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PM-Tax
Wednesday 11 February 2015
News and Views from the Pinsent Masons Tax team
In this Issue
Our Comment
•HMRC ‘two-pronged’ attack on tax avoiders and avoidance scheme promoters by Fiona Fernie
•US tax system could fuel M&A activity by US multinationals by Eloise Walker
2
•HMRC targets moderately wealthy by James Bullock
Recent Articles
•New diverted profits tax could apply to real estate structures by John Christian and Heather Self
•The Chinese GAAR by Eloise Walker and Robbie Chen
5
•Office of Tax Simplification: Final report on partnership taxation by John Christian
Our perspective on recent cases
European Commission v United Kingdom (Case C-172/13)
HMRC v National Exhibition Centre Limited [2015] UKUT 0023 (TCC)
PricewaterhouseCoopers LLP & Another v HMRC [2015] UKFTT 0007 (TC)
HMRC v Astral Construction Limited [2015] UKUT 0021 (TCC)
Biffa (Jersey) Ltd & Another v HMRC [2015] UKFTT 0010 (TC)
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PM-Tax | Our Comment
HMRC ‘two-pronged’ attack on tax
avoiders and avoidance scheme
promoters
by Fiona Fernie
Planned new measures to tackle what HMRC has described as “persistent” use of avoidance schemes
would target the promoters of these schemes, as well as taxpayers.
HMRC is consulting on proposed additional financial and reporting
burdens for those who have used multiple avoidance schemes, as
well as looking at whether to introduce additional penalties in the
most abusive tax avoidance cases. However, the most significant
development is that the proposals do not just focus on taxpayers.
The measures proposed in the new consultation would apply to a
group of ‘serial’ users of tax avoidance schemes yet to be defined,
but which could cover those who use the same avoidance scheme
in more than one year or who use different avoidance schemes
over a short period. These taxpayers could be required to pay a
surcharge on the repeated or concurrent use of tax avoidance
schemes that fail, or could become subject to special notification
requirements. Those who enter these special measures could also
have their names published by HMRC.
These measures are a continuation of the government’s proposals
to ‘close the tax gap’ and change the behaviours of recalcitrant
taxpayers. The intention is to build on previously-announced
measures which aimed to remove the economic benefit to the
taxpayer of being part of a disputed tax avoidance scheme, thus
discouraging the use of such schemes.
The consultation also proposes strengthening the new Promoters
of Tax Avoidance Schemes (POTAS) rules to catch promoters if a
“significant proportion” of the schemes that they notify under
DOTAS fail in the courts or tribunals. This new “threshold
condition” would be set in such a way as to ensure that it does not
catch tax advisors who conscientiously comply with the reporting
regime and whose products are generally compliant with the law,
according to the consultation document.
The current proposals differ from previous measures, however, in
that they do not only focus on taxpayer behaviour. Instead, the
idea is that there should be a two-pronged attack, one aspect of
which is a focus on the promoters of high-risk avoidance schemes.
It will be interesting to see what effect the proposed measures in
relation to the promoters of schemes – which include ‘naming and
shaming’ and fines of up to £1 million – have on the number and
efficacy of new schemes introduced to market.
The consultation also considers whether to introduce additional
penalties for cases where the general anti-abuse rule (GAAR) applies,
and if so how to do this. The GAAR was introduced in July 2013 and
is designed to prevent ‘artificial and abusive’ tax avoidance schemes
that “cannot reasonably be regarded as a reasonable course of
action”. This could take the form of a new penalty for cases where
the GAAR applies, or the introduction of a surcharge in cases where
the GAAR applies, according to the consultation.
The government announced that it would consult on potential
sanctions for repeat users of known avoidance schemes as part of
the Autumn Statement in December. The new measures follow last
year’s introduction of ‘accelerated payment notices’ (APNs)
allowing HMRC to demand the payment of disputed tax associated
with an avoidance scheme up front. APNs can be issued where
schemes hit certain ‘avoidance hallmarks’, such as the scheme
being subject to disclosure requirements under the Disclosure of
Tax Avoidance Schemes (DOTAS) rules.
The consultation closes on 12 March 2015.
Fiona Fernie is a Partner (non-lawyer) leading
our Tax Investigations team. She has over 25
years’ experience in assisting clients subject to
investigations/enquiries by HMRC with
particular focus on COP8 and COP9
(Contractual Disclosure Facility) cases and
large complex investigations. She also assists
clients who want to make a voluntary
disclosure of tax irregularities to HMRC.
According to HMRC, it has issued APNs worth over £1 billion since
the new regime came into force. However, HMRC was recently
ordered not to enforce APNs in relation to a group of clients
represented by Pinsent Masons, who are pursing a judicial review
claim against the issue of the notices. The outcome of the review
could have a significant impact on whether taxpayers are
influenced to change their behaviours and steer away from using
tax avoidance schemes.
E: fiona.fernie@pinsentmasons.com
T: +44 (0)20 7418 9589
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PM-Tax | Our Comment
US tax system could fuel M&A
activity by US multinationals
by Eloise Walker
Cash reserves held outside the US for tax reasons by US multinationals are likely to fuel a big increase in
M&A activity in Europe over the next year.
Apple, the US technology company, has reported the biggest
quarterly profit ever made by a public company. It reported a net
profit of $18 billion in its fiscal first quarter. According to Standard
and Poor’s, this topped the $15.9 billion profit made by ExxonMobil
in the second quarter of 2012. Apple’s figures also show huge net
cash reserves of £142 billion.
the G20 asked the OECD to recommend possible solutions.
However, such solutions are unlikely to impact the US position in
the short term.
In July 2013, the OECD published a 15 point Action Plan and the
first formal proposals dealing with seven of the 15 specific actions
were published in September 2014. The remaining actions are due
to be published in September 2015.
The reason why multinationals like Apple are sitting on so much cash
may be because of the way the US tax system operates. The US is
unusual in having a ‘worldwide’ tax system which taxes companies’
profits wherever they arise – even if they are earned overseas. If
profits are earned overseas, the tax can be deferred, but only so long
as the profits are kept out of the US. If the profits are repatriated to
the US they will be taxed at the normal US rate – which at 35% is
currently one of the highest rates of corporate tax around.
The European Commission is also investigating the favourable tax
rulings given by some EU countries to multinationals. In September
2014 the European Commission said that advance pricing
arrangements (APAs) agreed between the Irish tax authorities and
Apple may have given the company unfair advantages
incompatible with EU state aid laws.
So, although moves are afoot to change the international tax
system and there is pressure in the US to stop multinationals
avoiding US tax on their overseas profits, in the short term there is
plenty of cash sloshing around in these multinationals looking for a
home. That could therefore lead to increased European M&A
activity in the technology sector in the near future.
There is therefore a massive incentive for US multinationals to
keep their foreign profits out of the US. This leads to the crazy
situation where groups like Apple borrow money in the US to fund
returns of value to their shareholders, despite having huge cash
reserves elsewhere in the world.
US multinationals will be looking for a home for these cash
reserves and this could fuel an increase in European M&A activity,
particularly in the technology sector, where many of these
multinationals operate.
Pinsent Masons, in association with Mergermarket, has surveyed
more than 150 senior executives from both technology corporates
and private equity firms to discover what the future holds for
European technology M&A in 2015 and beyond for this exclusive
report, Ahead of the curve: the growth of European technology M&A.
The fact that the pound and the euro are both low against the
dollar adds to the attractiveness of European investments for US
companies; making UK and other European investments look
cheaper than they were before.
Eloise Walker is a Partner specialising in
corporate tax, structured and asset finance and
investment funds. Eloise’s focus is on advising
corporate and financial institutions on UK and
cross-border acquisitions and re-constructions,
corporate finance, joint ventures and tax
structuring for offshore funds. Her areas of
expertise also include structured leasing
transactions, where she enjoys finding
commercial solutions to the challenges facing
the players in today’s market.
Although there are international moves afoot to clamp down on
the avoidance of tax by multinationals, it is likely to be some time
before there is a fundamental change in the international tax
system. Any changes proposed are unlikely to have much practical
effect in the foreseeable future on the cash mountains already held
by US multinationals, which are currently available for investment.
The Organisation for Economic Co-operation and Development
(OECD) is looking at ways to prevent base erosion and profit
shifting (BEPS). BEPS refers to the shifting of profits of
multinational groups to low tax jurisdictions and the exploitation
of mismatches between different tax systems so that little or no
tax is paid. Following international recognition that the
international tax system needs to be reformed to prevent BEPS,
E: eloise.walker@pinsentmasons.com
T: +44 (0)20 7490 6169
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PM-Tax | Our Comment
HMRC increasingly
targeting the
moderately wealthy
by James Bullock
A 60% jump in the amount of extra tax collected by HMRC from moderately wealthy taxpayers
shows that the department is leaving no stone unturned in its efforts to target tax avoidance.
Figures obtained by Pinsent Masons, showed that HMRC collected
£137.2 million in additional tax as a result of investigations by its
‘affluent unit’ last year; up from £85.7 million in 2012/13. The
figures show that HMRC is no longer focussing its compliance
efforts solely on the super-rich.
New powers that would give HMRC the ability to withdraw
outstanding tax directly from the bank accounts of debtors, as
announced in the 2014 Budget, are due to come into force this
year. In November, the government announced that it would
require HMRC to conduct face-to-face meetings with those with
tax in dispute before it could use the new powers, following critical
responses to a consultation on the proposals.
People who would just consider themselves moderately successful
professionals and businesspeople are now also coming under the
scrutiny of HMRC’s specialist units. This unrelenting attitude is
being backed up by new civil powers to pursue unpaid tax and a
much more aggressive approach to prosecutions – targeted at
professionals and entrepreneurs.
The government also consulted last year on the introduction of a
new ‘strict liability’ offence, carrying automatic criminal penalties,
for those who failed to declare offshore taxable income. The new
offence would have allowed HMRC to prosecute taxpayers that did
not correctly declare income or gains, regardless of whether this
was done with any intention to defraud. HMRC has not yet
responded to its consultation despite having already legislated for
other proposals announced at the same time, indicating that the
plans may have been quietly shelved.
Whilst the fact that more is being raised from compliance
investigations should as a general principle be welcomed, HMRC
needs to be vigilant that over-zealous use of some of its new
powers does not end up being damaging to business. The diluting
of the direct recovery of debt proposals in late November, and the
apparent disappearance of the proposed strict liability offence of
offshore tax evasion, are hopeful signs that HMRC is getting the
message on this front.
James Bullock is Head of our Litigation and
Compliance Group. He is one of the UK’s
leading tax practitioners and has been
recognised as such in the leading legal
directories for many years. James has over
twenty years of experience advising in relation
to large and complex disputes with HMRC for
large corporates and high net worth individuals,
including in particular leading negotiations and
handling tax litigation at all levels from the Tax
Tribunal to the Supreme Court and Court of
Justice of the European Union.
The figures relate to investigations carried out by HMRC’s ‘affluent
unit’ into the tax affairs of approximately 500,000 UK residents
with either annual income of over £150,000 or wealth over £1
million. It was set up in 2011 to target the group of taxpayers
whose income means that they are not considered wealthy enough
to be scrutinised by its ‘high net worth’ unit. In 2013, the affluent
unit was doubled in size with the recruitment of an additional 100
inspectors. The private wealth threshold was also decreased to £1
million from £2.5 million, bringing more taxpayers into its remit.
E: james.bullock@pinsentmasons.com
T: +44 (0)20 7054 2726
HMRC has also run a number of voluntary disclosure campaigns
targeting specific groups of professionals over the past few years. It
is currently encouraging legal professionals to voluntarily declare
any undisclosed income before a June 2015 deadline. HMRC’s new
‘Connect’ database system gathers real-time data from public and
private sources including banks, local councils and social media to
help it identify groups where tax avoidance may be an issue.
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PM-Tax | Recent Articles
New diverted profits tax could apply to real
estate structures
by John Christian and Heather Self
Diverted profits tax (DPT) is a new tax aimed at multinationals operating in the UK which is due to
apply from 1 April 2015. DPT is not targeted at structures for UK real estate investment or
development, but it is so widely drafted there are concerns that it could it impact upon structures
involving non-UK residents.
This article is based on the draft legislation published for
consultation on 10 December – this may change before the rules
come into force.
In outline the “effective tax mismatch” test will apply if the foreign
tax (ignoring the offset of losses, but taking account of all other
provisions of the foreign legislation) is less than 80% of the
equivalent UK corporation tax (20% from 1 April 2015).
When will DPT apply?
DPT will apply in two circumstances:
The “insufficient economic substance” condition will apply where
the tax benefit of the transactions is greater than any other financial
benefit, and it is reasonable to assume that the transactions were
designed to secure the tax reduction. Alternatively, it will apply
where a person is a party to one or more of the transactions, and
the contribution of economic value by that person is less than the
tax benefit, and it is reasonable to assume that the person’s
involvement was designed to secure the tax reduction.
•where a non-UK resident company is carrying on activity in the
UK in connection with supplies of goods and services to UK
customers and it is reasonable to assume that any of the activity
is “designed so as to ensure” that the foreign company is not
carrying on a trade in the UK through a permanent establishment;
(this is referred to as the “avoided PE”), or
•where a group has a UK subsidiary or permanent establishment
and there are arrangements between connected parties which
“lack economic substance”. One example of this would be if
profits are taken out of a UK subsidiary by way of the payment of
royalties to an associated entity in a tax haven.
What happens if DPT applies?
Taxpayers will have to notify HMRC if it is reasonable to assume that
taxable diverted profits “might” arise to the company. HMRC have
accepted that this notification obligation is too wide, but it is not clear
how the draft legislation will be amended to address this concern.
DPT will not apply to small and medium-sized entities and in the
case of an avoided PE, DPT will only apply where UK sales are at
least £10 million.
If HMRC believes that there is a liability to DPT, it will issue a
preliminary notice setting out the grounds on which DPT is payable,
and calculating the DPT based on certain simplified assumptions. In
particular, HMRC can disallow 30% of “relevant expenses” which
would otherwise reduce the liability of the company.
In determining whether a tax liability arises in respect of an
avoided PE, two further tests are applied. If either test is failed,
then DPT will be charged:
•The first test is that in connection with the supplies of goods or
services to UK residents, arrangements are in place the main
purpose or one of the main purposes of which is to avoid a charge
to corporation tax
The company can correct obvious errors in the preliminary notice,
but cannot appeal at this stage and must pay the DPT that HMRC
says is payable, prior to entering into detailed discussions with
HMRC. During the review period, which lasts up to 12 months, the
company and HMRC will attempt to reach agreement on the
amount of DPT due. If agreement cannot be reached, HMRC will
issue a final notice. At this stage, the profits will be calculated on
OECD transfer pricing principles, but with the ability for HMRC to
recharacterise arrangements based on what they consider to be
the most likely alternative transaction.
•The second test applies to both the avoided PE and the
“arrangements which lack economic substance” situations. It is
intended to be an objective test, which will be satisfied if two
conditions are met: there is an “effective tax mismatch outcome”
and “insufficient economic substance”.
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PM-Tax | Recent Articles
New diverted profits tax could apply to real estate structures (continued)
The company can appeal to the Tax Tribunal, but only at the end of
the review period. This will result in a significant cash flow
disadvantage for the company.
•development projects involving offshore owned UK property are
usually structured to minimise the risk of a UK PE in respect of a
property development trade. These structures should be reviewed
against the DPT proposals, in particular the “avoided PE” test.
DPT is chargeable at 25% – significantly in excess of the rate of
corporation tax which is due to reduce to 20% in April 2015.
What should you do?
In our view the legislation is not designed to catch this sort of
transaction and should be amended so that it is clear that it does
not apply. We have responded to the consultation on the draft
legislation asking that the scope of the rules be narrowed.
DPT applies for periods beginning on or after 1 April 2015 and there
is no grandfathering of profits from structures already in place.
How could DPT apply to real estate transactions?
In theory the tax could apply in some circumstances where a non UK
resident company (for example an offshore SPV) has been used in a
transaction involving UK land or where there is a UK presence and
profits are extracted to offshore owners based in low tax jurisdictions.
If the legislation is passed without significant amendment,
investors and developers should review their structures and
transfer pricing arrangements, and may wish to consider seeking
an Advance Pricing Agreement (APA) to confirm that DPT does not
apply in their circumstances.
The avoided PE rules could be relevant to development activities.
For other real estate activities, the main risk is that the offshore
SPV has “insufficient economic substance”. Where the local tax
rate is less than 16%, a DPT charge could arise
John Christian is head of our corporate tax
team. He specialises in corporate and business
tax, and advises on the tax aspects of UK and
international mergers and acquisitions, joint
ventures and partnering arrangements, private
equity transactions, treasury and funding
issues, property taxation, transactions under
the Private Finance Initiative and VAT.
Unfortunately the draft legislation is not very well drafted so it is
not at all clear at present whether it will apply, but the following
observations can be made:
•straightforward investment structures are probably not intended
to be subject to DPT but some commentators have noted that
bona fide commercial arrangements could technically be argued
to be caught
E: john.christian@pinsentmasons.com
T: +44 (0)113 294 5296
•in particular, investments using a propco/opco involve a trading
activity being carried on through the opco and structures should
be reviewed against the “economic substance” test
Heather Self is a Partner (non-lawyer) with
almost 30 years of experience in tax. She has
been Group Tax Director at Scottish Power,
where she advised on numerous corporate
transactions, including the $5bn disposal of
the regulated US energy business. She also
worked at HMRC on complex disputes with
FTSE 100 companies, and was a specialist
adviser to the utilities sector, where she was
involved in policy issues on energy generation
and renewables.
•the avoided PE rules require someone in the UK to be carrying on
an activity in the UK in connection with “supplies of goods or
services” made by the non-UK company to customers in the UK.
This is VAT, rather than direct tax terminology, and it is not clear
what it means in connection with transactions involving land.
Until clarification emerges, it should be assumed that it may be
viewed purposively as referring to all supplies and therefore could
apply to land supplies
E: heather.self@pinsentmasons.com
T: +44 (0)161 662 8066
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PM-Tax | Recent Articles
The Chinese GAAR
by Eloise Walker and Robbie Chen
The introduction of new administrative measures for the general anti-avoidance rule in the People’s
Republic of China will be the envy of HMRC, with its tight timescales, the burden of proof being laid
firmly on the taxpayer, and its failure to address double taxation. However, greater control by the
State Administration of Taxation over local tax authorities and the GAAR’s wide ambit (it should
catch Circular 698 issues) will be welcome to those who meet its stringent background information
and data retention requirements.
HMRC brought in the UK’s general anti abuse rule (UK GAAR) after
much heated consultation. The end result was unappetising for all
concerned, with taxpayers scratching their heads over the double
reasonableness test and the unsatisfactory guidance. By contrast,
the administrative measures published in December 2014 for the
application of the general anti-avoidance rule in the People’s
Republic of China (PRC GAAR) are short and to the point. HMRC
can only look upon them with envy. The same must be true for
taxpayers: as a taxpayer, you do not want to have to apply the
GAAR; but if you do have to, at least in China you will know where
you stand.
In contrast, under the UK GAAR the tax advantage has to be only
one of the main purposes. The test is objective (whether it would
be reasonable to conclude that a tax advantage was a main
purpose of the arrangement). The purpose test is therefore a lower
bar for HMRC to pass, allowing it to focus on whether the
arrangements are in fact abusive.
At the discussion draft stage, the PRC’s State Administration of
Taxation (SAT) – the highest tax authority in China – did consider
following the UK’s approach and adopting the wider ‘one of the
main purposes’ test. Fortunately, this was abandoned for the
higher hurdle of ‘sole or main purpose’, which benefits taxpayers by
narrowing the scope of the PRC GAAR.
How the PRC GAAR works
The PRC GAAR first appeared in the Enterprise Income Tax (EIT)
Law in 2008. It empowers the tax authorities to make reasonable
adjustments to any enterprise’s arrangement if it does not have a
reasonable commercial purpose and if it leads to a reduction of
taxable income. A transaction ‘without reasonable commercial
purpose’ is defined as a transaction with the main purpose of
reducing, exempting or deferring the payment of tax.
How is a GAAR case investigated in China?
When the local tax authority starts a general anti-avoidance audit,
it sends a ‘notice on tax audit’ to the enterprise that is to be
investigated. Within 60 days of receiving a notice, the enterprise
has to provide documents to prove that its arrangement has a
reasonable commercial purpose. The tax authority then reviews
the documents provided, holding a subsequent round of meetings
with the taxpayer for further information and clarification.
Which transactions are under the spotlight?
An arrangement can be labelled as a tax avoidance scheme if its
sole or main purpose is to obtain tax benefits (referred to as any
deduction, exemption or deferral of EIT payable); or if tax benefits
are obtained under a disguised arrangement that is in effect
inconsistent with the transaction’s economic substance.
If the local tax authority believes that the documents cannot prove
the arrangement has a reasonable commercial purpose, it should
consult internally with the SAT. If the SAT concurs with its opinion,
the local tax authority may send a ‘special tax audit adjustment
notice’ to the enterprise and make a tax adjustment based on the
information already acquired.
Common types of such tax avoidance schemes are:
The purpose of involving the SAT in the final decision is designed to
ensure that all GAAR investigations are conducted in a consistent
manner and that technical criteria are properly applied.
•abuse of tax incentives
•tax treaty shopping
•abuse of a company’s legal form
According to a question and answer session with a SAT official, an
expert committee will be formed from within the SAT for each
individual GAAR hearing. A GAAR investigation will normally be
closed within nine months from the date when the local tax
authority formally initiates the investigation.
•transactions with companies registered in a tax haven to
avoid tax
•other business arrangements without reasonable commercial
purposes.
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PM-Tax | Recent Articles
The Chinese GAAR (continued)
The PRC GAAR is likely to be a source of envy for HMRC. It appears
to put the burden of proof firmly on the taxpayer to show that
their arrangements are not tax avoidance; and there is a long list of
information in article 11 that the taxpayer has to produce
(including, ominously, a general reference to such ‘other
information as the tax authority deems necessary’). The tax
authority can also require the scheme promoter to provide
information under article 13, which must be bad news indeed for
some of the large global accountancy firms.
•The burden of proof lies with the taxpayer.
•If the taxpayer fails to provide supporting documents, the tax
authorities can deem the tax to be payable. It remains to be seen
how this process will actually work in practice
•If, after review by the SAT, the tax authority rules against the
taxpayer and issues a preliminary adjustment notice, the
taxpayer has only seven days to appeal
•With the expansion of the PRC’s double tax treaty network and
the signing of tax information exchange treaties with major tax
havens, it is likely the PRC tax authorities could have more ways
to find out, from their overseas counterparts, information on
overseas parties involved in a transaction.
Contrast this with the UK GAAR, where (at least in theory) the
burden of proof under FA 2013 s 211(1) rests firmly with HMRC to
show, on the balance of probabilities, that the tax arrangements
are abusive.
The good news
However, it is not all bad news. Those with business interests in the
PRC (especially those who have tangled with the tax authorities
before and suffered from cumbersome processes and a lack of
consistency) may welcome some clarity:
What are the tests and adjustments?
The PRC tax authorities adopt a ‘substance over form’ test and a
‘reasonable commercial purpose’ test when examining possible
GAAR cases. When those requirements are met, the Chinese tax
authorities can:
•The procedures and process of a GAAR investigation should now
be more standardised than in the past
•recharacterise the arrangement in whole or in part
•The PRC GAAR only targets cross-border transactions
•disregard the existence of a transaction party for tax purposes, or
treat such a transaction party and other transaction parties as a
single entity
•A PRC GAAR investigation is the last resort of the tax authorities
and it appears it will only be used when other remedies cannot
secure the PRC’s taxing rights
•recharacterise the relevant income, deductions, tax incentives,
foreign tax credits, etc., or reallocate these items among
transaction parties
•The final decision on a PRC GAAR investigation lies with the SAT.
This should help to prevent inconsistent treatments between
taxpayers in similar circumstances
•employ any other appropriate means to adjust the position.
•A PRC GAAR case should be closed within nine months.
Interestingly, the PRC tax authorities need not have much regard
to the international tax position in making their adjustments.
Article 21 makes it clear that when an adjustment in the PRC
results in international double taxation or in abrogation of the
protections in a double tax treaty, the taxpayer has to file an
application for the relevant tax authorities to sort it out under the
mutual agreement procedures in that tax treaty.
If specific other anti-avoidance rules also apply (such as transfer
pricing, thin capitalisation and controlled foreign enterprises,
treaty limitation of benefits or beneficial ownership issues), then
those rules take priority over the PRC GAAR. (In contrast, the UK
GAAR takes priority over everything else.)
Currently, the most frequent GAAR investigations in the PRC are
related to offshore indirect share transfers under a circular 698
filing, especially where the offshore holding company to be
transferred is located in a tax haven. Those facing circular 698
investigations will especially welcome a more regimented process
with fixed deadlines.
Applying mutual agreement procedures is a notoriously difficult,
expensive and lengthy affair, with no certainty of outcome. This is
much more favourable to the tax authorities than the requirement
on HMRC to show in court proceedings that its proposed
counteracting adjustments are just and reasonable before they can
alter the tax treatment of a transaction under the UK GAAR.
What should I do now?
Although most normal commercial arrangements should not fall
foul of the PRC GAAR, any international group involved in
transactions in or with the PRC needs to be mindful of the
potential for a GAAR investigation (or of being dragged into
someone else’s).
The bad news
From the preceding paragraphs, the taxpayer might be forgiven for
thinking it was all bad news. Indeed, certain aspects of the PRC
GAAR are less than desirable:
•The taxpayer only has 60 days (or at most 90 days if an extension
is granted) to provide all the documents needed to prove that
their transaction is not for the purpose of avoiding PRC taxes and
has a reasonable commercial purpose
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PM-Tax | Recent Articles
The Chinese GAAR (continued)
The key point is to have the supporting data ready to send.
Remember that the deadline is only 60 days. Article 11 has a list of
what may be needed, but note that it is wide and includes: internal
management data (board resolutions, memos and emails);
contracts, supplementary agreements and payment receipts; and
correspondence with other parties. For emails in particular, it will
be important to avoid casual references to tax savings in the
correspondence between the parties. Particular care may also be
needed around confidentiality undertakings and non-disclosure
agreements, with exclusions inserted to allow for GAAR disclosure,
as such restrictions may not be a sufficient excuse for failure to
supply information to the PRC tax authorities.
Watch out for further developments. If the SAT decides a
transaction is taxable due to a GAAR adjustment, the taxpayer still
needs to negotiate with the local tax authority how the tax is
calculated – how to determine the tax basis, what is the deemed
income, etc. These areas do not yet have clear guidelines and will
be subject to further negotiation with the tax authority.
Lastly, if you are unfortunate enough to suffer a PRC GAAR
adjustment, then good luck with avoiding double taxation at the
international level. Unless further guidance emerges in the future,
or the OECD manages to pull off a multi-jurisdictional agreement
under its BEPS project (action point 15) and persuade the PRC to
be a party, you are going to need it.
Eloise Walker is a Partner specialising in
corporate tax, structured and asset finance and
investment funds. Eloise’s focus is on advising
corporate and financial institutions on UK and
cross-border acquisitions and re-constructions,
corporate finance, joint ventures and tax
structuring for offshore funds. Her areas of
expertise also include structured leasing
transactions, where she enjoys finding
commercial solutions to the challenges facing
the players in today’s market.
E: eloise.walker@pinsentmasons.com
T: +44 (0)20 7490 6169
Robbie Chen is a Senior Associate in our
Shanghai office. Robbie provides tax services
on foreign direct investment, corporate
restructuring, cross border M&A, and tax
planning for companies and individuals.
Robbie also gives VAT and customs advice in
relation to import/export, bonded areas, and
processing trades.
E: robbie.chen@pinsentmasons.com
T: +86 21 6138 2527
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PM-Tax | Wednesday 11 February 2015
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PM-Tax | Recent Articles
Office of Tax Simplification:
Final report on partnerships
by John Christian
The Office of Tax Simplification’s (OTS) final report on its review of the taxation of partnerships has
recently been issued. Although the report is a “final report”, the OTS notes that further updates are
likely to be issued – which reflects the sense in the report that progress still needs to be made in a
number of areas.
The key recommendations identified in the report are:
•International: the report confirms a number of challenges for
international partnerships around unclear application of double
tax treaty provisions to partnerships/LLPs. The report
acknowledges that these issues are only capable of resolution
through treaty renegotiation but the issues may at least have
been put on the agenda for current and future treaty
negotiations. Other areas identified can more easily be addressed
through changes in HMRC practice. These include certification of
residence of LLPs and partnerships for double tax treaty purposes,
the suggested use of a single composite tax return for
international partnerships (rather than individual returns) and
extension of the Double Tax Treaty Passport Scheme (DTTP) to
partnerships (it is currently limited to UK companies). A number
of other difficult areas are noted including foreign exchange
(where there are no income tax rules equivalent to the
corporation tax foreign regime), application of the remittance
basis to partners and the rules applying to short term visitors.
•Group Structures: the OTS notes the unclear legislation and lack
of HMRC guidance in relation to group structures which include
LLPs for corporation tax, CGT and IHT purposes. The OTS notes
that the position in relation to IHT business property relief may
need to be dealt with in legislation but that guidance from HMRC
as to how they interpret group relief and entrepreneurs’ relief
provisions would be helpful.
•CGT: Statement of Practice D12: D12 sets out a number of
important points of practice in relation to the chargeable gains
treatment of partnerships. It is heavily relied on in practice as the
underlying legislation is brief. Whilst the OTS interim report
noted that it cannot be right for a key area of CGT to be largely
governed by a statement of practice, the way forward agreed
with HMRC (and the consensus of those the OTS consulted) is for
D12 to be updated to reflect changes in business ownership and
operation, rather than for the statement to be legislated. HMRC
has agreed to produce an updated statement.
•Entrepreneurs’ Relief: the application of entrepreneurs’ relief to
partnership businesses and structures involving partnerships is
unclear in a number of areas. The report recommends that
technical questions raised by professional bodies in 2011 be
addressed in the Partnership Manual and HMRC are understood
to be dealing with this.
•Operational and Other Issues: the report notes a number of
technical areas where HMRC do not accept the need for change
including the position on Gift Aid, VAT registration process,
simplifying basis periods and allowing deduction of expenses
from partners’ profit share. The report repeats the
recommendation that HMRC create a “Head of Partnership” role
and that an industry/HMRC liaison group focussing on
partnerships be set up but to date HMRC has not accepted the
need for these.
The OTS process has been valuable in highlighting the numerous
areas in which the tax treatment of partnerships is unclear and in
achieving clarification and publication of HMRC practice in a
number of areas, particularly the publication of the Partnership
Manual. The reaction from HMRC to date in relation to the Head of
Partnerships and liaison group recommendations is disappointing
and until HMRC are more aware of the practical issues facing
partnerships, they are likely to remain as an after thought in the
tax regime. To take one example, it is difficult to see the policy
reason for the DTTP process not to be available to partnerships
with UK corporate partners.
John Christian is head of our corporate tax
team. He specialises in corporate and business
tax, and advises on the tax aspects of UK and
international mergers and acquisitions, joint
ventures and partnering arrangements, private
equity transactions, treasury and funding
issues, property taxation, transactions under
the Private Finance Initiative and VAT.
E: john.christian@pinsentmasons.com
T: +44 (0)113 294 5296
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PM-Tax | Wednesday 11 February 2015
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PM-Tax |PM-Tax
Our Comment
| Cases
Cases
European Commission v United Kingdom (Case C-172/13)
The UK’s cross-border group relief rules are compatible with EU law.
The European Commission brought treaty infringement proceedings
against the UK claiming that the UK’s cross border group relief rules
make it “virtually impossible” for companies to claim tax relief on
losses made by non-resident subsidiaries.
The CJEU pointed out that losses sustained by a non-resident
subsidiary may be characterised as definitive only if that subsidiary
no longer has any income in its Member State of residence. It said
that “so long as that subsidiary continues to be in receipt of even
minimal income, there is a possibility that the losses sustained may
yet be offset by future profits made in the Member State in which it
is resident”.
In the Marks and Spencer (M&S) case in 2005, the CJEU found that
certain aspects of the UK rules on group loss relief were
incompatible with the EU principle of freedom of establishment. It
ruled that if a member state allows a resident parent company to
transfer losses suffered to a member of the group established
within that member state in order to reduce its tax liability, it must
offer the same possibility with respect to losses incurred by a
subsidiary established in another member state where all other
possibilities for relief have been exhausted. The UK updated its
corporate tax rules to reflect the decision in 2006.
It pointed out that the UK had confirmed that losses sustained by a
non-resident subsidiary could be characterised as definitive where,
immediately after the end of the accounting period in which the
losses had been sustained, that subsidiary ceased trading and sold
or disposed of all its income producing assets.
A second challenge that cross border group relief was not permitted
before the UK changed its group relief rules in 2006 was dismissed
on the basis that the Commission had not shown any situations in
which cross-border group relief on M&S principles for losses
sustained before 1 April 2006 had not been granted.
The Commission claimed that the UK’s amendments relied on a
particularly restrictive interpretation of the 2005 decision. It said
that the UK’s definition of ‘exhausted’ is particularly restrictive
because the determination that it is impossible for losses to be used
in future must be made immediately after the end of the
accounting period in which the losses are sustained. It argued that
this should instead be considered at the time when the claim for
group relief is made in the UK, otherwise cross border group relief
would only be available if the overseas company had been
liquidated before the end of the accounting period.
The Commission’s challenges were therefore dismissed.
Comment
It is relatively unusual to see a tax decision of the CJEU which backs
the UK, rather than the Commission, but this decision does follow
the Advocate General’s opinion. However, the Court does not go as
far as the Advocate General who suggested that a review of the
“appropriateness” of the M&S decision was “both possible and
necessary” because the regime had resulted in “a virtually
inexhaustible source of legal disputes between taxpayers and the
member states’ tax administrations.”
The UK argued that the provisions do not make cross-border relief
conditional upon the non-resident subsidiary having been put into
liquidation before the end of the accounting period. It said that
evidence of an intention to wind up a loss-making subsidiary and
initiation of the liquidation process soon after the end of the
accounting period would be taken into account.
As a result of the decision, the UK’s cross border group relief rules
are likely to continue in their present very restrictive form. Groups
seeking to claim the relief therefore need to take quick action to
close down loss making overseas subsidiaries. The UK told the CJEU
that an intention to liquidate the subsidiary “soon after” the end of
the accounting period would be taken into account. It remains to be
seen how this will be interpreted in practice.
The CJEU said that the Commission had not shown that cross
border group relief would only be available if the subsidiary was
liquidated before the end of the accounting period in which the
losses arose. It said that under Section 119(4) CTA 2010 the
assessment as to whether the losses could be used by the subsidiary
must be made by reference to the situation ‘immediately after the
end’ of the accounting period. It said “It is thus clear from the
wording of that provision that it does not, on any view, impose any
requirement for the subsidiary concerned to be wound up before
the end of the accounting period in which the losses are sustained”.
Read the decision
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PM-Tax | Wednesday 11 February 2015
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PM-Tax | Cases
Cases (continued)
HMRC v National Exhibition Centre Limited [2015] UKUT 0023 (TCC)
FTT finding on the facts in card processing fee case upheld but UT agrees referral to CJEU on scope of
the financial services VAT exemption.
Before the FTT, the National Exhibition Centre (NEC) had been
successful in reclaiming the VAT it paid on the booking fees it charged
where customers purchased concert tickets by means of debit or
credit cards. NEC had paid VAT initially believing that the card
payment services constituted part of the single supply for events, but
succeeded in its reclaim on the basis that it was a separate and
distinct supply of card services which should be exempt.
As for the challenge on Edwards v Bairstow grounds, the UT made it
clear that it was not possible for the UT to exercise a fresh fact
finding enquiry. Instead, the UT had to focus on whether the
conclusion of the FTT was one that was not reasonably open for it
to make, which would only then amount to an error of law.
In determining whether the FTT was able to reach the conclusion
that it did, the UT considered all the evidence that was open to the
FTT. The UT said that the finding of the FTT was one which was
possible to be made. It also said that the FTT was correct to adopt
an approach which considered the true commercial reality of the
situation. Doing so followed the Court of Session’s decision of
Scottish Exhibition Centre and, whilst not binding, “it has long been
the position that the interpretation of tax legislation ought, so far
as possible, to follow the decisions of the cross-border court.”
HMRC did not challenge the FTT’s finding that the booking service
supplied by the NEC was for its own account and not as agent for
the event promoter. Instead HMRC claimed that the FTT asked itself
the wrong question in finding that the booking fees charged by the
NEC amounted to a “payment card processing service”, and secondly
that the FTT made an error of law under Edwards v Bairstow
principles because the conclusion was not one reasonably and
properly open to it.
HMRC’s appeal relating to the supply was dismissed. The FTT
agreed to refer to the CJEU the question of whether card
processing services fell within the financial services exemption.
The parties asked that if the UT dismissed HMRC’s appeal, the case
should be referred to the CJEU on the question of whether card
processing services were exempt from VAT pursuant to the
exemption for financial services.
Comment
The issue of whether the card processing services are within the
VAT exemption for financial services has also been referred to the
CJEU by the FTT in the recent case of Bookit. It is to be hoped that
the CJEU will provide some clarity on the issue.
The UT considered its jurisdiction, and confirmed that it could only
hear appeals relating to matters of law. The UT therefore dismissed
HMRC’s first ground of appeal, saying that it was clear from its
judgment that the FTT had considered the issue from the point of
view of the consumer, and that in asking itself the correct question
the UT had not made an error of law.
Read the decision
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PM-Tax | Wednesday 11 February 2015
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PM-Tax | Cases
Cases (continued)
PricewaterhouseCoopers LLP & Another v HMRC [2015] UKFTT 0007 (TC)
The UK’s block on the recovery of input VAT on business expenses is lawful in spite of the way it was
re-enacted in 1988 and a CJEU referral was refused.
PWC appealed against HMRC’s refusal to allow the repayment of
input tax incurred in relation to non-employee business
entertainment. PWC said the block on recovering input tax on
business entertainment in the UK has been unlawful since 1988.
PWC claimed that the effect of the unlawful extension to the input
tax block in 1988 was that the entire block became unlawful under
EU law in relation to all business expenses, i.e. not just those
relating to overseas customers. PWC claimed that it should be able
to reclaim input VAT on all business expenses and argued that a
reference to the CJEU was required to determine the issue.
When the Sixth VAT Directive (6VD) was introduced, it envisaged
that the EU Council would publish rules regarding the deductibility
of business expenses. Those rules were never introduced, but
Article 17(6), 6VD included a transitional provision allowing
member states to continue to use the rules relating to business
expenses that were in effect prior to the introduction of the 6VD.
Judge Barbara Mosedale dismissed PWC’s reliance on the Advocate
General’s opinion in Van Laarhoven. She said that any ambiguity in
the Advocate General’s opinion would not amount to a sufficient
reason for a referral to the CJEU.
Before 1988 the UK had rules blocking the reclaiming of VAT on
business expenses which included an exemption allowing input tax
recovery on business expenses relating to overseas customers. In
1988 (after the introduction of the 6VD, which was directly
effective) the existing rule was repealed and Article 2 of the Value
Added Tax (Special Provisions) (Amendment) Order 1988
contained an input tax block on the recovery of business
entertainment expenses which did not contain an exception for
entertaining overseas customers.
Judge Mosedale also found that there was no further case law
which could support PWC’s case. In fact, she agreed with HMRC
that another decision, Ampafrance, defeated PWC’s argument
directly. In that case a narrow block existing prior to the 6VD had
been repealed, and then a wider block enacted post-6VD. The FTT
said that Ampafrance is authority for a block introduced after the
6VD to be valid to the extent that it corresponds with a pre-6VD
block, even if the rest of the new law has no legal effect.
Given these findings, the FTT did not make a reference to the CJEU
and dismissed PWC’s appeal. Judge Mosedale was also not swayed
by PWC making clear their intention to appeal should their case
fail, stating that the test for being allowed to appeal is lower than
that for a reference.
The UK government accepted in Danfoss that the extension to the
block by removing the overseas customer exemption was unlawful,
and ultimately reversed the legislation. The government also made
refunds where input VAT had been incurred on supplies to
overseas customers.
Comment
As PWC made it clear that they would be appeal the decision if they
were unsuccessful, we have probably not heard the last of this case.
Read the decision
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PM-Tax | Wednesday 11 February 2015
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PM-Tax | Cases
Cases (continued)
HMRC v Astral Construction Limited [2015] UKUT 0021 (TCC)
Development of nursing home incorporating redundant church building was a zero-rated supply.
Astral supplied construction services relating to the development
of a nursing home on the site of and incorporating a redundant
church. The church building formed the main entrance and
reception area of the nursing home post-development, with new
2-storey ‘wings’ being added either side of the church, which were
collectively around six times the size of the church building.
The UT upheld the FTT’s decision, agreeing that the question of
whether the works were a conversion or enlargement/extension of
the church was a “question of fact, degree and impression”. The UT
therefore upheld the FTT’s decision that the “sheer scale” of the
development works meant that “as a matter of impression, size,
shape, function and character” the nursing home was “so vastly
different” from the existing church so as to preclude a finding that
it constituted a conversion or enlargement of the church.
Astral treated the supplies as zero-rated on the basis that they
were made in the course of the construction of a building designed
for use for a relevant residential purpose (i.e. as a nursing home).
HMRC disagreed; it decided that the works were not the
construction of a building but the extension or conversion of an
existing building which qualified as a special residential conversion
(under Item 1, Group 6, Schedule 7A VATA), such that the supplies
were eligible for the reduced VAT rate of 5%, but were not
zero-rated.
The UT also rejected HMRC’s contention that there must be a
construction of a completely new building (i.e. without
incorporating an existing building such as the church) in order to
qualify as a zero-rated “construction of a building” under Item 2 of
Group 5 of Schedule 5 to the VAT Act.
Comment
This case demonstrates that there is no exact measure of what will
constitute a ‘construction’ of a building for the purposes of the
relevant VAT legislation and what will be an ‘extension’ or
‘conversion’. It will be a matter of fact and degree and involve a
comparison of factors such as the size, function, character and
impression of the premises pre and post-development. The fact
that an original building has been retained and incorporated into
the structure of the post-development premises will not in itself
mean that the works are an extension or conversion as opposed to
a construction.
Astral’s appeal to the FTT was upheld, the FTT finding that the
nature and extent of the development works meant that the
nursing home was neither a conversion nor an extension of the
existing church. HMRC appealed to the UT.
Read the decision
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PM-Tax | Wednesday 11 February 2015
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PM-Tax | Cases
Cases (continued)
Biffa (Jersey) Ltd & Another v HMRC [2015] UKFTT 0010 (TC)
Costs awards follow the successful party in each appeal, even if two related appeals resulted in one
win for the taxpayer and one for HMRC.
Biffa (Jersey) Ltd (Jersey) took part in a scheme which failed before
the FTT. The scheme involved Jersey buying its own shares from
another group company, BHL for £200 million and then cancelling
those shares. A year later BHL bought 200 further shares in Jersey
for £214 million from another Biffa group company and again sold
the shares back to Jersey, but for £200 million.
Jersey claimed that HMRC should pay its costs on the basis that
Jersey had appealed against an assessment amounting to over £14
million and only paid £500,000, effectively succeeding in respect
of 95% of the tax at stake. BHL said HMRC should pay its costs as
its appeal had been succeeded in full.
HMRC claimed Jersey should pay 65% of its costs. It said that the
Biffa companies took part in the same scheme and therefore
should not be assessed on costs separately. HMRC also argued that
the arguments against each company were in the alternative, and
therefore, success in one meant that HMRC had defeated the
scheme. HMRC did reduce its costs claim however, to 65% on
account of dropping its claim against BHL only a few months
before the hearing.
BHL claimed that the £14 million difference between what it paid
and sold the shares for should be treated as interest under a
deemed loan and therefore an allowable deduction. HMRC denied
the deduction for BHL and assessed Jersey on the basis that the
£14 million deemed loan was income. Jersey and BHL appealed to
the FTT.
In an earlier decision the FTT found that Jersey was liable to
corporation tax on the loan. However, the parties had agreed that
the assessment could only be raised in relation to a small period of
time due to time limits. The taxable interest was therefore only
£500,000. HMRC did not succeed on an alternative argument
which would have meant the full amount was taxable. Shortly
before the original hearing HMRC said it would not contest BHL’s
appeal and the FTT therefore found for BHL in its appeal.
The FTT decided that Jersey was not entitled to costs for its appeal
and that costs should be awarded to HMRC as the FTT had ruled in
favour of HMRC and the only reason for the reduction in the tax
due was as a result of HMRC overlooking a time limit. The FTT said
that HMRC’s case against BHL was distinct from that against
Jersey. The FTT relied on the earlier FTT decision of Versteegh Ltd to
find that because the arguments against Jersey and BHL were not
made in the alternative, BHL was successful in its appeal and
should be awarded costs despite the scheme’s failure overall.
The FTT now had to deal with three applications. First, Jersey asked
the FTT to amend its decision to make clear that it was successful
in part, with the decision adjourned for the parties to agree figures.
The FTT refused, stating that this was not the case and that it had
not allowed an appeal in part, but instead gave a decision in
principle in HMRC’s favour. It made clear that the parties had
agreed between themselves that only £500,000 could be properly
assessed because the remaining interest had occurred in an earlier,
now protected, period.
The FTT then considered whether it should make a general costs
order “to reflect the overall justice of the case” in light of BHL and
HMRC being successful in related appeals. The FTT rejected
HMRC’s reduction of its costs to 65% as having no justification.
The FTT considered other ways to apportion responsibility for
costs, including by reference to the number of issues won or the
number of appeals won, but rejected them all. It decided to not
make a costs order that “depart[ed] from the straightforward
approach of ordering the unsuccessful party in each appeal to pay
the costs of the successful party, even where the two appeals are
connected.” The FTT said that the possibility of BHL’s costs being
more than HMRC’s was a litigation risk and one that HMRC could
have avoided by reviewing its case against BHL earlier than a few
months prior to the hearing date.
Comment
This interesting decision shows that the tribunal will not easily
depart from the principle that costs are awarded to the successful
party – even if multiple appeals relate to essentially the same
scheme. There is a risk that HMRC will lose out in this case as its
costs could well be much lower than BHL’s.
Read the decision
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PM-Tax | Wednesday 11 February 2015
15
PM-Tax | People
People
Tori Magill joins our Contentious Tax Team
We are very pleased to announce that Tori Magill has joined our Contentious Tax Team. Tori is a Director specialising in fraud and
avoidance investigations, with experience gained in HMRC’s highest profile investigation roles.
Tori is a former Group Leader in HMRC’s Specialist Investigations (SI) directorate, responsible for HMRC’s most complex fraud and
avoidance investigations and litigation.
Previously Tori was a Criminal Investigations Team Leader specialising in Organised Crime and Technical Taxes, and was HMRC’s policy
expert for HMRC’s Criminal Investigations and Civil Fraud Investigations for direct tax, indirect tax and Excise duties. She was also
responsible for the design and implementation of the Contractual Disclosure Facility for civil fraud investigations, and was the policy
owner of HMRC’s Offshore Disclosure facilities.
Prior to joining HMRC, Tori worked in a top 10 accounting firm where she lead their Tax Litigation and Dispute Resolution Team, and
headed up the firm’s Tax Transparency policy. Tori said;
“I am delighted to be joining what is currently the only Tax Team in the UK market that can offer clients the full spectrum of Contentious
Tax services. The renowned expertise of the individuals and the market-leading collective creates a formidable client service offering. The
team aims to be the firm of choice for all contentious tax issues, and I am very much looking forward to the challenge of being a part of
achieving that.”
Tori is the LexisNexis Litigation and Disputes Expert and her latest article will be published in Tax Journal this month (and will appear in
the next edition of PM-Tax). She tweets as @tori_magill.
Tori Magill
Tax Director
T: +44 (0)20 7490 6419
M: +44 (0)7825 692250
E: tori.magill@pinsentmasons.com
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PM-Tax | Wednesday 11 February 2015
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This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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