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.”
No escape
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.
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%.
The Treasury should be pleased by the Supreme Court’s decision in the Prudential case. The case is one of the long-running claims that the UK’s tax treatment of foreign dividends broke EU free movement of capital rules. The UK changed the law in 2009 – but there’s still plenty of money involved in claims for back years.
This particular case is about portfolio dividends, typically held by investment funds, where the shareholding is less than 10% and usually much less. The UK used to levy corporation tax on such dividends, whereas equivalent dividends from UK investments were exempt. The European Court of Justice decided this was unlawful many years’ ago – but this case was about the exact method of allowing relief for overseas tax. The Supreme Court has decided that relief should be given by reference to the foreign nominal rate, irrespective of whether this was actually paid by the underlying company. It’s a sensible, pragmatic answer.
The element of the case which has the biggest impact is the Court’s ruling on compound interest. Prudential – and many other claimants – have argued that they should be given compound interest on their tax refunds, which could easily double or triple the value of a claim. HMRC have estimated that paying compound interest on all claims could cost the Exchequer some £4-5 billion.
However, the Supreme Court ruled that a 2007 case, Sempra Metals, had been wrongly decided by the House of Lords. The Supreme Court has followed its recent decision in Littlewoods and decided that the EU principle of effectiveness (requiring an effective remedy for breach of EU law) did not require compound interest.
UK law similarly does not require the payment of compound interest. The Supreme Court noted that there is symmetry between taxpayers and the Exchequer, with tax law setting simple interest for both.
The result is that the Exchequer will save over £4 billion, which will no doubt come as a relief in these times of deficits.
The Supreme Court’s decision in Pimlico Plumbers tells us one important thing about taxation of the gig economy. The tax treatment of an individual is assessed separately from the rights of a worker under employment legislation. Mr Smith, a heating and plumbing engineer, claimed before the Employment Tribunal that he was an employee of Pimlico Plumbers under a contract of service and alternatively that he was a ‘worker’. The Tribunal dismissed his employment claim but concluded he was a ‘worker’. Pimlico appealed this finding to the Supreme Court. Lord Wilson, delivering the judgement of the court, said:
“From 1970 onwards Parliament has taken the view that, while only employees under a contract of service should have full statutory protection against various forms of abuse by employers of their stronger economic position in the relationship, there were self-employed people whose services were so largely encompassed within the business of others that they should also have limited protection, in particular against discrimination but also against certain forms of exploitation on the part of those others; and for that purpose Parliament has borrowed and developed the extended definition of a “workman” first adopted in 1875.”
Later, Lord Wilson notes “Mr Smith correctly presented himself as self-employed for the purposes of income tax and VAT.”
There has been much debate on employment rights and tax treatment of individuals engaged in the so-called gig economy. The Supreme Court demonstrates that the issue goes back to 1875 – and that in some cases self-employed individuals do have additional rights, but below those of employees engaged under a contract of service.
Mr Smith was entitled to protections due to a ‘worker’ primarily because his contract with Pimlico Plumbers was one of personal service – and the company was not a client or customer of his.
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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:
