Practical points: August 2021

189. Setting up digital tax accounts

HMRC remains committed to giving agents access to the services and information available to their clients, and acknowledges that it has some way to go to achieve this ambition. However, as HMRC develops its online services and upgrades security and data protection, certain types of online transaction will remain the preserve of businesses and individuals.

Businesses and individuals represented by a tax agent will increasingly find that they need to have access to HMRC digital services for any transaction that involves providing bank details, or to appoint an agent.

HMRC has published helpful guidance on setting up a business tax account (BTA), a new sign-in page and videos on how to add different taxes to the account.

There is also guidance on personal tax accounts (PTA).

Tips

When creating an account, three options are presented: individual, organisation or agent. Selecting the correct option is critical as it determines the type of account that is set up (PTA, BTA or agent) and what services can be added to the account.

A single set of credentials can be used for all services within a BTA. Having one BTA means that all information is available in one place, so it is generally better to add services to an existing BTA rather than setting up a separate account for another tax.

HMRC is working on developing a single digital account bringing together all of its services in one place.

Contributed by Caroline Miskin

190. Voluntarily VAT-registered businesses: no digital links soft landing

Making Tax Digital (MTD) VAT will be extended to VAT-registered businesses with taxable turnover below the VAT registration threshold for their first VAT period starting on or after 1 April 2022. Not only will they have to file their VAT return using MTD-compliant software (including bridging software), but they will also have to keep digital records.

This includes the requirement for digital links between different parts of the digital records used to compile the digital return (ie, no re-keying). While the digital links requirement applied from the first VAT return period starting on or after 1 April 2021 for those joining MTD VAT from 1 April 2019, businesses joining MTD VAT from 1 April 2022 should plan to have digital links in place between their software products from the outset. HMRC has updated the guidance on digital links in VAT Notice 700/22, with a range of practical examples at section 8.

From Rebecca Benneyworth’s Tax update at ICAEW’s Virtually Live, 16 June 2021

191. Working from home allowance and multiple employers

If an employer pays a £6 per week working from home (WFH) allowance, this is tax free. It is considered that this is the case even if the employee has multiple employments and multiple employers pay the allowance.

During the coronavirus pandemic, from 20 March 2020 until 5 April 2022, employees can claim tax relief for working from home if their employer does not pay a tax-free allowance.
If an employee has multiple employments and none of their employers pay an allowance, it is considered that the employee should only claim tax relief for WFH in respect of one employment. Similarly, if the employee receives an allowance from one or more employer but not from others, they should not claim tax relief for WFH for the non-reimbursing employers in addition to the tax-free allowance received from the others. 

From Rebecca Benneyworth’s Tax update at ICAEW’s Virtually Live, 16 June 2021

192. Record keeping for super deduction and special rate allowance

Both the super deduction and special rate allowance have detailed rules concerning the amount that is pooled initially and the calculation of balancing charges on disposal.
On acquisition, super-deduction expenditure is added to a single asset pool at zero tax-written-down value rather than a negative amount. When the asset is disposed of, a balancing charge arises. The disposal proceeds are 130% if the disposal is in a period ending on or before 31 March 2023 or pro-rated between 100% and 130% for periods spanning 31 March 2023.

For special rate expenditure, if a 50% first-year allowance is claimed, the remaining expenditure is added to the special rate pool. On disposal, proceeds are allocated on a similar basis: 50% of the disposal proceeds would give rise to a balancing charge and the remainder would reduce the special rate pool.

This means that records of assets on which the super deduction and special rate allowances will have to be maintained until disposal to flag that a balancing charge will arise. Tax software products should be checked to establish whether this record keeping is supported. If not, separate records may have to be maintained.

From Rebecca Benneyworth’s Tax update at ICAEW’s Virtually Live, 16 June 2021

193. Business premises renovation allowances

The Upper Tribunal (UT) has given its decision in London Luton Hotel BPRA Property Fund LLP v HMRC. The issue is how much of the expenditure of £12.5m – the development sum incurred by London Luton Hotel BPRA Property Fund LLP (the LLP) in 2010/11 under a contract in connection with the redevelopment of a property near Luton Airport into a hotel – qualified for business premises renovation allowances (BPRA). BPRA were a form of capital allowances introduced in 2007 and withdrawn in 2017.

HMRC opened an enquiry into the LLP’s tax return, following which it disallowed £5.3m of the claim. The First-tier Tribunal (FTT) agreed with HMRC that the whole £12.5m did not automatically qualify, but it held that much of the expenditure incurred was ‘qualifying expenditure’. The UT found that the FTT’s approach contained errors of law. However, having reformulated the question the FTT had to address, it reached a similar conclusion – namely, that it was necessary, in determining to what extent the sum claimed by the LLP qualified for BPRA, to consider each of the specific obligations covered by the development agreement, rather than the development sum as a whole. It went on to apply the ‘qualifying expenditure’ test in s360B, Capital Allowances Act 2001 et seq to each element in turn.

From the weekly Business Tax Briefing published by Deloitte

194. Clarity on mixed partnerships

The Upper Tribunal (UT) has upheld in Walewski v HMRC [2021] UKUT 0133 (TCC) the First-tier Tribunal (FTT) decision of last year. In doing so, the UT has confirmed what is, on the face of it, an unsatisfactory effect of the law, which should be noted by all partnerships with corporate members.

The case was about the ‘mixed member partnership’ rules. Broadly, these are anti-avoidance provisions that permit (or rather, as the UT pointed out, require) all or part of the partnership profit share allocated to a corporate partner to be reallocated for tax purposes to any individual partner who has ‘power to enjoy’ the profit share where the relevant conditions are fulfilled.

In Walewski, the FTT’s decision that reallocation was, in principle, required was not disputed before the UT. The appeal was on two grounds, the more interesting of which was that since the individual in question was a member of the partnership for only half of the period in question, it surely followed that only half of the company’s profit share was susceptible to reallocation. As the appellant put it, the legislation “envisages cases where individual partners divert their share of profits arising from an LLP [or a partnership] to a partner that is a company, and this is relevant because an individual cannot divert that which he does not have to divert in the first place”.

Not so, said the UT. The legislation applies “for a period of account” and applies “if the various conditions are met at any time in the period of account. As a matter of construction, there is no requirement that [the individual] be a partner for more than a moment of time within the relevant period of account.” It is not even necessary that there should be any overlap between the period during which the individual is a member and the period when the company is a member. All that is required is that each should have been a member at some point in the relevant period of account.

The further argument made on behalf of Mr Walewski was that even if the legislation did apply for the whole of the period, any reallocation had to, by law, be made on a “just and reasonable basis”; and that it was neither just nor reasonable to reallocate to him a share of partnership profits that were referable to a period when he had not been a partner. Again, the UT was having none of it: this was “an impermissible attempt to argue primary points of discretion” – it was for the FTT to decide what was “just and reasonable” and the UT could not interfere.

Finally, it’s worth pointing out that there are provisions under which a company’s share of partnership profit may, in some limited circumstances, be reallocated for tax purposes to an individual who is not and never has been a partner, which might have been relevant here. But those provisions were not being invoked by HMRC. Reliance was instead placed on the basic rules with the rather surprising result described above.

The amounts are large – some £22m of profit – so the case may yet go further. Meanwhile, we have clarity on the (rather unsatisfactory) state of the law.

Contributed by David Whiscombe writing for BrassTax, published by BKL

195. Building renovation not deductible from profits

A farming partnership has been denied relief on the costs of altering a run-down farmhouse to convert it to holiday accommodation. The costs were found to be capital in nature, not revenue, and not wholly and exclusively for the purposes of the trade.

A farming partnership, since dissolved, had assets including farm buildings, the largest of which was historically used as accommodation for the farm manager. Following the death of one manager, a partner took over his role, but did not occupy the property. As a listed building, the partnership was compelled to carry out expensive repairs and secured a grant to fund these. It was in very poor condition, and the renovation was intended to provide holiday lets in the building to diversify the partnership business. The First-tier Tribunal found that the entire cost of the works was capital rather than revenue, as, although necessary, the result was to change a barely habitable farmhouse into a luxury holiday home, which changed the overall character. The farm was not previously running a trade of holiday letting, so the expenses could not have been allowed as wholly and exclusively for the trade, even if found to be revenue.

Messrs Elliot Balnakeil v HMRC [2021] UKFTT 193 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

196. Deferred revenue expenditure

Although the numbers are large in the recent First-tier Tribunal case of West Burton Property Ltd v HMRC [2021] UKFTT 160 (TC), the principle is straightforward and the decision is interesting. We predict that it will go to appeal.

West Burton Property Ltd (WBPL) owned a power station that it let to its parent company. It routinely incurred expenditure of a revenue nature on maintaining it. But instead of deducting the expenditure in the year in which it was incurred, its accounting policy (confirmed to be fully compliant with UK generally accepted accounting practice) had long been to carry it forward as ‘deferred revenue expenditure’ (DRE) and amortise it over the following four years, over which period it was (presumably) allowed for tax purposes against rental income. So far, so uncontroversial: the company was following the basic principle of matching expenditure against income.

In 2011, WBPL sold the power station to its parent company, which continued to operate it. The transfer was at ‘book value’, meaning that the parent was charged an amount equal to the aggregate value in WBPL’s books of (a) the depreciated cost of the power station (some £179m) plus (b) the DRE (some £65m).

WBPL claimed that it was entitled to deduct the £65m in computing its rental income for 2011. At first blush, this is a surprising claim, given that nothing was charged in the profit and loss account – the benefit of the DRE had (in effect) been sold to the parent along with the power station. Logic might therefore suggest that if anyone was to get relief for the DRE it would be the parent, in future accounting periods.

But logic, as readers will appreciate, is sometimes a stranger to tax. The company persuaded itself (and, more importantly, the Tribunal) that – contrary to all appearances – the £65m DRE was in reality recognised or accounted for in the profit and loss account, as was the £65m received. The DRE was, as revenue expenditure, a proper deduction in computing rental profit for the year; the £65m received was a capital receipt (being part of the capital proceeds for the sale of the power station) and was not (again, contrary to appearances) a taxable reimbursement of the DRE.

Hence the expenditure, which in the normal way of things would have been relieved over four years, became a tax-allowable deduction in full in the year in which the power station moved from the subsidiary to the parent.

Hmm. We wonder whether the Upper Tribunal will see it that way.

Contributed by David Whiscombe writing for BrassTax, published by BKL

197. Appeal allowed in part on loan to participator issue

The First-tier Tribunal (FTT) found that payments made by a company did not comprise a loan to a participator. Despite an error in the documentation that meant it was listed in the director’s loan account, it was properly a loan to a different company. However, a loan relationship was not created, so no deduction was allowed.

The taxpayer company (A) made a series of payments to another company (B), in which the first’s director and major shareholder also had a 50% shareholding. B was struck off and A recognised a deduction for a bad debt, claiming that a loan relationship had existed. On enquiry, HMRC found that the payments made by A were in fact made to the shareholder initially, who had gone on to invest them in B. It issued an assessment on the basis that this was a loan to a participator, as well as denying the deduction for the loan relationship debit.

A appealed, arguing that the intent had always been to make loans from A to B, but that amounts had been listed in the director’s loan account in error. The FTT agreed and allowed the appeal in part, finding that there had not been a loan to a participator. However, the bad debt deduction for A was disallowed, as the terms of the arrangement did not create a valid loan relationship.

WT Banks & Co (Farming) Ltd v HMRC [2021] UKFTT 155 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

198. Test and Trace payments

The £500 payments to those on low income who are required to self-isolate are taxable, but not subject to national insurance contributions and they are not income for student loan repayment purposes.

Contributed by Peter Bickley

199. Inducement to accept changes to pension scheme was earnings

The First-tier Tribunal (FTT) found that payments made to employees to compensate for future reduced pension payments were taxable as earnings, as they were not simply made to put the employees in the same position, but were a change to the future conditions of employment.

A large company decided to change its pension scheme arrangements and made payments to employees to facilitate the change. HMRC held that for 1,100 of the employees, the payments derived from the employments and should be subject to income tax and national insurance contributions as earnings.

The employer maintained that the payments were compensation for the expected lower pension payments, and reduction in future employer contributions, so were non-taxable as they simply put the employees in the same position as before the change. HMRC argued that as the employees retained the pension entitlements they had accrued up to the date of the change, the compensation for these future reductions was linked to their earnings, so taxable as such. The FTT agreed with HMRC, also noting that the change to pension arrangements was part of a wider renegotiation of working conditions and could not be separated from the integrated package, and that although the employees lost a right to purchase additional pension benefits, only 7% of scheme members used that right.

E.ON UK PLC v HMRC [2021] UKFTT 156 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

200. Substitution explained

No, not the sort of substitutions made in the course of the Euro 2020 football tournament – we mean the sort of substitution that is a key feature of determining whether an engagement is a contract of employment (a contract of service). Or rather – following the decision in the recent Upper Tribunal (UT) case Northern Light Solutions Limited v The Commissioners for HM Revenue and Customs [2021] UKUT 134 (TCC) – that is now slightly less of a key feature than it had hitherto been thought to be.

The obligation to provide personal service has always been considered a fundamental element of a contract of service. For example, in 1999, the Court of Appeal said (in Express and Echo Publications Ltd v Tanton [1999] ICR 693) that a clause entitling the worker not to perform any services personally was “a provision wholly inconsistent with [a] contract of service”. HMRC guidance is clear on the point.

An essential element of an employment is that the worker provides personal service. If the worker undertakes to perform a task and is free to hire someone else to do it or to give substantial help, it is unlikely that the worker is an employee. This is a very important factor to take into account in any status case.

But the position has been materially revised by the decision in Northern Light Solutions. This was an ‘IR35’ case: the question was therefore whether, if the services in question had been provided under a contract between the worker and the client, that contract would have been a contract of service. The First-tier Tribunal (FTT) had held ([2020] UKFTT 100 (TC)) that the hypothetical contract would have included a right of substitution (albeit only if the substitute was acceptable to the client, acting reasonably); but nonetheless held that the contract would have been one of service. The company appealed to the UT on the grounds (inter alia) that that was an error of law: if there was a right of substitution, the contract could not be one of service.

The UT referred to the Supreme Court decision in Pimlico Plumbers v Smith [2018] UKSC 29. That was not a tax case nor even one about contracts of service, but about whether Mr Smith was a ‘worker’ under the Employment Rights Act. Crucially, however, that status also requires the person to ‘perform personally’ his work or services; so, the answer to the question posed in that case by the Supreme Court (“Where, then, lie the boundaries of a right to substitute consistent with personal performance?”) was also relevant when considering substitution in the context of contracts of service.

The Supreme Court formulation was that the presence or absence of a right of substitution is more nuanced than had previously been thought. What matters is “whether the dominant feature of the contract remained personal performance”. And, applying that principle to the facts in Northern Light Solutions, the UT considered that the ‘dominant feature’ test was passed and the FTT had made no error.

It is fair to observe, we think, that replacing a (comparatively) simple bright-line test with one that requires contemplation of whether personal service is a ‘dominant feature’ is unlikely to render any simpler the (already difficult) question of status determination.

Contributed by David Whiscombe writing for BrassTax, published by BKL

201. Refund of NIC on car allowances

The First-tier Tribunal (FTT) agreed with HMRC that car allowances paid to staff in lieu of a company car were earnings, as the rate was set by job grade rather than business need, so national insurance contributions (NIC) were fully chargeable as an employee benefit. As they were not strictly linked to expenditure on a car, they did not fall within an exemption for relevant motoring expenses (RME).

The company ran a scheme in which staff at set grades were entitled to choose between a company car, or to receive a ‘car allowance’ instead. The allowance was treated as chargeable to income tax on the employee, reduced by business mileage at the HMRC rate. Primary and secondary NIC were paid, but the company later attempted to reclaim secondary NIC following a separate case. It argued that whether or not the payments were earnings, an RME exemption applied.

The FTT heard evidence on which staff were entitled to these allowances, how the rates were set and how the use of them was tracked. It found that the payments were earnings, rather than a reimbursement of business expenses, as the rates were not set by reference to business-related need, but by job grade and it was accepted that there was an element of bounty. It also found that the payments were not RME, as for a payment to qualify, it must be made in respect of use by the employee rather than expected or potential use.

Laing O’Rourke Services Ltd v HMRC [2021] UKFTT 211 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

202. The benefits of not sharing shared parental leave

Although it is widely known that parents can share statutory shared parental pay (ShPP) and leave (ShPL), it is less common knowledge that mothers/primary adopters can curtail their statutory maternity or adoption pay (SMP or SAP) and leave (SML or SAL) and take ShPP and ShPL instead – there is no need to share with anyone as long as their partner would have been eligible.

Why does this matter?

Both SMP/SAP and ShPP pay out for 39 weeks and SML/SAL and ShPL provide 52 weeks’ leave. However, these statutory benefits differ in that for the first six weeks SMP/SAP can be paid at a higher rate if mother/primary adopter is eligible before dropping to a flat rate, whereas ShPP is payable at the same flat rate throughout.

SML/SAL has to be taken as one continuous block, whereas ShPL can be taken in weekly blocks within the 52 weeks.

The ability of the mother/primary adopter to change from SMP/SAP and SML/SAL to ShPP and ShPL means that they can take SML/SAL and, if entitled, receive the higher rate of SMP/SAP for six weeks and then switch to ShPP and ShPL, and agree with their employer which weeks within the 52 weeks to take as ShPL. This enables mothers/primary adopters to go back to work (as long as it’s for at least a week at a time) and arrange for other family members, say, grandparents, to temporarily look after the child(ren) while earning money to fund the next chunk of shared parental leave.

Contributed by Kate Upcraft, Kate Upcraft Consultancy

203. SDLT saving scheme for house purchase defeated

The First-tier Tribunal (FTT) has found that taxpayers who purchased a house in a company, which was then distributed to them due to a reduction in share capital, were personally liable for stamp duty land tax (SDLT) on the purchase. The arrangements made meant that they had the power to call for conveyance, as well as the company.

The taxpayers, a married couple, subscribed for all the shares in a newly incorporated company. It used the funds to place a deposit on a house, then, on completion of the purchase, it reduced its share capital to £2, making a distribution in specie of the house to the taxpayers. The original subscription to the company was made by the taxpayers giving promissory notes payable on the day of completion of the house purchase. No SDLT returns were made, on the basis that there was no consideration paid for the transfer of the house to the taxpayers. HMRC assessed the taxpayers for SDLT as though they had purchased the house personally.

The FTT dismissed the taxpayers’ appeals, finding that the arrangement constituted a transaction under which a person other than the purchaser (the company) was entitled to call for conveyance. The distribution was contingent on the house purchase being completed. The consideration was the subscription to the company, slightly more than the amount the company paid for the house due to conveyancing costs.

Brown v HMRC [2021] UKFTT 208 (TC)

From the weekly Tax Update published by Smith & Williamson LLP

204. Landlord not established for VAT by merely owning property

Titanium Ltd, based in Jersey, owned two commercial properties in Austria that it leased to Austrian businesses. The lease was subject to VAT (as a land-related supply), but a disagreement arose over whether VAT should be accounted for by Titanium or by the lessees. The reverse charge potentially applies to supplies by non-established businesses, so if Titanium had a fixed establishment in Austria by virtue of owning the property, then it should have charged VAT. However, Titanium did not employ any staff in Austria and engaged a local property management company to deal with day-to-day operations. It retained control over any important decisions (agreeing leases, authorising repairs or improvements, and appointing the management company), but none of these required it to have a presence in Austria.

The Court of Justice of the European Union (CJEU) has ruled that the property on its own could not be a fixed establishment, as an establishment requires both human and technical resources. The only questions referred to by the CJEU related to identifying an establishment and it did not therefore provide any further guidance on the operation of the reverse charge in this case.

From the weekly Business Tax Briefing published by Deloitte

205. Car park fines subject to VAT

Apcoa Parking Danmark A/S operated car parks on private land under agreements with site owners. It set the conditions for using the car parks and imposed a €69 ‘control fee’ if drivers did not comply with them. In the opinion of Advocate General (AG) Jean Richard de la Tour, such fees were subject to VAT. Case law treating retained deposits as outside the scope of VAT depends on the non-performance of any service and was not applicable in this case because the drivers who incurred the fines used the car parks. A more appropriate comparison was between car parking fines and charges for the early termination of telecoms contracts, which are subject to VAT.

Apcoa argued that the control fee was out of all proportion with the normal charges for parking. However, the AG observed that the drivers had a free choice whether or not to incur the control fees (they could return to their vehicle on time, park in the marked bays, etc), and it made sense for the fees to be high because of the cost of enforcing them. There was, therefore, in his opinion, a direct link between the control fees and the provision of parking. Apcoa’s claim for VAT of €3.37m on the control fees should therefore be rejected.

From the weekly Business Tax Briefing published by Deloitte

206. No closing stock adjustment in VAT retail scheme

In 2002, Poundland agreed a bespoke VAT retail scheme with HMRC that did not (like the scheme it replaced) require adjustments for opening and closing stocks of zero-rated goods when calculating output tax due. In 2017, Poundland moved to another scheme based on its electronic point-of-sale system. HMRC considered that Poundland should have made a closing adjustment for stocks of zero-rated goods on hand and assessed it for £2.1m.

The First-tier Tribunal has allowed Poundland’s appeal. Some zero-rated goods might have been included in calculations under the 2002 scheme (which operated by reference to stock purchases) as well as the 2017 scheme (which included their sale). However, the 2002 scheme was a mechanism for estimating output tax due and did not mean that the stock was actually being zero-rated when it was recognised in the scheme calculations. If HMRC had considered a closing stock adjustment appropriate, then it should have required it to be set out in the 2002 scheme. It was not possible to infer the need for such an adjustment in 2017, when it became apparent that a considerable potential adjustment had arisen over the 15 years that the scheme had been operating for. On that basis, and on the basis of other errors in HMRC’s approach to issuing the assessment, Poundland’s appeal was allowed.

From the weekly Business Tax Briefing published by Deloitte

207. Royal Opera House: dining to Mozart

The Royal Opera House (ROH) production of Don Giovanni runs for three and a half hours, so opera goers may wish to visit the Balconies restaurant in the opera house for a starter and main course before the performance, and return to their table for dessert and coffee in the interval. If the costs of staging the performance had a ‘direct and immediate’ link to the taxable catering as well as the exempt ticket sales, then the ROH could recover part of the associated VAT.

However, when is a link sufficiently direct and sufficiently immediate? In the Court of Appeal’s (CA) judgement, the fact that the staging of the production was commercially essential to generating catering turnover (ie, without the opera, far fewer people would have dined at the restaurant) did not prove the required link. Although the catering might not have taken place but for the customers who came to see the opera, a direct and immediate link is not established by a simple ‘but for’ test. Furthermore, the CA considered that case law concerning input tax recovery by businesses making taxable and non-business supplies was not relevant to the apportionment of input tax between taxable and exempt supplies. The CA concluded that the Upper Tribunal had been right to find in favour of HMRC and dismissed the ROH’s appeal.

From the weekly Business Tax Briefing published by Deloitte

208. Outsourced fund management functions can be VAT exempt

DBKAG licensed software from SC GmbH that it used to measure the performance and manage the risk of special investment funds (SIFs). K provided tax services (creating tax statements to show income earned by individual investors) to another SIF manager. The Court of Justice of the European Union (CJEU) has ruled that the VAT exemption for SIF management can apply to such services.

The services were only part of the overall fund management activity and they depended on information supplied by the fund manager, and were supplied to the fund manager. However, provided that they formed a ‘distinct whole’, they could be exempt – SIF management does not become exempt only if it is outsourced in its entirety. The CJEU also held that the software and the tax services were capable of being ‘specific and essential’ to the management of the SIFs. It noted that fund administration is listed as a form of collective portfolio management in the UCITS (Undertakings for the Collective Investment in Transferable Securities) Directive and held that it could have an intrinsic link to fund management if the tax reports were required by Austrian law on SIFs. The CJEU’s reasoning supports the conclusion of the Upper Tribunal in Blackrock that automated fund management can be exempt.

From the weekly Business Tax Briefing published by Deloitte

209. VAT on intragroup services

HMRC has lost an appeal on services provided by a parent to its subsidiaries. The Upper Tribunal (UT) confirmed the First-tier Tribunal’s (FTT’s) conclusions on how intragroup services should be characterised.

The taxpayer was a UK parent company that charged offshore subsidiaries for management, technical and logistical services. The charges were added to intercompany loan balances, which are repayable on demand. Payment had, however, not been demanded. HMRC argued that the arrangement did not amount to making taxable supplies for consideration. On that basis, input tax could not be recovered by the parent. Alternatively, HMRC argued that the taxable supplies were not made in the course of an economic activity.

The FTT rejected both arguments. The UT upheld the FTT’s decision on appeal. First, the fact that payment had not been demanded did not change the characterisation of the agreements and they were found not to be contingent in these circumstances. Second, as the agreements were not contingent, the UT was not required to resolve the question of whether or not an addition to a loan balance amounted to consideration for the services to and payment by the subsidiaries; this important issue remains unclear. Third, whether or not the supplier also provides a loan facility to the recipient of the services cannot affect the characterisation of those services as an economic activity.

HMRC v Tower Resources plc [2021] UKUT 123 (TCC)

From the weekly Tax Update published by Smith & Williamson LLP

210. Contracted out services: VAT subject to normal assessment procedures

NHS Trusts are allowed to reclaim VAT on costs relating to their non-business activities under the contracted out services (COS) scheme. Although this is a purely domestic provision that is not derived from the EU Principal VAT Directive, the UK has chosen to administer it through the normal VAT return process: NHS Trusts have to be VAT-registered to use the scheme and include COS VAT as input tax in their VAT returns.

In Milton Keynes Hospitals NHS Foundation Trust, the Court of Appeal has ruled that HMRC’s powers of assessment also apply to COS VAT. The Trust had reclaimed VAT on IT services under COS, but HMRC considered that the services did not qualify and assessed the Trust. In the court’s judgement, repayments made under the COS scheme did not lose their character as amounts of VAT, and the Trust accounted for COS VAT by reference to ‘prescribed accounting periods’. HMRC was therefore entitled to issue an assessment in the normal way, and the Trust will need to pursue alternative arguments that the assessment was out of time, or that the VAT was correctly claimed, at a substantive Tribunal hearing. 

From the weekly Business Tax Briefing published by Deloitte

211. Insuring taxi cabs is exempt

Various taxi companies submitted claims for overpaid output tax following the Upper Tribunal’s decision in Wheels Private Hire Ltd in 2017, which held that optional insurance provided to self-employed drivers alongside taxi finance and maintenance services should be treated as a separate exempt supply for VAT purposes. In Wheels, some drivers had taken out their own insurance. By contrast, the terms of the block insurance policy arranged by Black Cabs Services Ltd (BCSL) were such that BCSL’s owner could not remember a single instance of a driver getting their own insurance separately. Nevertheless, the First-tier Tribunal has ruled that the average driver would have distinguished the insurance (which was itemised separately on invoices) from other costs, and that the insurance was optional. Applying BGZ Leasing, BCSL’s charges for insurance were separate and exempt from VAT and its appeal was allowed.

From the weekly Business Tax Briefing published by Deloitte

212. Innocent agents assessed for excise duty

In October 2013, WR drove a lorry loaded with 25,000 litres of beer into the UK at Dover, using an administrative reference code (ARC) number copied from a previous consignment. The reuse of the ARC number indicated an attempt to evade excise duty, so HMRC seized the beer, confiscated the lorry and assessed WR for duty and penalties. WR was not responsible for the paperwork (which he had no way of checking) and was hauling the beer on behalf of someone he knew only as ‘Des’, whom he met rarely, who paid him in cash and who did not appear to help with any further enquiries.

The Court of Justice of the European Union (CJEU) has ruled that WR was ‘holding’ the goods within the meaning of the Excise Duty Directive because he was in physical possession of them, and he could therefore be assessed despite being an ‘innocent agent’. Where the Directive considers intention or culpability relevant, it says so expressly. The Directive was deliberately broad because it would be practically very difficult for tax authorities to collect duty if they had to prove that a driver was complicit in an attempted fraud. Based on the CJEU’s response, the Court of Appeal is likely to allow HMRC’s appeal and uphold the assessment on WR. 

From the weekly Business Tax Briefing published by Deloitte

213. HMRC update on corporate criminal offences

Corporate criminal offences (CCO) for the failure to prevent the facilitation of tax evasion were introduced by the Criminal Finances Act 2017. The offences came into effect on 30 September 2017 and apply to organisations that failed to prevent the facilitation of tax evasion from that date onwards. HMRC has updated its statistics on its compliance activities in relation to CCO investigations. HMRC currently has 14 live CCO investigations, as opposed to 10 when the figures were last updated in August 2020. No charging decisions have yet been made. A further 14 live opportunities are currently under review. To date, HMRC has reviewed and rejected an additional 40 opportunities. As before, HMRC’s investigations and opportunities cover 10 different business sectors, including financial services, oil, construction, labour provision and software development. 

From the weekly Business Tax Briefing published by Deloitte

214. Remuneration payments were not unlawful share issues

A taxpayer’s bid to have a tax avoidance scheme voided under contract law has failed. The Court of Appeal (CA) found that the shares issued under the scheme were not issued at a discount. The scheme could not therefore be set aside as a mistake and HMRC can pursue its case in the tax tribunals.

The taxpayer argued that the arrangements contravened the provisions of the Companies Act because shares were unlawfully issued at a discount. Therefore, it sought to have the scheme set aside in this case on the ground of mistake and HMRC would be prevented from treating the payments as taxable remuneration. The case directly affects other cases where the scheme has been used. The tax effects of the scheme are being tested by the tax tribunals and form no part of this appeal.

The CA upheld the High Court’s decision that the shares were not issued at a discount. The directors remained liable up to the limit represented by the nominal value of a share when called upon and could do so from any funds they held. They did not have to use the money paid to them by the company. Those payments were not made out of the company’s capital; they were made out of trading income. The CA dismissed the taxpayer’s appeal on this basis without the need to consider the question of mistake.

Chalcot Training Ltd v Ralph & Anor [2021] EWCA Civ 795

From the weekly Tax Update published by Smith & Williamson LLP

215. EU reaches political agreement on public country-by-country reporting

Provisional political agreement has been reached between negotiators for the EU Members States and negotiators for the European Parliament on a proposed Directive for public country-by-country reporting in the EU. The provisional text would require multinationals with worldwide revenues of more than €750m to disclose publicly, on a country-by-country basis, corporate income tax information relating to its operations in each of the 27 member states, as well as information for certain third countries in the EU list of non-cooperative jurisdictions. Both EU-parented groups and non-EU parented groups with EU subsidiaries or branches would have reporting obligations. The reporting would take place within 12 months from the date of the balance sheet of the financial year in question.

The draft Directive (which has not yet been published) sets out the conditions under which a company may obtain a deferral of the disclosure of certain elements for a maximum of five years. EU member states would have 18 months to transpose the Directive into national law. The agreed text now goes back to the Parliament and Council for the formal approval and adoption of the Directive. This process is expected to be completed after the European Parliament’s summer recess.

From the weekly Business Tax Briefing published by Deloitte

216. Model digital platform reporting rules: sale of goods and transportation rental

The Organisation for Economic Co-operation and Development (OECD) has published Model Reporting Rules for Digital Platforms: International Exchange Framework and Optional Module for Sale of Goods. This follows on from the Model Rules approved by the OECD/G20 Inclusive Framework of BEPS (the Inclusive Framework) in June 2020.

The original Model Rules provide for a new global tax reporting framework, under which digital platforms would be required to collect information on the income realised by sellers offering accommodation, transport and other personal services through their platforms, and report the information to tax authorities. The new document consists of a new module containing amendments to the Model Rules and interpretive guidance, and a new multilateral agreement to support the international exchange of information collected.

The amendments in the module reflect the interest of a number of countries to permit an extension of the scope to cover income realised by sellers from the sale of goods and from the renting out of vehicles. The multilateral agreement will support the annual automatic exchange of information collected under the rules between the tax authorities. 

From the weekly Business Tax Briefing published by Deloitte

217. High Court dismisses Danish Tax Authority’s claim

The Danish Tax Authority (SKAT) has been denied the assistance of the High Court (HC) in enforcing the return of funds that it alleges UK taxpayers obtained fraudulently, as refunds of withholding tax. The HC found that the claim was inadmissible because an English court could not assert the powers of a foreign state in England.

The SKAT withholds 27% of dividends. Non-residents are often entitled to claim this back under a double tax agreement, and a standard form is used. The SKAT determined that a number of claims made by UK residents could have been invalid and sought the return of the funds. The primary source of the claims was an LLP that it believed had been deliberately making fraudulent claims in bulk. It applied to the HC to ask it to enforce the return of the funds, some £1.5bn, to Denmark.

The HC dismissed the claim, as under common law it could not enforce the law of a foreign state. The SKAT had argued that this was not a sovereign claim, but simply an attempt to recover losses for damage to its property. However, the HC determined that the basis of the claim was the Danish tax system and enforcement of its dividend tax regime was not possible.

Skatteforvaltningen (The Danish Customs And Tax Administration) v Solo Capital Partners LLP & Ors [2021] EWHC 974 (Comm)

From the weekly Tax Update published by Smith & Williamson LLP

218. HMRC wins a £125m foreign tax relief case

A UK company has lost an appeal against HMRC’s refusal of claims for relief against US tax. The First-tier Tribunal (FTT) found that the UK/US tax treaty did not require the UK to provide relief because the UK company was not US resident for the purposes of that treaty, nor did it carry on business in the US.

HMRC had denied relief of approximately £125m for US tax suffered by a UK company. The company was deemed under US domestic law also to be US tax resident because its shares were ‘stapled’ to those of a US limited partnership. This was because more than half of the UK company’s shares could not be transferred separately from the shares of the US limited partnership. The company had failed to obtain relief using the mutual agreement procedures within the UK/US tax treaty.

The first question was whether or not the UK company was US resident under the tax treaty by virtue of the share stapling. The FTT ruled that it was not. The treaty provides a non-exhaustive list of factors that can determine residence and allows additional factors to be considered. It was held that those additional factors must impose a worldwide liability to tax and provide a connection or attachment to the contracting state. The US deeming provision for stapled shares did not provide a connection or attachment to the US. The FTT went on to find that, based on the facts of the case, the UK company’s participation in the limited partnership did not amount to carrying on a business in the US. Therefore, the tax treaty did not require the UK government to provide relief for the US tax incurred. The appeal was dismissed.

G E Financial v HMRC [2021] UKFTT 0210 (TC) 

From the weekly Tax Update published by Smith & Williamson LLP