims in respect of overseas dividends pre-July 2009.
From the Weekly Business Tax Briefing dated 26 January 2024, published by Deloitte
Employment taxes
Taxpayer’s appeal on termination payment dismissed
The Upper Tribunal (UT) has upheld a First-tier Tribunal (FTT) judgement that a payment made by a bank to an ex-employee was a termination payment and taxable as such. It was made to settle employment tribunal (ET) proceedings brought by the employee, who had argued that this was a settlement payment relating to her discrimination claims, so non-taxable.
A bank entered into a settlement with its regulator under which it was ordered to pay a penalty of $600m and sack several employees. In consequence, the taxpayer’s employment with the bank was terminated the following week. The bank offered her compensation ‘for the termination of her employment’. She refused the initial offer, but settled with her former employer for £6m after commencing ET proceedings prior to a hearing.
The taxpayer argued that the payment was in relation to her case against the employer. She believed that the ET might have awarded her a small amount for injury to feelings, but nothing for financial loss or unfair dismissal. Instead, she held that the payment was in relation to her ‘moral claim’, based on discrimination, as the bank’s reluctance for this to be publicised led to the settlement. Essentially, she argued that the payment was unrelated to the termination of employment.
The FTT dismissed her appeal, finding for HMRC. The termination was an integral part of her claim, the trigger for it, and the reason she was able to negotiate from a strong position. The payment was made at least ‘otherwise in connection’ with the termination, so the amount over the £30,000 limit was subject to tax. The settlement agreement drawn up at the time referred to termination payments, and was structured to take advantage of the exemption for legal costs and with reference to the £30,000 tax-free limit.
The UT dismissed her appeal. There was no error of law in the FTT decision, and there was enough evidence to show that the termination was central to her ET discrimination claim.
Mathur v HMRC [2024] UKUT 38 (TCC)
From Tax Update February 2024, published by Evelyn Partners LLP
VAT
Removal of low value consignment relief
In 2012, low value consignment relief (LVCR) for postal imports, which eliminated the charge to import VAT, was removed for supplies from the Channel Islands. Judicial review proceedings taken by the governments of Jersey and Guernsey at the time challenging the removal were unsuccessful. The removal affected Jersey Choice Ltd, which grew horticultural products in Jersey and sold them to UK customers, applying LVCR. Jersey Choice brought proceedings against the UK government (HM Treasury) for breach of EU law, claiming £15m for damages suffered. The High Court and Court of Appeal both struck out Jersey Choice’s appeal on the basis that it had no reasonable grounds for the claim. The Supreme Court has upheld the Court of Appeal judgment.
The Channel Islands were within the EU customs union, but outside the EU for VAT purposes. Jersey Choice argued that the removal of LVCR amounted to a charge having equivalent effect to a customs duty and was contrary to the EU customs regime, which provides for the free movement of goods. However, the Supreme Court held that the legality of the removal must be assessed under the EU Principal VAT Directive, not the customs regime. As Jersey was a ‘third country’ in the context of the EU VAT regime, the EU principles of equal treatment and proportionality could not apply. The Supreme Court dismissed Jersey Choice’s appeal.
Jersey Choice Ltd v HM Treasury [2024] UKSC 5
From the Weekly VAT News dated 19 February 2024, published by Deloitte
VAT treatment of sports nutrition bars
DuelFuel Nutrition Ltd makes twin packs of sports nutrition bars, marketed as a flapjack (to be eaten prior to exercise) and a brownie or cake slice (for recovery following exercise). In the judgment of the First-tier Tribunal (FTT), neither of the products qualified for zero-rating as cakes. For historical reasons, HMRC has always accepted that flapjacks can be treated as cakes in certain circumstances, but this approach does not extend to products such as cereal bars or flapjacks with more than minor additions (which typically includes energy or sports nutrition bars), and HMRC therefore ruled that DuelFuel should charge VAT on its products.
On appeal, the FTT conducted a multifactorial review of the products’ ingredients, taste and texture, packaging and marketing, and circumstances of consumption, etc and concluded that they were not cakes, and could not be zero-rated as cakes. The FTT then had to consider whether the products were ‘confectionery’, and concluded that, in the normal sense of the word, they were not. However, it accepted HMRC’s argument that Note 5 (to Group 1, Schedule 8, VATA 1994) deems “sweetened prepared food which is normally eaten with the fingers” to be confectionery so long as it does not produce an absurd result.
The FTT rejected DuelFuel’s claim for a more restrictive interpretation and concluded that the products were confectionery, and therefore subject to VAT at 20%.
DuelFuel Nutrition Limited [2024] TC09055
From the Weekly VAT News dated 12 February 2024, published by Deloitte
Upper Tribunal - Floorspace-based VAT override inappropriate
The Hippodrome in London’s Leicester Square has casinos, bars and restaurants, and a theatre. Hippodrome Casino Ltd (HCL) refurbished the property through 2009 to 2012 with a view to providing a Las Vegas-style experience to customers. In 2022, the First-tier Tribunal (FTT) considered that there was little crossover between the casinos (exempt) on one hand, and the bars, restaurants and theatre (taxable) on the other. In its view, a floorspace-based standard method override (which improved HCL’s input tax recovery by £548k annually) was a better reflection of the use of HCL’s costs than the standard partial exemption method. The Upper Tribunal (UT) has now overturned this decision.
The FTT had reached its conclusion on the basis that the bars, restaurants and theatre were not merely an adjunct to, or an amenity for, the gaming. However, the UT considered that this failed to address HMRC’s core argument. According to the UT, the FTT had failed to consider properly whether the areas designated as relating to taxable activity in HCL’s override calculation actually had a dual use (for example, because they were designed to encourage customers to use the gaming activities, or were subsidised by the profits from the gaming). The override calculation had to consider the economic use of HCL’s costs, rather than merely which area they related to.
The UT concluded that HCL’s operation of the Hippodrome was principally about the gaming activity, supported by the other entertainment and hospitality activities. It accepted HMRC’s argument that most of the areas relied on by HCL as giving rise to input tax recovery had a dual use, and concluded that HCL had failed to show that its floorspace-based override calculation reflected how costs were used was an improvement on the standard method. The UT allowed HMRC’s appeal, and dismissed HCL’s underlying appeals against HMRC’s rejection of its override.
HMRC v Hippodrome Casino Ltd [2024] UKUT 00027
From the Weekly VAT News dated 5 February 2024, published by Deloitte
VAT fixed establishment
Advocate General (AG) Kokott has considered an attempt by Romania to identify a toll manufacturer (Adient Romania, which made car seat covers) as a fixed establishment (FE) of an affiliated entity (Adient Germany, which owned the raw materials and the finished products). If it was, then Adient Romania should have charged Romanian VAT on its toll manufacturing services, as they were domestic supplies received by Adient Germany at its Romanian establishment.
Previously, the Court of Justice of the European Union (CJEU) has stated that it could not rule out the possibility of a subsidiary operating as a FE of its parent. However, in the AG’s opinion, that concept should not be applied too broadly. For example, the mere fact that two companies belong to the same corporate group cannot, on its own, support this approach. Nor is it relevant to consider the nature of the onward supply made by the principal or the ultimate destination of the manufactured goods. The question is whether an entity like Adient Romania has made resources available to Adient Germany, rather than providing it with services. Even if Adient Germany did have a FE in Romania, the Romanian tax authorities needed to be able to identify it as the relevant establishment that received the services.
In AG Kokott’s view, it is settled case law that the business establishment (head office) is generally to be preferred to an FE, as it is an objective, simple, and practical way of identifying a customer’s location. Using an FE instead is an exception to this general rule, and only becomes relevant if the FE is taking the place of the head office and performing its functions in relation to certain supplies (and its ability to do so using resources put at its disposal by another group company are set out contractually). If the CJEU follows AG Kokott’s opinion, Adient will further clarify that the power of tax authorities to identify some group entities as representing establishments of others is relatively limited.
SC Adient Ltd & Co. KG v Agenţia Naţională de Administrare Fiscală Case C‑533/22
From the Weekly VAT News dated 5 February 2024, published by Deloitte
VAT and cosmetic surgery treatments
From when it started trading in 2010, Aesthetic-doctor.com Ltd (ADCL) never charged VAT to its customers, considering that its treatments were exempt supplies of healthcare. HMRC disagreed, and assessed ADCL for VAT of £1.6m for the period from 2010 to 2020. The First-tier Tribunal (FTT) has dismissed ADCL’s subsequent appeal. As in other recent cases in the same area, there was argument about whether only “purely cosmetic” surgery was excluded from exemption, and about how significant a therapeutic purpose had to be for treatments to qualify as healthcare.
ADCL’s appeal principally failed, however, because of deficiencies in its documentary evidence, which could not be resolved through witness evidence from ADCL’s director. As the FTT noted, a taxpayer has to keep relevant and appropriate records to claim an exemption from VAT, and this obligation is brought into focus in tribunal, where the burden of proof is on the taxpayer. In this case, ADCL failed to prove the nature and extent of any psychological issues for individual patients even at a basic level. The FTT concluded that the purpose of the services provided by ADCL was not, in the round, to diagnose, treat or cure health disorders, nor to protect, maintain or restore human health. Consequently, its services did not qualify for exemption and its appeal was dismissed.
Aesthetic-Doctor.com Ltd v HMRC [2024] TC09030
From the Weekly VAT News dated 29 January 2024, published by Deloitte
Personal liability notices
In 2014-15, HMRC assessed Award Drinks Ltd for VAT on the basis that its sales of alcoholic drinks had taken place in the UK and not in France. Award Drinks had previously been put into voluntary liquidation, but with assistance from the company’s former director, Paul Judd, the liquidators contested the assessments. The company’s appeal was ultimately unsuccessful, and HMRC therefore pursued penalties for deliberate errors both on the company and (by way of a personal liability notice) on Mr Judd.
In defending himself against the penalty, Mr Judd argued, as had the company in its appeal, that the sales had taken place in France. In support of this case, he was prepared to provide further witness statements. In a case management decision, the First-tier Tribunal (FTT) has ruled that it would be an abuse of process to allow Mr Rudd to present this evidence and run this argument after the courts had already established that Award Drinks’ supplies had taken place in the UK. Mr Judd had been closely involved in how Award Drinks’ appeal had been run, and there was “sufficient identification” between Mr Judd and the company, meaning that he should not be allowed to relitigate an argument that had been decided.
Mr Judd’s appeal at the FTT can proceed based on his arguments that the company did not deliberately commit an error, and/or that the deliberate inaccuracy was not attributable to him. But the tribunal will hear the appeal based on the fact that Award Drinks should have charged VAT.
Paul Judd v HMRC [2024] TC09033
From the Weekly VAT News dated 29 January 2024, published by Deloitte
Practical Points
Every month, the Tax Faculty publishes short, practical pieces of guidance to help agents and practitioners in their day-to-day work.
