179. New guidance on MTD VAT penalties

HMRC’s fact sheet on Making Tax Digital (MTD) VAT penalties provides long-overdue guidance on the penalties that apply to MTD VAT. 

The fact sheet covers the filing method penalty that can be applied to businesses that fail to sign up to MTD VAT and continue to file their VAT return, other than using MTD functional compatible software. ICAEW’s Tax Faculty understands that HMRC will start to charge this penalty once all VAT records have been transferred to its new database later this year.

The general regulatory penalty that can be applied for failing to comply with MTD digital record-keeping requirements (including the requirement for digital links) is also highlighted.

The fact sheet does not cover default surcharge or the new points-based late submission and payment penalty system that will apply from January 2023.

Contributed by Caroline Miskin

180. Film co-production company eligible for seed enterprise investment scheme

The First-tier Tribunal (FTT) has overruled an HMRC decision to refuse to issue seed enterprise investment scheme (SEIS) compliance certificates on shares issued by a film co-production company. It found that the taxpayer did have the intention to grow and develop its trade, and that its business activities were sufficient to constitute a qualifying business activity for the purposes of SEIS relief.

The taxpayer, a film production company, sought authority to issue SEIS certificates in relation to two investments. HMRC rejected the application on the basis that it failed to meet three conditions – a decision that the taxpayer appealed.

The first condition under consideration was the risk to capital condition. As with many film production companies, the taxpayer was investing in only one film at a time. The FTT found that this did not mean that the taxpayer had no intention to grow and develop the trade, and that it was not unreasonable for the taxpayer to assume that a successful low-budget production would result in the opportunity to secure a larger budget for a future production.

The second was whether or not the taxpayer was carrying on a qualifying trade. Based on the documentary evidence available, the FTT concluded that the taxpayer’s trade was the co-production of films. Many film and television productions are co-produced particularly for films requiring multiple locations and special effects. The FTT was therefore satisfied that the activities of co-production were sufficient to constitute a discrete trading activity.

The final consideration was whether or not disqualifying arrangements were used to artificially increase the SEIS relief available. In this instance, the film rights were held by another entity and only assigned or licensed to a production company at the point when the film title was viable to move to the pre-production phase. A special purpose vehicle was set up for each film. HMRC argued that special purpose vehicles would artificially increase the level of relief available compared to the rights and production sitting within one company. The FTT considered the development of intellectual property and the production of the films to be separate business activities requiring discrete skills and resources, and so it was not artificial to split them into separate entities. In addition, the company initially holding the film rights did not issue any shares with the benefit of SEIS and so the FTT was satisfied that there were no disqualifying arrangements.

Having examined these three areas, the FTT found that HMRC was wrong to refuse to issue the compliance certificates.

Cry Me a River Ltd v HMRC [2022] UKFTT 00182 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

181. Unauthorised transfer charge not upheld on scammed taxpayer

The First-tier Tribunal (FTT) has ruled that an assessment applying an unauthorised payment charge for a pension withdrawal was invalid, as the taxpayer had not acted carelessly nor deliberately. She had been scammed out of her pension and was unaware that the loan was connected to the pension transfer.

The taxpayer, who was surviving by means of payday loans and pawning her belongings, took out a loan recommended by a financial adviser, who also recommended that she move her pension. She was unaware that the two were connected, but the outcome was the loss of her pension fund. HMRC argued that the loan she received, of which she had repaid well over half before becoming aware of the scam, was derived from her pension. An unauthorised payments charge was applied, along with a surcharge.

The FTT ruled that this was invalid and allowed the taxpayer’s appeal. The loan was an unauthorised member payment, although the taxpayer did not know it, but the assessment was invalid. This was on the basis that the taxpayer had not acted carelessly nor deliberately and HMRC had issued a discovery assessment while the enquiry window was still open. Alternatively, the FTT also found that it would not have been just nor reasonable to apply the surcharge, although the unauthorised payment charge itself would have remained payable.

Curtis v HMRC [2022] UKFTT 172 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

182. Stud farm losses

Practical point 135 in the June issue of TAXline outlined the removal of the Thoroughbred Breeders’ Association agreement on stud losses from HMRC’s Business Income Manual at BIM55725. That agreement allowed up to 11 years of stud farm losses from the start of the business.

HMRC has now confirmed that opening stud farm losses are restricted to the normal ‘hobby farming rules’ when starting to trade. While the need to prove commercial intent has always been imperative, there is now greater emphasis for tax advisers to check on behalf of their clients the recent compliance with the loss rules, (eg, 2020/21, the history of loss claims and stud business plans).

This change, combined with other operational pressures could see some small breeders leaving the industry. The VAT and tax impact of such action, including the timing, will need to be calculated by tax advisers. Likewise, the potential negative impact on capital taxes must be considered.

Contributed by Lucy Knighton ACA, Managing Director, and Julie Butler FCA, Founding Director, Butler & Co Alresford Limited

183. HMRC updates guidance on accounts required for non-resident corporate landlords

Since April 2020, non-UK resident companies have been subject to corporation tax on rental profits arising on their UK properties. HMRC has clarified the accounts requirement for non-resident companies with UK rental profits (but no UK permanent establishment) in various scenarios by updating its COTAX Manual at COM130010.

Companies that are subject to corporation tax are required to submit returns for accounting periods ending after 31 March 2010, through the Corporation Tax Online Service. The tax computations submitted must be in Inline eXtensible Business Reporting Language (iXBRL) format.

The accounts must also be in iXBRL, unless the return is for an unincorporated charity, club or society, or a company that is neither resident nor incorporated in the UK. In that case, they may be in iXBRL or, in some cases, PDF format. There are separate rules for UK permanent establishments of non-UK resident companies.

HMRC’s updated guidance makes it clear that iXBRL accounts are required if the company’s accounts are prepared using an accounting standard that is supported by an XBRL taxonomy that is accepted by HMRC (currently UK GAAP, IFRS and US GAAP).

If the company’s accounts are not so prepared, then those accounts should instead be submitted as a PDF attachment to the online return. In that case, a UK GAAP/IFRS profit and loss account (P&L) for the UK property business must also be included in the corporation tax computation, in iXBRL format, using the corporation tax computational taxonomy.

Such a P&L in iXBRL format must also be filed if the accounts are prepared under US GAAP (despite the fact that this is an accounting standard supported by an XBRL taxonomy accepted by HMRC).

If the company does not produce accounts, it only needs to include a UK GAAP/IFRS P&L for the UK property business in the corporation tax computation. The P&L should be tagged in iXBRL format using the corporation tax computational taxonomy.

These various scenarios are also set out in a tabular format in a standalone document.

Contributed by Richard Jones

184. Delays in processing R&D claims

HMRC has announced that to prevent abuse of research and development (R&D) tax credit payments, it is enhancing its extensive compliance checks. These additional checks will mean HMRC’s standard processing times will increase. 

For the vast majority of claims, HMRC aims to either pay the payable tax credit or contact the claimant regarding the claim within 40 days. HMRC’s ambition is to return to its standard 28-day processing times as soon as it is able.

HMRC has confirmed that the longer processing times also apply to those that have been through advanced assurance.

HMRC also requests that this guidance is followed.

• To help HMRC process R&D payments quickly, ensure all entries are completed on the R&D section of the corporation tax return (CT600 form).
• Submitting additional information to support the claim, such as the R&D report, will help HMRC process the claim quicker.
• Review the latest guidance on completing the CT600 form on
  uk
• If a claim is submitted that is incorrect, inflated, or fraudulent, agents may be liable to a penalty (see HMRC’s standards for agents).

HMRC asks claimants not to contact the R&D helpline/mailbox to chase their claims. HMRC also asks agents not to contact any HMRC official about a claim. Instead, agents should check the company’s online account to check the status of the claim. However, HMRC has also clarified that the longer processing time still applies if the repayment is shown as being due. This is because the additional checks are carried out once the repayment has been created within the system.

185. Qualifying bodies for R&D credit and relief purposes

HM Treasury has made the Research and Development (Qualifying Bodies) (Tax) (Amendment and Further Prescribed Bodies) Order 2022, SI 2022/690. Certain expenditure on research and development (R&D) undertaken on a company’s behalf by qualifying bodies (for example, UK universities) and certain contributions to independent research carried out by qualifying bodies can be included in R&D tax claims.

HM Treasury is able to prescribe additional qualifying bodies through secondary legislation, and this order names an additional 43 bodies worldwide, with varying degrees of retrospective effect. The order also amends a similar order from 2018 (SI 2018/217) to remove the Lomonosov Moscow State University as a qualifying body.

From the weekly Business Tax Briefing published by Deloitte

186. Loan interest payable disallowed due to unallowable purpose

The First-tier Tribunal (FTT) has found that the main purpose of a loan relationship to which the taxpayer was party was to obtain a UK tax advantage. The loan therefore had an unallowable purpose and no deduction was allowed for the resulting interest expenses.

The taxpayer, a UK incorporated company, was a member of a multinational group with its ultimate parent company in the US. It was set up to acquire a US group worth $1.1bn. The transaction involved a series of steps that sought to maximise group interest deductions while minimising taxable credit interest. Overall, the funding arrangements provided a deduction for third-party interest in the US, and group interest in the UK with no taxable credits in the US, UK or Cayman Islands, where a finance company had also been set up. HMRC denied relief for more than £40m of loan interest debits claimed by the taxpayer on the grounds that the loan had an unallowable purpose. 

In reaching its decision, the FTT considered whether or not the main purpose of the loan arrangement was to obtain a tax advantage, and if it was, what proportion of the interest payment was attributable to that unallowable purpose. The FTT found that the presence of freestanding loan relationship debits that were surrendered by way of group relief to UK members of the group, without any corresponding taxable receipts, did mean that the taxpayer had secured a tax advantage by being party to the loan relationship. Evidence, including reports and internal emails, showed the sole purpose of the funding arrangement was to obtain a UK tax advantage. The UK and Cayman Island companies had no employees or tangible assets, which further evidenced the lack of genuine commerciality in the loan agreements.

As the main purpose for the taxpayer being party to the loan relationship was to obtain a UK tax advantage, no part of the loan had an allowable purpose and so it was correct that the interest payments be disallowed in full. The taxpayer’s appeal was dismissed.

JTI Acquisition Company (2011) Limited vs HMRC [2022] UKFTT 166 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

187. Deduction for amortisation of goodwill disallowed

A deduction for amortisation in respect of goodwill recognised on incorporation of a sole trade business has been denied by the First-tier Tribunal (FTT). There was no acquisition of new goodwill from an unconnected third party.

Two individuals formed a partnership to run an estate agency business in 1999. The partnership ended in 2010 when one of the partners retired, but the business continued as a sole trader. The retiring partner was paid £450,000 to transfer his legal ownership in the partnership property to the sole trader. The business was subsequently incorporated in 2013 and £900,000 of goodwill was recognised in the company accounts. Half of the goodwill was attributed to the shareholder’s original share of the partnership business. This was treated as pre-2002 goodwill, with no tax deduction for amortisation. The other half was treated as an acquisition of goodwill and a tax deduction was claimed.  

HMRC denied the deduction on the basis that the goodwill is inseparable from the business to which it relates, and as the business had not changed, and the shareholder of the appellant company had been involved throughout, then at no point had the goodwill been acquired from an unrelated party. The legislation deems that all goodwill will have been created pre-2002 if any one of the related parties was carrying on the business prior to that date. HMRC also argued that, although not recognised as a separate legal entity, it was the partnership that owned the goodwill and not the individual partners.

The FTT first considered who owned the goodwill prior to the dissolution of the partnership. It found that the partners did not own the underlying assets of the partnership, they had a beneficial interest in the partnership, including the goodwill. The FTT also considered what it was that was transferred on retirement and found, as supported by the partnership agreement, it was the beneficial interest in the partnership that was transferred, not the underlying assets. The FTT concluded that as the goodwill was not acquired from the retiring partner, and as the goodwill was not created, or acquired from an unconnected third-party post April 2002, no deduction was available.

Beadnall Copley Ltd v HMRC [2022] UKFTT 00183 (TC)

From the weekly Tax Update published by Evelyn Partners LLP

188. Working-from-home deductions

Many thousands of employees will have claimed the flat rate tax deduction of £6 per week for working from home (WFH) in 2020/21.

These claims were not automatically rolled over to 2021/22, so the taxpayer was required to submit a new claim for that year. However, once made, the WFH deduction would be incorporated into the taxpayer’s PAYE code.

HMRC has reminded employers that deductions for working at home expenses have generally been removed from PAYE codes for 2022/23.

If the employee still qualifies to claim the deduction, (ie, they are required to work from home and the employer does not pay them the £6 per week WFH allowance), they need to make a fresh claim for 2022/23. It has to be a requirement for the employee to work from home, not an option.

Where the employee made the claim for the WFH deduction through their self assessment tax return, that claim will have been carried forward to their 2022/23 PAYE code.

In cases where the taxpayer no longer qualifies for the WFH deduction, they should contact HMRC to ask for the deduction to be removed from their PAYE code. This can be done through the taxpayer’s personal tax account, but a tax agent cannot access that account.

For HMRC guidance on claiming work related expenses.

From the weekly Tax Tips published by the Tax Advice Network

189. Payment by employers for homeworking arrangements

Employers who are adopting homeworking arrangements (eg, working three days each week on the employer’s premises and two days at home), could consider making payments to employees to reimburse their additional household expenses. These payments are tax free if the conditions in s316A, ITEPA 2003 are met. The conditions in s316A, ITEPA 2003 are far less restrictive than the requirements to be satisfied for an employee to claim a deduction for their additional costs.

HMRC’s Employment Income Manual at EIM01472 explains that the exemption may also apply where the arrangement involves hybrid or flexible working. Provided the homeworking is regular or follows a pattern, the days worked from home can vary from week to week.

While employers can reimburse reasonable additional household expenses that an employee incurs in carrying out the duties of the employment at home under homeworking arrangements, in practice, the amounts may be difficult to quantify. Therefore, HMRC accepts that £6 per week or £26 per month for monthly paid employees can be paid to an employee working regularly at home without the employer having to justify the amount paid. Furthermore, if the £6 guideline rate is paid, the employee does not have to keep any records to demonstrate the additional expenditure (see EIM01476).

However, employers can also agree a scale rate payment with HMRC that is calculated to do no more than reimburse the average additional costs that employees meet while working at home. Given the current rates of inflation, particularly for household costs, it may be useful to agree that the scale rate payment can be increased annually in line with inflation. EIM01478 provides an example of how a scale rate payment might be calculated. If the employer has agreed a scale rate payment based on records of costs kept by employees, HMRC’s Employment Income Manual confirms that it is not necessary for employees to keep subsequent evidence of costs incurred.

190. Employers with multiple employer PAYE references

The rules on when elections for separate PAYE schemes must be submitted have been relaxed from 6 April 2022.

Previously, elections for a separate PAYE scheme had to be made before the beginning of the tax year for which the election was to take effect. From 6 April 2022, a change has been made to reg 98, Income Tax (Pay as You Earn) Regulations 2003, SI 2003/2682, covering ‘Multiple PAYE Schemes’, to allow employers to elect during a tax year.

Under the new regulation, an employer must make an election before the beginning of the tax month immediately preceding the tax month for which the election is to have effect. For example, if you want to make an election that takes effect from 6 May, the election must be made before 6 April.

Contributed by Peter Bickley

191. Calculating class 1 NIC from April 2022

National Insurance Contributions Act 2022 says that, since 6 April 2022, class 1 secondary (employer) national insurance contributions (NIC) are charged at zero % on earnings for qualifying employees working in a Freeport site, up to the Freeport upper secondary threshold (FUST) of £25,000.

HMRC’s guidance for software developers (booklet EB5 2022-23) tells payroll IT developers to insert a breakpoint for FUST when calculating NIC in respect of all employees, (ie, not just qualifying Freeport employees), and to do so for both primary (employee) and secondary NIC.

By contrast, the examples on how to calculate class 1 NIC in CWG2 2022-23 Employer further guide to PAYE and NIC 2022/23 at para 3.9.7 NIC: zero rate of secondary rate contributions for employees working in a Freeport tax site includes the FUST only for secondary class 1 contributions for qualifying Freeport employees.

HMRC’s other guidance – for instance, the chart at page eight of CA38 2022-23 showing earnings limits and NIC rates – includes FUST only for secondary class 1 contributions. This chart could also be interpreted as including the FUST for all table letters (ie, not just for qualifying freeport employees).

However, CWG2 2022-23 confirms at para 3.9.7 that: “These changes do not alter any of the rules for calculating national insurance other than by using the Freeport rate where appropriate” and “primary class 1 contributions will remain unchanged”. This statement and the example appear to accord with the legislation.

Any differences arising as a result will add up to a few pence, depending on whether or not a breakpoint at the FUST is applied in calculations of:

• primary and secondary class 1 NIC for non-Freeport employees; or
• primary NIC for Freeport employees.

HMRC will accept either calculation for primary or secondary contributions (ie, with or without a breakpoint at the FUST, undertaken using the exact percentage basis method or using the table method) for non-Freeport employees. For qualifying Freeport employees, a breakpoint at the FUST will always be needed in the secondary class 1 NIC calculation.

Contributed by Peter Bickley

192. Private residence relief allowed for period before construction

The First-tier Tribunal (FTT) has found for the taxpayers that ‘period of ownership’ for private residence relief (PRR) means the period of ownership of the dwelling being sold. The period during which they just owned the land, on which a house was subsequently built, was therefore not excluded from the relief.

The taxpayers bought a plot of land on which they built a house, moving in four days after the works were complete. The build took more than two years and they sold the house after a year of residence. HMRC’s interpretation of the legislation was that the period of ownership was the whole period they owned the land and that PRR should only apply to the period they occupied the house.

The FTT found for the taxpayer that the ‘period of ownership’ was the time for which they owned the dwelling, not just the land. Although there is no clear definition in the legislation, the judge noted that this was the natural meaning. ‘Dwelling house’ in the legislation could not be interpreted to include land with no house. An extra-statutory concession on property undergoing renovations did not affect the reading of the legislation.

This is a somewhat surprising decision, given that in the past courts have found that the period of ownership in this scenario starts when the land is acquired, for example in Henke. It will be interesting to see the Upper Tribunal’s thoughts on this matter, should this case be heard there.

Lee & Anor v HMRC [2022] UKFTT 175 (TC)

Henke & Anor v HMRC [2006] UKSPC SPC00550 

From the weekly Tax Update published by Evelyn Partners LLP

193. Taxpayer loses appeal on share proportion for business asset disposal relief

The First-tier Tribunal (FTT) has denied business asset disposal relief (BADR), then known as entrepreneurs’ relief, on a holding of just under 5% of shares in a company. Despite an internal understanding that the taxpayer held 5%, this was not reflected in his shareholding.

The taxpayer held A and B ordinary shares in a holding company. The B shares did not have voting rights. He held just under 5% of the A shares, but he claimed BADR when the company was sold on the basis that he indirectly owned an additional fraction to make his shareholding up to 5%. He also received 5% of the proceeds on sale.

It has always been understood in the company that he owned 5%, although the number of shares in issue was such that his percentage of shares held was a tiny fraction less than 5%, and some paperwork referred to his 5% share. HMRC contended that he had no beneficial interest in any shares other than his, which fell under 5%, but he argued that the additional fraction was held on trust for him.

The FTT found for HMRC. There was not enough certainty of intention to create an express trust giving the taxpayer the additional percentage to take him up to 5%. Although his share had been referred to in rounded-up terms as 5%, this was shorthand, not a statement of exact fact. There was also no constructive trust, as there was no common intention among the shareholders that any of them held their shares on trust for the taxpayer. They each believed themselves to be the full owner of their own shares. There was no resulting trust, as again there was no intention to hold the shares on trust, and there was insufficient certainty of subject matter.

Kavanagh v HMRC [2022] UKFTT 173 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

194. Appeal on deductions for CGT dismissed

The First-tier Tribunal (FTT) has found that borrowing by a company was not expenditure on shares, so a shareholder who repaid loans could not deduct the expenses when calculating the chargeable gain.

The taxpayer sold some shares to a trust, in two tranches. The agreement was that they would be free of secured debt. He discharged the company’s debts in consequence and claimed this as an expense of the sale of shares.

The FTT agreed with HMRC that this was not a deductible expense, as it was not an incidental cost of sale. The agreement could have been structured to sell the shares at a lower price, with the debt in place. The expenditure did not change the state or nature of the shares, so it was also not enhancement expenditure.

Tedesco v HMRC [2022] UKFTT 171 (TC)  

From the weekly Tax Update published by Evelyn Partners LLP

195. Annexe found not to be separate dwelling

Multiple dwellings relief (MDR) has been denied on a property with an annexe, as although it had been used for AirBnB lettings, it was not suitable for use as a permanent separate residence.

The taxpayers, a married couple, bought a property and paid stamp duty land tax at the rate for the purchase of a single dwelling. They later filed an amendment on the basis that MDR was due, and appealed HMRC’s rejection. The annexe they claimed as separate was over the garage, detached from the main house, with a separate lockable door and shower room. Systems such as the boiler, heating controls and security alarms were separate from the main house. The previous owners had used it for longer-term guests, and the taxpayers had stayed there when the main house was being renovated, then advertised it as a holiday let.

The First-tier Tribunal agreed with HMRC that no relief was due, as the annexe was not suitable for use as a separate dwelling. It had no oven nor designated kitchen area, no separate postal address nor council tax bill. The kitchen area, consisting of a few appliances such as a microwave on the landing, with water needing to be fetched from the shower room, was not suitable for use as a long-term home. It was just additional living space for the occupants of the main family home

It was noted that suitability for occupants generally matters. It is not sufficient for the property to be suitable only for a particular type of occupant such as a relative or squatter.

Generally the assessment is multi factorial and there is no one size fits all and there is no exhaustive list of factors that can be applied to each and every case.

Dower & Anor v HMRC [2022] UKFTT 170 (TC)

From the weekly Tax Update published by Evelyn Partners LLP

196. Sale of TV studios not a VAT transfer of going concern

In 2014, Haymarket Media Group Ltd secured planning permission to demolish Teddington TV studios and construct 213 flats and six houses on the site. It agreed to sell the freehold to Pinenorth Properties Ltd for £85m. Haymarket first leased a small building on the site to Pinenorth’s advisers, on the basis of which it treated the sale as the transfer of a property letting business (reducing stamp duty land tax by £680,000). HMRC, however, considered that no transfer of a going concern (TOGC) had taken place, and assessed Haymarket for £17m.

The First-tier Tribunal (FTT) observed that the sale required vacant possession of the property, and it ruled that granting a minor (and predictably short-lived) lease to a business that was working for Pinenorth did not create a property letting business. Nor, in the FTT’s judgement, was Haymarket operating a property development business. Haymarket’s intention was always to sell the site to a property developer and not develop the site itself. Obtaining planning permission enhanced the value of Haymarket’s asset, but it did not represent the start of a property development business. As a matter of commercial and economic reality, and despite the contract labelling the sale as a TOGC, Haymarket was operating neither a property development business nor a property letting business, and the sale should not have been treated as a TOGC. Haymarket’s appeal was dismissed.

From the weekly Business Tax Briefing published by Deloitte

197. EU VAT Committee proposes action to address double taxation under Import One Stop Shop

The EU’s Import One Stop Shop (IOSS) allows suppliers and online platforms selling imported goods worth up to €150 to EU buyers to account for VAT, instead of requiring the buyer to pay VAT on import. However, if the postal operator is unable to transmit the platform’s IOSS number, or an EU member state is not yet able to validate IOSS numbers in customs declarations, then import VAT is being charged as well as IOSS VAT.

The EU VAT Committee has now published guidelines approving a temporary solution proposed by the Group on the Future of VAT: if the purchaser can show that they have been charged import VAT, then the platform should be able to include a credit on their IOSS return, and refund the buyer the unexpected import VAT.

The views of the VAT Committee are not binding on EU member states, but the Committee recognised that an interim measure to address potential double taxation was desirable and urgent. Further action may therefore be expected to address this problem in the near future.

From the weekly Business Tax Briefing published by Deloitte

198.Abuse of law question a matter for the national courts

WebMindLicenses Kft (WML) licensed its know-how to Lalib Lda in Portugal, which, with support from DuoDecad Kft (WML’s Hungarian associate), charged consumers for access to its websites. In 2015, the Court of Justice of the European Union (CJEU) ruled on how Hungary should decide whether to treat WML, rather than Lalib, as supplying services to consumers (applying the abuse of law doctrine).

Earlier this year, Advocate General Julianne Kokott considered the ramifications for DuoDecad, which would have to charge Hungarian VAT if its real customer was WML. She recognised the potential for double taxation if Hungary applied abuse of law, but Portugal did not, and volunteered the CJEU’s services to help resolve such conflicts. In its judgement, however, the CJEU has been less accommodating.

The referring court was essentially asking it to resolve a factual question and determine whether WML or Lalib had been supplying the services. The CJEU commented that the contractual relationship between DuoDecad and Lalib should only be redefined if it arose from an abuse of rights itself (rather than merely being connected with an abuse by Lalib or WML). Overall, however, it concluded that it had no jurisdiction to apply rules of law to a particular situation, and it declined to comment on which company should be treated as supplying services to consumers.

From the weekly Business Tax Briefing published by Deloitte

199. VAT disallowed on purchase of cars

Where a taxpayer fails to provide sufficient evidence that the purchase of a car is intended only for business use, input tax cannot be claimed on the basis that it will not be considered business expenditure.

The First-tier Tribunal (FTT) has ruled that where a taxpayer claims input VAT on the purchase of a vehicle, VAT is not recoverable unless it can be proven that the vehicle is unavailable for private use. An exception to this rule is where the vehicle is registered as a taxi or for private hire.

The FTT considered whether or not the taxpayer met the conditions for recovering VAT on the purchase of a car. The taxpayer was registered for VAT and carried out a trade in camping, weddings and events. The taxpayer reclaimed VAT in relation to the purchase of two luxury vehicles on the basis that they would be used for business purposes, as well as some items of clothing and a personalised number plate.

The FTT found that there was not sufficient evidence to prove that the vehicle could not be used for personal use, which was the key test in recovering the VAT. Additionally, the FTT found that the clothing and personalised number plate were not for business purposes and therefore dismissed the appeal entirely.

Maddison and Ben Firth T/A Church Farm v HMRC [2022] TC08496 

From the weekly Tax Update published by Evelyn Partners LLP

200. Business and non-business activities for VAT purposes

In Revenue and Customs Brief 10 (2022) HMRC explains changes to its long-standing policy following recent cases. This is particularly relevant for charities, non-profit making organisations, businesses providing nursery or crèche facilities, businesses in receipt of grants or subsidies, and business or organisations carrying out non-business activities.

HMRC’s previous policy was that a business activity is possible even in the absence of a profit motive. However, following the recent cases of Longridge on the Thames [2016] EWCA Civ 930 and Wakefield College [2018] EWCA Civ 952, HMRC will no longer apply the ‘business test’ based on the six indicators from the historic cases of Lord Fisher [1981] 2 All ER 147 and Morrison’s Academy Boarding Houses Association 1977 SC 279 when determining whether an activity is a business.

In future, a new two-stage test should be taken to determine whether an activity constitutes a business activity.

Stage 1: The activity results in a supply of goods or services for consideration. This requires the existence of a legal relationship between the supplier and the recipient. The first step is to consider whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration cannot be business activity for VAT purposes.

The Court of Appeal in Wakefield College emphasised that a ‘supply for consideration’ is a necessary condition, but not a sufficient condition for an ‘economic activity’.

Stage 2: The supply is made for the purpose of obtaining income therefrom (remuneration). Where there is a direct or sufficient ‘link’ between the supplies made and the payments given, the activity is regarded as economic. The Court in Wakefield College made a distinction between consideration and remuneration. Simply because a payment is received for a service provided does not itself mean that the activity is economic. For an activity to be regarded as economic, it must be carried out for the purpose of obtaining income even if the charge is below cost.

The six criteria that emerged from the historic cases, known as the ‘business test’, were:

• Is the activity a serious undertaking earnestly pursued?
• Is the activity an occupation or function that is actively pursued with reasonable or recognisable continuity?
• Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
• Is the activity conducted in a regular manner and on sound and recognised business principles?
• Is the activity predominately concerned with the making of taxable supplies for a consideration?
• Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

HMRC is now saying that businesses can no longer rely on the old “business test” to decide whether an activity is business or not. However, the business test can still be used as a set of tools designed to help identify those factors which should be considered.

Contributed by Neil Gaskell

201. Related party customs valuation

The starting point for valuing goods for customs duty purposes is the transaction value. Under the Community Customs Code, an alternative method might apply if the supplier and customer were related, and their relationship potentially affected the transaction value. Baltic Master imported air conditioning parts into Lithuania from Gus Group in Malaysia. The two companies had traded with each other for a long time relatively informally (for example, their contracts did not set out delivery or payment terms). The Court of Justice of the European Union (CJEU) has considered whether this meant that they were ‘related’ for valuation purposes (ie, legally recognised partners in business, or under common control).

In the court’s view, related party valuation methods were an exception to the general rule and should be interpreted strictly. That meant that Baltic Master and Gus Group could only be ‘legally recognised partners in business’ if there was a document demonstrating that relationship. Alternatively, for either Baltic Master or Gus Group to control the other, one company would need to have the power to direct or constrain the other. The existence of a close bond of trust, which is all that was apparent to the CJEU from the evidence provided, would not be enough to trigger the related party valuation provisions.

From the weekly Business Tax Briefing published by Deloitte

202. Duty classification of teddy bear accessories

Attendees at a Build-a-Bear workshop not only get to make a cuddly bear or doll, they can also kit them out with a range of clothes, wigs and shoes. Classifying these accessories for customs duty purposes is not straightforward. There is a duty-free tariff classification (9503 00 29) for dolls’ accessories, but there is no equivalent for teddy bears. Instead, Note 3 to the chapter of the Combined Nomenclature (CN) states that parts and accessories that are suitable for use solely or principally with a particular item should be classified with those items.

In Build-a-Bear Workshop UK Holdings Ltd, the Court of Appeal has now ruled that Note 3 first served to bring Build-a-Bear’s accessories within the CN heading for dolls and other toys, and then had to be applied again to determine which sub-heading was appropriate. At that point, the general rules of interpretation (GIR 6) prevented Build-a-Bear from relying on Note 3 to classify the items as dolls’ accessories. Based on the First-tier Tribunal’s findings of fact, these were simply bear accessories and therefore subject to duty at 4.7%.

From the weekly Business Tax Briefing published by Deloitte

203. Split contract arrangements held to be DOTAS notifiable

The First-tier Tribunal (FTT) has held that arrangements for splitting contracts into employment and consultancy were notifiable disclosure of tax avoidance schemes (DOTAS) arrangements.

Two associated companies offered a tax scheme. This involved splitting employment into a contract remunerating directors’ fiduciary services, and a second contract offering the services of the director under a consultancy arrangement with the promoter of the scheme or an associated entity. Under the latter arrangement, the consultant was paid through loans, which were thought at the time to be taxable on receipt as loans and not remuneration. The loans were not expected to be recoverable during lifetime.

The case concerned the notifiability of the arrangements for DOTAS under the premium fee and standardised arrangements hallmarks. The arrangements were held to be so notifiable, but they were held not to be grandfathered. Even though broadly similar arrangements had been previously promoted, the FTT found that there were material differences sufficient to mean that the grandfathering exception, whereby similar arrangements were known before 2006, did not apply.

AML TAX (UK) LIMITED (2) DENMEDICAL UK LIMITED v Revenue & Customs [2022] UKFTT 174 (TC) 

From the weekly Tax Update published by Evelyn Partners LLP

204. UK CFC State aid case

The EU’s General Court has handed down its judgement in favour of the European Commission in the lead cases in the UK controlled foreign company (CFC) State aid litigation (Cases T-363/19 and T-456/19).

The UK government, and a number of UK taxpayers, sought to annul the European Commission’s 2019 decision that between 1 January 2013 and 31 December 2018 the group financing exemption within Chapter 9 of the UK’s CFC rules was incompatible with EU State aid rules (at tinyurl.com/TX-CFCDecision). The General Court rejected the applicants’ arguments, finding that: the CFC rules constituted the correct reference system for State aid analysis purposes; the Chapter 9 exemptions constituted derogations from the CFC rules’ objective of guarding against the artificial diversion of profits from the UK; and these derogations constituted an unjustified selective advantage conferred on those benefiting from Chapter 9.

Decisions of the General Court may be subject to an appeal, limited to points of law, before the EU Court of Justice and any appeals must be lodged within two months and 10 days of the date of judgement.

From the weekly Business Tax Briefing published by Deloitte

205. UK to delay implementation of global minimum tax rate

The 136 countries of the Organisation for Economic Co-operation and Development (OECD) inclusive framework reached agreement on a package of reforms designed to manage the taxation of large multinationals at an international level in October 2021. The measures, referred to as pillars one and two, were due to be implemented in 2023.

Pillar two is designed to ensure that multinational groups pay a minimum rate of tax in every jurisdiction they operate in, through a framework of rules known as the Global anti-Base Erosion (GloBE) rules – therefore, how much tax they pay.

The government consulted on the implementation of pillar two in the UK. That consultation closed on 4 April 2022. Ahead of a formal response in the summer, the Financial Secretary to the Treasury, Lucy Frazer, has sent respondents an interim update on the implementation of pillar two.

The start date will be pushed back from 1 April 2023 to accounting periods beginning on or after 31 December 2023, acknowledging the need for a sufficient lead-in time before the rules are implemented in the UK. Implementing the rules ahead of other countries could also put UK businesses at a competitive and administrative disadvantage.

206. New UK-Luxembourg double tax treaty signed

The UK and Luxembourg signed a new double tax convention and protocol on 7 June 2022, the full text of which has been published by HMRC. The new convention and protocol, which are not yet in force, will introduce a number of changes compared with the current treaty. These include:

A provision within the new convention’s capital gains article will allow gains from the sale of shares in a property-rich company (or comparable interests) to be taxed by the jurisdiction in which its immovable property is situated. ‘Property-rich’ is defined as an entity deriving more than 50% of its value directly or indirectly from immovable property.

A reduction of the limit on withholding taxes on royalty payments from 5% to nil.

The new convention will allow for dividends paid by real estate investment trusts (REITs) or similar entities to be subject to withholding tax not exceeding 15% (unless the beneficial owner of the REIT is a recognised pension fund, in which case a 0% rate applies). In most other cases, residents may claim a 0% withholding tax rate on dividends.

The new convention includes a dual-residence tiebreaker for companies based on mutual agreement by the UK and Luxembourg competent authorities, with grandfathering possible in some cases.

The new convention and protocol will enter into force when both countries have completed their domestic parliamentary procedures and have notified each other accordingly. If these ratification processes are completed before the end of 2022, changes to withholding taxes will have effect from 1 January 2023, changes to UK corporation tax will generally have effect from 1 April 2023, and changes to UK income tax and capital gains tax will generally have effect from 6 April 2023.

The draft Double Taxation Relief and International Tax Enforcement (Luxembourg) Order 2022 has been laid before the House of Commons and an accompanying draft explanatory memorandum has been produced by HMRC.

From the Deloitte Monthly Tax Update