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Midweek Tax News


A weekly update on tax matters to 3 March 2015

Midweek Tax News provides you with a succinct overview of the key tax developments that have occurred each week to allow you to stay up-to-date on tax issues that may have an impact on your business. If you would like to discuss an article in more detail, please speak to the relevant contact listed at the end of this issue or to your usual EY contact.

With the Chancellor of the Exchequer unveiling his 2015 Budget on 18 March, listen to Chris Sanger, Head of EY Tax Policy, and David Kilshaw, EY Private Client Services partner, as they discuss what to expect. They talk about their predictions, including possible hot topics and the likely content of the Finance Bill due to be published before the end of March. As this is the last Budget before this year's general election, they will also consider the potential process for the Budget measures.

Access the podcast for Flash or Windows Media Player.

The First-tier Tribunal decision in the Leekes case has found that, on the transfer of the whole of a loss making trade to another trading group company, losses in the trade transferred did not have to be streamed against profits of the transferred trade, if there is only one combined trade post-transfer. In the case in question, the acquiring company acquired a trade, together with associated brought forward losses, and combined that with its own trade, which HMRC agreed was the same trade for tax purposes. In certain circumstances, specific rules restrict the utilisation of tax losses transferred against profits of the activity transferred in (the streaming rules). HMRC felt that these specific rules did not apply as the whole trade was transferred, but it considered streaming was instead implied under the general provisions, which restricted relief to what the transferor would have been entitled to “had it continued to carry on the trade”. HMRC considered that this meant loss relief was limited to the profits the transferor would have made had it continued the transferred trade, but the taxpayer considered that this provision only defined the amount of available loss.

The Tribunal preferred the taxpayer's argument. It held that as a matter of commercial reality there was, post-transfer, only one trade, and that any tax legislation that required streaming of this combined trade would need to be explicitly stated rather than implied. Furthermore, it considered that the taxpayer's interpretation was more in line with commercial reality and gave rise to less need for the fictions that would have been necessary in order to trace the results of a trade that no longer existed separately.

This is an interesting decision which considers the legislation before the rewrite in 2010 but should still be considered in the context of the new legislation.

Following Royal Assent to the National Insurance Contributions Act 2015, the APN regime will be extended to national insurance contributions (NICs), taking effect from 12 April. This means that from this date, HMRC may start issuing APNs to taxpayers who have secured a tax advantage via NICs through arrangements which are notifiable under the disclosure of tax avoidance schemes regime or for which HMRC determines there to be a relevant judicial ruling that may deny the tax treatment adopted. Where a taxpayer receives an APN, they are obliged to pay the tax demanded even though their appeal may not have been determined.

The extension of APNs to NICs will be of particular relevance to those who have entered into any planning related to employment tax, including in particular, employee benefit trusts (EBTs) and employer financed retirement benefit schemes. We understand that HMRC has held off issuing APNs on such arrangements until the introduction of the APN extension to NICs.

The introduction of the extension of the APN regime follows shortly after the closure of the EBT settlement opportunity on 31 March 2015. In many cases, this has provided an opportunity to reach a settlement on historic EBT structures on favourable terms whilst providing certainty for the future. If individuals and companies have not yet explored the settlement parameters available under the settlement opportunity, there remains a short window of time to explore resolving all tax uncertainties before the APN extension takes effect.

A number of countries around the world have chosen not to wait for final outcomes from the OECD BEPS project before taking action and have implemented BEPS-driven legislation and regulation. At the same time, BEPS concerns have inspired changes in the administrative and enforcement practices of many countries' tax authorities.

A special edition of our publication, The latest on BEPS - 2014 in review, provides highlights of the OECD and country activity relating to the 15 BEPS Actions during 2014 and a look ahead to BEPS developments expected in 2015. An appendix provides links to further information on the activity highlighted in each country.

As part of the BEPS Action plan, the OECD is expected to issue final reports with revisions to the Transfer Pricing Guidelines by the end of 2015. At the same time, transfer pricing audit activity is expected to increase, particularly with respect to substance and the alignment of value drivers and profitability. Tax authorities may well begin to draw on some of the guidelines and proposals with respect to transfer pricing that were released by the OECD in 2014. Our global tax alert summarises the transfer pricing highlights of the past year along with changes coming in 2015 for 49 jurisdictions.

On 28 February 2015, the Finance Minister of India presented the Union Budget for 2015-16, which has proposed a phased reduction of the corporate tax rate from the current 30% to 25% over the next four years. Budget announcements included clarity on most issues regarding the taxation of indirect transfers of Indian assets and the deferral of implementation of general anti-avoidance rules (GAARs) by two years. It is intended that the GAARs should come into effect from 1 April 2017 as part of a comprehensive regime to deal with aggressive avoidance, base erosion and profit shifting.

Other proposals include abolishing the wealth tax with the revenue shortfall being made up by an additional surcharge of 2% on individuals and companies with income over INR 10mn. Among international tax changes, a foreign company will be treated as a resident of India if its place of effective management is in India at any point during the year from 2015-16 onwards. Also, interest paid by a branch of a foreign bank in India to its head office will be treated as income subject to Indian tax and withholding tax. Withholding tax under domestic law on royalties and fees for technical services is reduced from 25% to 10%. Furthermore, new rules will be introduced to prevent an Indian fund manager from causing an offshore fund to be taxable in India.

Finance Bill 2015, which was introduced as part of the Budget, contains a number of other tax proposals to amend the Indian Tax Laws. For more details and analysis of the Union Budget please see our publication Budget Connect+ 2015.

The First-tier Tribunal has referred the case of Bookit Ltd to the Court of Justice of the European Union (CJEU). This case concerns the VAT treatment of credit and debit card handling fees charged to customers making advance bookings for cinema tickets, specifically whether they qualify for VAT exemption under EU law.

In 2006, the same taxpayer successfully argued in the Court of Appeal that its card handling fees then being charged were exempt from VAT. In other cases involving very similar issues (such cases including Scottish Exhibition Centre Ltd, National Exhibition Centre Ltd and Way Ahead Group Ltd), the Tribunal has, until now, followed that decision.

However, in the present case, HMRC now maintains that subsequent case law of the CJEU gave rise to a real doubt as to the correctness of the original decision. As the Tribunal had reservations as to the scope of the exemption under EU law for ‘transactions concerning payments’, it decided that a reference should be made to the CJEU on this issue. The Upper Tribunal has since indicated that a similar reference will be made to the CJEU in the case of National Exhibition Centre Ltd.

Any taxpayers who charge a fee for handling payments by credit or debit card will be interested in the outcome of this litigation.

New rules announced on sale and leaseback in the UK

The Government has announced new anti-avoidance rules that came into effect on 26 February 2015 and will be included in a Finance Bill in due course. The rules deal with situations where a capital asset is acquired without the acquirer incurring qualifying capital or revenue expenditure. An example would be where another connected party pays for the asset on the acquirer's behalf. Where the asset is subsequently transferred to another party, the new rules prevent the transferee from claiming capital allowances on the asset.

The new rules have been brought forward to deal with a particular avoidance scheme of which HMRC has become aware. Capital allowances on gifts of assets are specifically excluded from the new rules which are likely to have little effect on most businesses.

Upper Tribunal (UT) decides against taxpayer on loan relationship planning

The UT has dismissed the appeals in Versteegh, agreeing with the First-tier Tribunal (FTT). The scheme involved three companies in the same group. A lending company advanced money to a borrower company but interest on the loan was not paid to the lender. Instead, the borrower issued shares with a value equal to the interest payable to a third company.

The UT decided that the value of the shares should be taxed as what would now be miscellaneous income in the hands of the share recipient, rather than as interest in the hands of the lender. The FTT had decided that the interest was deductible by the borrower as it was recognised in the accounts and this point was not appealed by HMRC.

In reaching its decision, the UT considered whether the loan and credit transaction rules should apply to tax the interest on the loan in the hands of the lender rather than the recipient of the shares. The FTT had decided this provision did not apply. The UT disagreed. In principle, it thought the loan and credit transaction rules did apply but the loan relationship priority rule prevented them from giving rise to any tax effects in the hands of the lender.

A second issue was whether the value of the shares could be income in the hands of the share recipient even though it had no legal right to the shares. The UT decided that, for the shares to be income, it was enough that the borrower had an obligation to issue them under its agreement with the lender.

Office of Tax Simplification (OTS) publishes report on employment status

The OTS has published its report on employment status, which looks into simplifying the sometimes difficult issue of how to determine whether a worker is employed or self-employed for tax purposes.

The report contains a number of recommendations. Specific improvements recommended by the OTS include:

• Better employment status guidance, in one place with more real-life examples

• Help for individuals and small businesses on what action a business should take, and the documentation it should have, when engaging a self-employed individual, to preclude or reduce the burden of HMRC enquiries

• Setting up an HMRC employment status helpline and allocating more resources to this area

For the longer term, OTS suggestions included considering a ‘safe harbour’ approach where an employer, which was open about its arrangements, relied on HMRC advice and a ‘de minimis’ period of time or level of payment before employment status needs to be considered. It also proposed exploring the feasibility of a statutory employment test and a withholding tax for payments to those whose tax status is unclear.

Labour Party plans to reduce tax relief for pension contributions

In a speech on 27 February 2015, the Leader of the Labour Party, Ed Miliband, announced that a Labour Government would cut university tuition fees from £9,000 to £6,000 per year from September 2016. This policy is to be funded by a number of changes to tax relief on pensions:

• The rate of pensions tax relief for those with annual incomes of over £150,000 would be reduced from 45% to 20%

• The annual allowance would be reduced from £40,000 to £30,000

• The lifetime allowance would be cut from £1.25m to £1m

Taxpayers may wish to consider how these proposals might affect the timing of pension contributions and their mix of provisions for retirement.

New rates and bands of air passenger duty (APD) effective from 1 April 2015

From 1 April 2015, new rates and bands of APD apply to flights originating in Northern Ireland and the rest of the UK. The number of APD destination bands will be reduced from four to two by merging the former bands B, C and D. This will result in a simpler two-tier system depending on the class of travel and whether the distance flown is lower than or exceeds 2,000 miles from London. From the same date, the higher rate of APD (which applies to certain luxury aircraft weighing above 20 tonnes and with fewer than 19 seats) will be set at six times the reduced rate (applicable to the lowest class of travel) and three times the standard rate (for scheduled premium class travel).

In further related changes, from 1 May 2015, children under 12 will be exempt from the reduced rate of APD. From 1 March 2016, this exemption will be extended to children under 16.

Regulations on merging venture capital trusts enacted

The Venture Capital Trust (Winding up and Mergers) (Tax) (Amendment) Regulations 2015 have been enacted to deal with situations where there is a return of capital in respect of new shares which correspond to old shares in the merging entities. Previously, this action could lead to a venture capital trust losing its approved status.

UK and Senegal agree double tax treaty

The UK and Senegal signed a double tax treaty on 26 February. The treaty will come into force once it has been ratified in both countries and diplomatic notes exchanged.

Singapore issues its budget for 2015

The Singapore budget released on 23 February includes a number of new and enhanced incentives for business to expand. For example, the mergers and acquisitions relief has been increased from 5% to 20% of the value of the target acquired, but the cap on the value of qualifying acquisitions has been reduced from S$100mn to S$20mn. Further tax concessions for real estate investment, insurance and the maritime sector have been enhanced or extended. However, the approved headquarters incentive is ending on 1 October 2015.

For more details, please see our global tax alert.

South African Minister of Finance delivers his budget speech

In his budget speech of 25 February, Nhlanhla Nene, South Africa's Minister of Finance, proposed measures to deal with the “erosion of the tax base, profit shifting and illicit money flows”. The proposals, which are not yet published in detail, include improvements to transfer pricing documentation and reporting. Having transfer pricing documentation in place is currently advisable rather than compulsory, but this may change.

The controlled foreign company rules are to be tightened with a more stringent control test and the inclusion of sales of goods diverted from a connected South African resident. South Africa is also planning to introduce withholding tax on interest from 1 March 2015 and on service fees from 1 January 2016. Some further specifics on these developments have been announced.

Please see our global tax alert for more details.

Other Global Tax Alerts

Please see links to a selection of our tax alerts in respect of the following developments. Additional articles are available in our global tax alert library.

Germany: The EU Advocate General has opined that German exit taxation payable in instalments when assets are transferred to a foreign permanent establishment is legal under EU law. The final decision in this case may provide guidance with respect to the length of payment periods in general with regard to exit taxation.

Venezuela: The Government has enacted tax reforms that expand the scope of taxable employment income and allow the authorities a longer period to assess and collect tax.

Nigeria: New regulations have reduced the withholding tax to be deducted at source for all aspects of building, construction, and related activities from the previous rate of 5% to 2.5%.

Ecuador: Tax reforms have been enacted which include limits on the deductibility of certain expenses and the taxation of share transfers.

Czech Republic: Individuals are now required to submit a notification of tax exempt income exceeding CZK 5mn received after 1 January 2015 to the tax authorities.

Brazil: The Government has increased the general social contributions on gross revenues (effectively import duty) from 9.25% to 11.75% with special rates for certain categories of goods.

Other publications

Indirect tax in 2015: A review of global indirect tax developments and issues

Our latest global report, Indirect tax in 2015, is our sixth annual round-up of developments in VAT, goods and services tax (GST), excise duties, customs duties and environmental taxes around the world. We present changes, covering more than 100 jurisdictions, which have either been introduced in recent months or are expected in 2015 and beyond. Four summary maps are also included to provide a ‘snapshot’ of where the changes are taking place.

Please speak to your usual EY contact, or email us at, if you would like to receive a copy of our regular indirect tax newsletter, or information about our other publications.

Further information

If you would like to discuss any of the articles in this week's edition of Midweek Tax News, please contact the individuals listed below, Claire Hooper (+ 44 20 7951 2486), or your usual EY contact.

EY podcast on what to expect in the Budget

Email Chris Sanger

+ 44 20 7951 0150

First-tier Tribunal rules on availability of losses on an intra-group transfer of trade

Email Andrew Drysch

+ 44 20 7951 7076

Accelerated payment notice regime extended to national insurance

Email Jim Wilson

+ 44 20 7951 5912

Base erosion and profit shifting: A review

Email Claire Hooper

+ 44 20 7951 2486

India announces Union Budget for 2015-2016

Email Tejas Mody

+ 44 20 7951 6007

European Court referral on VAT liability of credit and debit card handling fees

Email Andrew Bailey

+ 44 20 7951 8565

For other queries or comments please email

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