The Upper Tribunal, in Ball UK Holdings has upheld the decison of the First Tier Tribunal that the company was not entitled under accounting standards to switch its financial statements to US dollars. The company was an intermediate holding company, ultimately owned by a US parent. By switching to dollars from sterling, the company claimed to crystallise a large tax-deductible loss on loans.
Mrs Justice Falk and Judge Jonathan Cannan had to consider whether accounting standards were a matter of law – such that an appeal lay to the Upper Tribunal. They ruled that “findings about the meaning as well as the practical application of FRS 23 are properly matters of fact”. As such, their interpretation was to be determined by the First Tier Tribunal, relying upon expert evidence.
Accounting standards “are documents written by accountants for accountants, and are intended to identify proper accounting practice, not law. No accountant would consider turning to a lawyer for assistance in their interpretation, and nor should they.”
The judges agreed that the findings of fact by the lower tribunal were conclusions it was entitled to reach – and the company’s appeal was rejected.
The Upper Tribunal has upheld the First Tier Tribunal’s decision to strike out the taxpayers’ appeal on the basis it had no reasonable prospect of succeeding. The case, The First De Sales Limited Partnership (2) Twofold First Services LLP (3) Trident First Services LLP (4) Trident Second Services LLP v HMRC, concerned a tax avoidance scheme. The judgement notes “Each Appellant carried on a modest business for the purposes of which it employed one or more individuals. In implementation of the schemes, each Appellant entered into a Deed of Restrictive Undertakings with an employee and a third party. Under each Deed, the employee agreed to be bound by certain restrictive undertakings as part of entering into a contract of employment and the Appellant made payments to the third party pursuant to the Deed. The schemes were intended to generate losses that could be utilised by individual partners/members…”
The employees were paid £60,000 and £80,000 in total – yet the partnerships each agreed to pay £970 million “solely in consideration of [the employee] giving the restrictive undertakings”, which were broadly a six-month non-compete provision.
It is thus one of those cases where reality fails to coincide with the written agreements. The judges held that:
“The payments were not in respect of, or for, the giving of, the restrictive undertakings. The memoranda supported the obvious conclusion that any relationship between the commercial value of the undertakings and the amount of the payments was irrelevant to these schemes, which were entered into solely for the purpose of tax avoidance.”
Mr Justice Henry Carr and Judge Greg Sinfield indulged in a spot of judicial wit, by referring to Lord Reed’s judgment in UBS:
“In our society, a great deal of intellectual effort is devoted to tax avoidance. The most sophisticated attempts of the Houdini taxpayer to escape from the manacles of tax (to borrow a phrase from the judgment of Templeman LJ in W T Ramsay Ltd v Inland Revenue Comrs generally take the form described in Barclays Mercantile Business Finance Ltd v Mawson:
“…structuring transactions in a form which will have the same or nearly the same economic effect as a taxable transaction but which it is hoped will fall outside the terms of the taxing statute. It is characteristic of these composite transactions that they will include elements which have been inserted without any business or commercial purpose but are intended to have the effect of removing the transaction from the scope of the charge.”
That paragraph is apt to describe the schemes which are the subject of this appeal, save in one respect. Houdini always allowed himself a reasonable prospect of escape from the handcuffs in which he was bound. These schemes do not have any reasonable prospect of enabling taxpayers who invested in them to escape from the manacles of tax.
HMRC have just lost a judicial review in relation to their guidance on VAT. Vacation Rentals provided credit card handling services and argued that they complied with the guidance set out in HMRC’s Business Brief 18/06 on when such services should be treated as exempt from VAT. HMRC later issued assessments, claiming that the services should be standard-rated. The company sought judicial review of HMRC’s decision, contending that “the policy is expressed in a way that is clear, unambiguous and devoid of relevant qualification”. The Upper Tribunal agreed. The judges further ruled against HMRC’s contention that “it would not be unfair or an abuse of power to resile from the guidance in that the Claimant was a “very sophisticated taxpayer”, with access to high quality advice”.
The Office of Tax Simplification recently recommended in their report on HMRC Guidance that “HMRC should undertake a consultation on the circumstances in which a taxpayer can rely on published guidance”. The decision reinforces that recommendation.
As impetus builds behind the BEPS Multilateral Convention, with more and more countries signing and ratifying, the question to consider is when will the new provisions apply?
There are two different issues: withholding taxes on the payment of interest, dividends and royalties and provisions affecting the taxable presence, overall profit or dispute resolution rights of companies and individuals.
The OECD secretariat has just published a note on the effective date for withholding tax – which is 1 January. The question put is which 1 January? Was it the one immediately following the expiration of the three months after the second country ratified – or was there a further year’s grace? The note sets out the legal advice from OECD Directorate for Legal Affairs, which states that it’s the first date – and there is no extra year. The problem arose because of slightly loose language in the English version of the Convention. Naturally the Vienna Convention on Treaties was considered.
A similar question arose in the UK, at least, on the effective date of the taxable period changes. Some argued that the changes took effect by reference to a company’s accounting period – not the country’s overall financial year. HMRC disagreed and clearly state that changes apply from 1 or 6 April, as appropriate.
The Upper Tribunal’s decision in Higgins illustrates one of the pitfalls of buying flats before they are ready for occupation.
Mr Higgins agreed to buy a flat before it was constructed, signing an agreement in 2006. Building work took longer than anticipated and completion took place only in January 2010, when Mr Higgins moved into the flat. He occupied it as his main residence until he sold it in 2012.
He claimed that the sale was exempt from capital gains tax, on the basis the flat had been his main residence throughout his period of ownership. However, HMRC disagreed, noting that he started occupation only in 2010 – and that the capital gains tax rules allocated the gain on a time basis, over the full period of ownership. Sadly for Mr Higgins, the Upper Tribunal has agreed with HMRC, overruling the First Tier Tribunal.
Effectively, buying off plan means that any gain is likely to have an investment element, now taxed at 28%.
HMRC have just lost another tax case about their management of the Enterprise Investment Scheme. Following their loss in Ames, the First Tier Tribunal has ruled in favour of the taxpayers in Oxbotica Ltd. This is a case about the Seed EIS scheme, designed to help start-ups. Oxbotica was founded to spin out technology from Oxford University, developed by several academics. Four individuals and Oxford University subscribed for shares in the company and the university made a loan to the company of £110,000. The company sought authority to issue an SEIS compliance certificate to three individuals, who had subscribed £316 for shares. HMRC turned down the application, asserting that the Department did not consider Parliament would have intended granting relief where the share subscription was just £316. HMRC also said that “in circumstances where the company had already secured funding from the University, HMRC considered that the purpose of the share issue was an attempt to secure capital gains tax relief.”
The Tribunal faced little difficulty in dismissing HMRC’s arguments. The SEIS legislation did not set out a minimum subscription level and there was no basis to add one in. On the facts, it was clear that the money raised had been spent on the company’s qualifying business activity. HMRC’s argument about the purpose being to obtain capital gains tax relief also failed, not least because HMRC had not claimed there was a tax avoidance purpose. It would surely have been impossible to show there was a tax avoidance purpose here, where the shares were subscribed for by the people working on the project and the company’s chairman.
It’s disappointing to find this case (and Ames) going before the Tribunal. Surely Parliament intended supporting start-up businesses with both income tax and capital gains tax reliefs – since that was what was enacted?
Let us hope HMRC reviews its approach to operating the reliefs.
After a career in private practice, I’ve just joined the Office of Tax Simplification, as a part-time policy adviser.
The OTS is an independent part of the Treasury. I work in a building I’ve often visited – and now have the opportunity to get lost in. The Horse Guards Road/Parliament Street building was one of Gordon Brown’s PFI projects, which broadly coincided with bringing together Treasury and HMRC policy specialists. It resonates with history – but modernity too, as atriums and water features have been added, hot-desking is common and the technology looks just like any up-to-date private business. The OTS conducts a mixture of its own reviews and reviews requested by the Chancellor. Details of current and closed reviews are online and the annual report will be published shortly. I’m now part of teams conducting two reviews.
I’ve also just been appointed by the HMRC Commissioners to the Advisory Panel for the UK General Anti-Abuse rule. The Panel is required to offer one or more opinions on arrangements before HMRC is permitted to counteract them by applying the GAAR. The initial permanent panel didn’t see any cases in its first two years, so panel members were offered extended terms. It’s now the time for three panel members to retire from duties – and three new members commenced their three-years terms from 1 June. Details of the Panel’s membership and opinions are online.
The Upper Tribunal has opened the door for Robert Ames’ late claim for Enterprise Investment Scheme relief. The case is a perfect example of a quite unnecessary restriction in the law – which provides that an individual may only claim exemption from capital gains tax on the sale of shares where income tax relief has previously been claimed on the share subscription. HMRC thus refused Mr Ames capital gains tax relief on his later sale of the shares. There’s no good reason for linking the claims, but the Upper Tribunal found it was the law. Mr Ames hadn’t claimed income tax relief on his share subscription, as his income that year was only £42. This was well below the personal allowance, which was given automatically in HMRC’s online Self Assessment system, as his counsel Keith Gordon pointed out.
It was suggested at the First Tier Tribunal hearing that Mr Ames could have submitted a late claim for income tax relief -so he did. HMRC turned him down, though.
Mr Ames sought judicial review of HMRC’s decision. Mr Justice Fancourt and Judge Greg Sinfield decided to quash the original decision.
HMRC’s care and management powers under section 5(1) of the Commissioners for Revenue and Customs Act 2005 allow it to accept late claims. The HMRC officer who refused the late claim did not consider whether this was one of those “…exceptional cases that do not meet these conditions and are not covered by guidance concerning the particular claim or election, where it may still be unreasonable for HMRC to refuse a late claim or election.”
The judges ordered HMRC to remake its decision, with a broad hint that this case was likely to be sufficiently exceptional to allow a late claim.
The Supreme Court’s decision in JP Whitter (Water Well Engineers) Limitedhighlights the need for those in the construction sector to comply fully with all the requirements of the Construction Industry sub-contractor Scheme. Under the CIS, payments made to a sub-contractor are subject to 20% withholding tax, unless the contractor benefits from gross payment status. Given that margins in the sector are low, a 20% withholding has a big impact – not least because main contractors may be concerned that sub-contractors do not have HMRC approval.
The company had been registered under the CIS for 25 years before a string of compliance failures in 2009-11. HMRC at first allowed the company’s appeal against loss of gross payment status but after PAYE failures for seven months decided to cancel CIS registration. The company’s evidence was accepted by the First Tier Tribunal – that loss of status would cost it 60% of turnover and 80% of its employees. However, the Supreme Court held that HMRC’s discretion in allowing continuing registration had to be exercised in the context of the CIS – and ignore wider factors, such as the impact on the business. The whole point of the CIS is to reduce tax evasion, which is why the rules are strict.
HMRC have filed for leave to appeal against the decision of the First Tier Tax Tribunal in the Hargreaves Lansdown case. The case is about the tax treatment of payments made by the online investment platform to individual investors. Hargreaves Lansdown wanted to offer its investors lower costs, which it negotiated with fund managers. Initially most fund managers rebated monies to HL, which passed part of it on to investors, either in the form of additional units, or through cash payments. The regulatory regime changed in 2014, such that platform providers were required to pass the whole of rebates to investors and then make separate charges to cover their own costs.
In 2013 HMRC issued a Technical bulletin in which it set out its view that platform rebates were in fact annual payments to investors, subject to 20% withholding tax and higher/additional rate income tax where relevant. Hargreaves Lansdown have challenged that view.
HMRC have fundamentally misunderstood what is going on. Investors didn’t receive income from their investments – rather, they benefited from lower costs. Judge Tom Scott ruled that the nature and quality of the loyalty bonus was that it was not a ‘profit’ to an investor, but a reduction of the net cost.
Whilst its disappointing that HMRC have appealed against this decision, let us hope that the Upper Tribunal will follow Judge Scott and help HMRC to a better understanding of the commercial – and thus tax – position. Reducing investment costs is a good thing – and it shouldn’t be interpreted by HMRC as substituting income tax charges for capital gain tax.