UK COVID-19 developments
Expansion of support for employees and the self-employed
On November 5, the British Chancellor announced the extension of the Coronavirus Job Retention Scheme (or vacation program) to the end of March 2021 (with a review in January 2021). He also announced that the Self Employed Income Support Scheme (SEISS) grant will be 80% of average trading profit (up to £ 7,500) from November to January 2021. For more details on this and other COVID-19 developments, please visit our Tax Talks blog.
Deferring an unsafe tax treatment notification
On November 12, the Treasury Secretary of the Treasury announced that the implementation of the new obligation for large corporations to inform HMRC of uncertain tax treatment would be delayed until April 2022. This delay is intended to allow further stakeholder engagement and allow the affected companies more time to prepare for the change.
As a reminder, if the tax treatment is uncertain, the company believes that HMRC may not agree with the interpretation of the law, case law or published guidance. The reporting measure to be introduced is intended to help HMRC identify potentially unclear areas of law and help HMRC and the government determine which areas to focus on and make the tax system clearer.
Large companies will be exonerated in making amends for 2021.
It is hoped that in the meantime further clarity will be found on the meaning of "uncertain" for the purposes of reporting to HMRC and that private investment funds will not be required to aggregate their individual investments when assessing which ones are present special business is big.
Other UK tax developments
The OTS report recommends changes to the UK system of taxation on investment income
On November 11th, the Office for Tax Simplification (OTS) published its first report after reviewing parts of the UK's capital gains tax system.
This review was requested by the Chancellor in July of this year, ostensibly as part of the government's longstanding review process and the simplification of the UK tax system, but with the specific purpose of identifying administrative and technical issues as well as areas where the current rules are May distort behavior or fail to fulfill their political intent. "
The OTS report makes a number of alternative recommendations, including:
- aligning capital gains tax and income tax rates more closely, with the OTS believing that current inequality may lead to skewed decisions and an incentive for taxpayers to regulate their affairs in an attempt to re-characterize income as capital;
- alternatively, if capital gains tax and income tax rates are not more closely coordinated:
– Attempt to reduce the number of "border problems" between capital and income, with a particular focus on whether more stock-based payments for employees should be taxed at income tax rates; and
– consider reducing the number of tax rates on investment income from the current four;
- Reducing the annual tax exemption amount (a person's tax-free capital gains allowance) to ensure that they are effectively acting as an “administrative de minimis” rather than a form of relief;
- Removing the capital gain increase on death and assuming instead that the recipient is treated as if he were acquiring the relevant assets at the deceased's basic historical cost. This recommendation relates to the interaction between capital gains tax and inheritance tax; and
- Examine how effective certain facilities are, including facilities on the sale of business goods (formerly known as facility relief) and facility facilities for investors, and whether such facilities should be changed and / or removed.
For more details on the report and the potential for change, please visit our blog on tax talks.
HMRC publishes proposals for changes to the UK anti-hybrid rules
As we reported in the UK tax round in March, the HMRC has discussed the UK anti-hybrid and other mismatch regimes. The consultation closed on August 28, 2020. On November 12, HMRC released a summary of stakeholder responses and government responses to them, including the bill that made certain changes to existing regulations. The consultation on the draft law ends on January 7, 2021.
The anti-hybrid rules are detailed and complex and have produced a number of anomalous results since their inception in January 2017. The anticipated changes follow a lengthy process of representing stakeholders on certain aspects of the rules and will be of particular interest to the private mutual fund industry. The changes include changing the definition of double inclusion, which can be used to avoid inadmissibility of the deduction in certain circumstances, and the concept of interaction, which is crucial to whether or not certain rules are subject to the rules. These changes are retroactive and will take effect on January 1, 2017. Further changes will take effect through the royal approval of the Finance Act 2021.
Double inclusion income
Deductions may not be permitted under the rules that are so-called deduction / non-inclusion or double deduction. According to these rules, the deductions remain deductible if they are deducted from "income from double inclusion". The narrow definition of double inclusion income has so far created particular problems for US / UK groups where a UK company is owned by a US parent and the UK company has chosen to be treated as tax transparent for US tax purposes . The bill extends the circumstances under which double inclusion income is treated as incurred and is welcomed by groups that have previously suffered from the narrow scope of the concept of dual inclusion income.
Definition of "acting together"
The concept of "acting together" is fundamental to determining whether the participants in an arrangement are sufficiently connected for the rules to apply. HMRC has recognized that the existing definition of cooperative has spread its network too widely and the proposed changes to the rules will remove the existing rules of cooperative in cases where the otherwise unaffiliated party does not have more than 5% of the shares in a member the group that is looking for the corresponding print. This change is effective January 1, 2017. In particular, the aim of this change is to remove the risk that UK companies that borrow from third party lenders without significant participation in the relevant group of borrowers could experience an anti-hybrid rejection of their interest expense.
In addition, changes are to be made to the rules that involve partnerships so that an investor in a collective investment scheme is not treated as trading with the other partners unless his partnership interest is 10%.
These changes should significantly reduce the circumstances in which the rules might apply to portfolio companies that own widespread collective investment schemes.
Exempt investors in hybrid companies
Under certain circumstances, the existing rules provide that the tax-free nature of an exempted company's receipt is derived from hybridity (and is therefore prone to non-admission), even if that receipt would not have been taxable without hybridity.
HMRC has recognized that the existing rules are disproportionate in their application to exempt companies. Although the bill has not yet been published in this area, the existing rules will be amended so that the payment that this investor receives will not be inadmissible to the payer if the recipient of a particular payment is a tax-exempt investor under the rules that apply similar rules as for qualified institutional investors under the significant exemption from UK participation.
Part of the government's intention with the changes is to improve the practicality and proportionality of the regulations.
These changes are of particular interest to private investment funds, where the application of the rules to their portfolio companies should be greatly simplified.
Developments in UK Jurisprudence
Rules for transferring assets abroad apply to tax avoidance systems
In Lancashire and Others v. HMRC (First Tier Tribunal, FTT), the First Tier Tribunal (FTT) found that profits from offshore partnerships under a commercialized tax avoidance scheme are subject to the Foreign Asset Transfer Rules (TOAA) so that the UK resident taxpayers (the complainants) were taxable on those profits.
Under the scheme, the applicants established Isle of Man trusts (with themselves as tenants), with the trustee establishing Isle of Man partnerships (with the applicants being entitled to the partnership profits). The complainants also entered into employment and consultancy agreements with the Isle of Man partnerships under which they would provide services to UK-based clients. The partnership received a fee from the end customer, and the partnership paid a portion of the fee to the complainant and shared a portion of the partnership's profits with the trustee as a partner in the partnership with the complainants, who were entitled to their profit sharing, the tenants of the trusts. The applicants paid UK income tax and social security contributions on the fee they received but not on their share of the profits. They claimed that the profit shares were exempt from UK tax based on the provisions of the Isle of Man-UK double taxation treaty.
The complainants accepted HMRC's argument that the fee and profit-sharing were income from employment (based on a previous FTT decision on the same tax avoidance system). However, they also applied for a PAYE credit for tax amounts that should have been deducted. The financial transaction tax ruled that regardless of a PAYE loan, the TOAA rules on profit-sharing apply, which means that the complainants' profit-sharing income is taxable as ordinary income.
The TOAA rules aim to prevent UK residents from avoiding income tax liability by transferring assets (including the creation of rights) overseas so that income from the assets of a non-UK resident Kingdom that is still resident in the UK has the power to enjoy the income. The financial transaction tax came to the conclusion that the creation of rights from the agreements between the complainants and the partnerships constituted a transfer of assets abroad by the complainants. The FTT also held that the TOAA rules take precedence over the labor income tax, so the profits from the partnership (and therefore the complainants) should be treated as the complainants' trade income rather than labor income.
This is an interesting case that shows the interaction between the TOAA rules and other tax regulations. It is also highlighted that in a scheme structured to benefit from tax exemption under a double tax treaty, the taxpayer should take into account that a number of tax avoidance rules are available to the HMRC. It is also the latest in a number of cases where HMRC has successfully applied the TOAA rules. This underlines that this is an important tool for the HMRC and should be carefully considered by taxpayers when making arrangements to which the rules might apply.
The appeals court considers a "fair and fair" division
In Total E & P North Sea UK Ltd v HMRC, the Court of Appeal (CA) considered the correct approach to sharing corporate profits during a transitional period when the additional tax burden on ring fence oil and gas profits rose from 20% to 32%. The relevant legislation provided for a time-based sharing of profits, but allowed companies to distribute their profits on a “fair and equitable” basis if such a distribution basis led to an inappropriative outcome.
The financial transaction tax, in the original case, had allowed the taxpayer to use a fair and equitable apportionment basis. In particular, the Tribunal stated that taxpayers only had to demonstrate that their approach was a fair and reasonable approach, not that it was the fairest and most reasonable approach.
The Upper Tribunal (UT) overturned the FTT's decision, finding that the FTT had been wrong in law and should have examined whether the outcome went beyond what was necessary to compensate for factors that made a time-based apportionment unfair or inappropriate did.
The competent authority has granted the taxpayer's appeal, stating that the “fair and reasonable” basis for the apportionment does not only take into account exceptional circumstances.
As noted above, the relevant provision states that if the time-based apportionment would work unfairly or inappropriately in the case of the corporation, then the company may choose an alternate basis that is fair and reasonable.
When the CA rejected UT's approach that it was only for the exceptional, it took the view that the use of "in the case of the company" was not limited to circumstances specific to a particular company and that Parliament intended the legislation to work with such a company restriction was to be expected that this would have been clarified. The Competent Authority also considered that while timing is the default position, it did not contribute to the determination of "unfair or inappropriate" and concluded that any company that made profits at a significantly faster rate during a period than the other (and could) Therefore, an alternative apportionment basis can be chosen regardless of whether the difference in profitability results from the exception or the routine.
This case is of interest to indicate when a fair and reasonable override may be applied and it limits HMRC's ability to disapprove of a taxpayer's approach to its method of apportionment to exceptional circumstances.
The financial transaction tax examines the tax treatment of intra-group loan certificates in the event of a company acquisition
In BlackRock Holdco 5 LLC v HMRC, the Financial Transaction Tax examined the tax treatment of some intercompany loan notes issued in connection with a business acquisition. The main issues that were decided were transfer pricing and whether the loan was improperly used.
The case focused on loan notes issued by BlackRock Holdco 5 LLC (LLC5) to the parent company. HMRC believed that LLC5 should not allow interest on the loan notes to be deducted. The Financial Transaction Tax rejected this claim and ruled in favor of LLC5.
Burdens from loan relationships (e.g. interest deductions on loan notes) cannot be permitted for improper purposes on a fair and reasonable basis under the anti-avoidance rules if one of the main purposes of the debtor involved in a loan relationship is to provide a tax advantage to back up. The financial transaction tax had to determine whether LLC5 had such a primary purpose in participating in the Loan Notes and, if so, what amount of the interest deduction (if apportioned fairly and fairly) was attributable to that primary purpose.
LLC5 argued that its only purpose in getting the loan notes was to facilitate the acquisition and that it was also commercial. The Financial Transaction Tax held that LLC5 had both a commercial purpose and a tax benefit purpose, but the burdens should be fairly and equitably allocated solely to commercial purpose, since it was believed that LLC5 would have received the loan notes even if it had not if it had been a tax break, the purpose of the tax break had not increased the burdens. Accordingly, the charges on LLC5's credit relationship were permissible.
In this breakdown, the Financial Transaction Tax adopted the approach taken in the earlier Oxford Instruments case: "As long as the company can demonstrate that it had one or more primary commercial purposes that were not related to a tax advantage in entering into and remaining party to the loan relationship, and that the relevant burdens would have arisen in any event, even without the main purpose of the tax benefit of the company, if none of the relevant burdens should be attributed to the main purpose of the tax benefit. “At BlackRock, the tax break has not changed the burdens on the loan relationship.
With regard to transfer pricing, the question for the financial transaction tax was whether the parties would have taken out the loans on the same terms and in the same amounts had they been independent companies. The financial transaction tax believed that the parent company's actual provision ($ 4 million loan) for LLC5 would have been provided by an independent lender to LLC5 had it been able to enter into certain arrangements, including the financial transaction tax decided that such arrangements would have been made. Accordingly, the FTT rejected HMRC's claim that some of the interest deductions should not be allowed under the transfer pricing rules.
The case is interesting in that the courts could address broader issues of the apportionment between primary purposes of commercial and tax benefits and that commercial purposes could override tax benefits if the non-taxpayer had made the appropriate arrangements.
The financial transaction tax takes into account double taxation treaties and domestic time limits
The applicant in Uddin v. HMRC, a Bangladeshi national, lived, studied and worked in Great Britain for five years. He had deducted income tax from his income. Under the Double Taxation Agreement between Great Britain and Bangladesh (DTA), he was entitled to an exemption from British tax as a student. HMRC made repayment for the four years prior to his claim, but not the fifth due to the fact that the deadline for making claims under UK national law was exceeded.
The financial transaction tax addressed the question of whether HMRC was right to refuse to repay the deduction for the period over the four years (i.e. 2012-13) and whether it was entitled to deduct the amount of the additional tax due for that year from the claims of the taxpayer deducted for repayments in the following year. She agreed to HMRC's request to delete the complainant's complaint to the extent that related to the years 2012-2013, but refused to open the complaint against the reduction in the years 2013/14 and 2014/15 Amount repaid by HMRC to be canceled by offsetting until 2012-13.
The relevant article in the DTA that the complainant relied on for the tax recovery could only be invoked by an individual for five years (according to the article itself). The financial transaction tax confirmed that the statutory deadline for claims in domestic law was not overridden by any provision in the DTA, and stated that the relevant article in the DTA does not say anything about tax claims, but only deals with tax liability. Accordingly, the financial transaction tax allowed the strike out of the appeal regarding the repayment of taxes paid in 2012-2013.
Regarding HMRC's reduction in the amount repaid for certain periods to compensate for underpayments in the 2012-2013 period, the financial transaction tax rejected the complainant's complaint because "it is far from clear" that HMRC has the right to to make such a compensation "and it certainly is to argue that it is not" and therefore the issue of the financial transaction tax should be viewed as a substantive matter.
It will be interesting to see how this matter develops, and it will be a helpful reminder of the three stages of tax collection and the distinction between a tax liability and its assessment, as well as the limits that HMRC might put on offsetting owed it Taxes on tax refunds it owes.
The line between evasion and avoidance
HMRC had previously received search warrants as part of HMRC's ongoing criminal investigation into the applicant's activities in this case. In the petitioners' petition for judicial review in the Crown Court at Ashbolt and another against HMRC, they argued that the warrants could only be issued if the judge who issued the warrants was satisfied that there was reason to believe existed that there was a criminal act committed. The applicants alleged that the evidence available to the judge who approved the arrest warrants only showed that the applicants had been lawful tax avoidance and tax evasion, so there was no reasonable cause to believe that they were dishonest had acted.
The applicants had used loan agreements to reduce their tax liability. These agreements were made taxable under the disguised rebate loan fee introduced in 2016. In response to the introduction of this tax burden, applicants had attempted to characterize the arrangements as fiduciary arrangements so that they were outside the loan fee.
The Crown Court ruled that there was sufficient evidence that HMRC believed the applicants had acted dishonestly and that the applicants' request for judicial review was rejected.
Touching the line between avoidance and evasion, the court found that tax avoidance "will move from lawful behavior to criminal behavior when it comes to deliberately and dishonestly submitting false documents to HMRC for the benefit of the taxpayer". Significantly, when the agreements were reformulated, the applicants indicated that the users had been trustees under the loan agreements from the outset. The court said this was inaccurate.
The Crown Court ruled that the arrest warrants were legitimately granted because, while the original tax break avoidance system was not necessarily illegal, the applicants' conduct may have been criminal when they later produced a misrepresentation document, and there were reasonable grounds for believing that the applicants knew that the claim that they were trustees was false.
Success fee and insurance premium as part of a settlement agreement that is taxable as labor income
In Murphy v HMRC, the applicant was a police officer who, among others, brought a class action lawsuit against the Metropolitan Police Service (MET) for unpaid overtime and other allowances. The lawsuit was settled and, under the settlement agreement, certain costs (the police officer's attorney's success fee and an insurance premium) were deducted from the total amount of the settlement and paid directly to the lawyers or insurance company. The complainant appealed against HMRC's allegation that these amounts constituted taxable labor income. The financial transaction tax denied his appeal on the grounds that the performance fee and the insurance premium were taxable as labor income.
As a reminder, an income tax is levied on the general income of an employee in the sense of the income stipulated in the case law and the Income Tax Act (Income and Pensions) of 2003. The question for the financial transaction tax was whether the payment of the performance fee and insurance premium arose from the complainant's employment or from something else. In determining that such amounts arise from employment, the FTT relied on what it believed to be clear provisions of the settlement agreement itself. The agreement made it clear that the claim related to unpaid allowances and overtime and that such amounts, if they had originally been paid by MET would constitute taxable income. The agreement stipulated that the parties would bear their own costs in addition to the agreed costs (including legal fees), with the financial transaction tax concluding that the settlement amount paid by MET included the performance fee and was therefore an outcome. The fact that the insurance premium did not fall below the agreed cost did not, in the view of the Financial Transaction Tax, change the underlying nature of the amounts paid to or on account of the applicants (including the complainant) under the settlement agreement.
As recognized by the Financial Transaction Tax in this case, there are few areas of tax law that have sparked more judicial comment and discussion than whether a payment made to an employee constitutes a labor income.
It should be noted that this case was resolved on the clear terms of the settlement agreement, so it remains to be seen to what extent its conclusion would apply more generally to similar agreements on different terms. However, the conclusion is of interest for M&A transactions where the seller, buyer or target company pays the legal fees of its management team, for example when management is advised separately on guarantees and equity that it will acquire in the new structure. Last but not least, it shows the importance of the terms of an agreement that the costs of the management team are to be borne by another person.
Developments in EU case law
Actual use and unintended use of services that are relevant for the deductibility of input tax
The European Court of Justice (ECJ) in the case Sonaecom SGPS SA v Autoridade Tributária e Aduaneira has approved the opinion of the Advocate General (AG) that the actual use of services determines the deductibility of the input tax regardless of any previous deviating intended use.
The case concerned the recoverability of the VAT incurred by a company on a broken business. Die Vorsteuer auf Beratungsleistungen war erstattungsfähig, die Vorsteuer auf Dienstleistungen im Zusammenhang mit der Kapitalbeschaffung bei einer Anleiheemission nicht. Das aufgenommene Kapital sollte den Aktienkauf finanzieren (der schließlich abgebrochen wurde). Das Kapital wurde stattdessen von der Gesellschaft verwendet, um ein Darlehen an ihre Muttergesellschaft zu vergeben.
Der EuGH stellte fest, dass die Vorsteuer nicht erstattungsfähig war, da die eventuelle Lieferung (das Darlehen) für Mehrwertsteuerzwecke befreit war. Die tatsächliche Lieferung war daher maßgeblich für die Erstattungsfähigkeit der Mehrwertsteuer, als die beabsichtigte Lieferung durch die tatsächliche Lieferung ersetzt worden war. Die Vorsteuer auf die Beratungsleistungen war erstattungsfähig, da das Unternehmen beabsichtigte, dem Unternehmen, an dem es Anteile erwerben wollte, Managementdienstleistungen (eine steuerpflichtige Lieferung für Mehrwertsteuerzwecke) zu erbringen. Diese Absicht blieb trotz der Transaktion bestehen und die steuerpflichtige Lieferung nicht auftreten, da die beabsichtigte Lieferung nicht durch eine tatsächliche Lieferung ersetzt wurde.
Weitere Einzelheiten zu diesem Fall finden Sie in unserer Steuerzusammenfassung vom Mai in Großbritannien, in der wir über die Stellungnahme der AG berichtet haben.