Tax Services

  • Share

Midweek Tax News


A weekly update on tax matters to 18 November 2014

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.

The G20 meeting in Brisbane last weekend committed to the completion of the BEPS project in 2015 and to improved transparency for tax rulings. This second commitment is mirrored by the proposal of the President of the European Commission to take forward automatic sharing of tax rulings within the EU. The final G20 communique also welcomed progress on the reform of patent box regimes and improved co-operation between tax authorities (both reported in recent editions of Midweek Tax News).

Shortly before he attended the G20 meeting, Pascal Saint-Amans, Director of the Center for Tax Policy and Administration at the OECD, spoke at EY's Asia Pacific Tax Symposium in Singapore. Among a broad range of discussion topics, he advised that the OECD expected the Country-by-Country Reporting and Transfer Pricing documentation requirements under BEPS Action 13 to be enforced in 2016 with the first reporting to be exchanged by tax administrations in 2017.

As confirmed by a subsequent strategy document, he noted that the OECD would, as part of their Strategy for Deepening Developing Country Engagement, be inviting more than 10 developing countries to join the BEPS project. The OECD would also be creating five regionally organised networks on tax policy for administration officials to co-ordinate dialogue. The regional networks are intended to carry forward areas of priority for developing countries such as tax incentives and the availability of transfer pricing comparability data.

For more details, see out international tax alert.

On 13 November, the Court of Justice of the European Union (CJEU) issued its decision in the case of Commission v UK (C112/14), finding that, by maintaining tax legislation concerning the attribution of capital gains to participators in non-resident companies, the UK was impeding the free movement of capital.

The judgment considers the rules in section 13 Taxation of Chargeable Gains Act 1992 under which UK resident participators of a non-UK resident company can be taxed at the point when the company disposes of assets and makes a gain. This section was amended in Finance Act 2013, with retroactive effect from April 2012, to include a purpose test and to become less wide-ranging. The present judgment looks at the section as it stood before these amendments, although the general comments made in the judgment about the operation of the section may be relevant to the revised legislation as well.

The CJEU held that the legislation might discourage UK residents from contributing their capital to non-resident close companies and impede such a company from attracting UK capital. Consequently, it constituted a restriction of the free movement of capital. Although combating tax evasion and tax avoidance may justify a restriction of the free movement of capital, the restriction must not go beyond what is necessary for achieving this. The CJEU found that the rules prior to the 2012 amendments affect real economic activity rather than just wholly artificial arrangements. Furthermore, there was no provision for the taxpayer to provide evidence of the commercial justification of the arrangements in question. As such, the CJEU found that the old section 13 went beyond what was necessary for achieving its objective.

The ruling potentially offers individuals, trusts and companies, which have paid tax under section 13, with an opportunity to review their position, whether the tax was paid under the old or new version of section 13. If in time, taxpayers should consider seeking to reclaim amounts paid.

The Commission has launched in-depth investigations to examine whether certain decisions by the tax authorities in Ireland, the Netherlands and Luxembourg comply with EU rules on State Aid. The Commission has now published the formal letter that was sent to the Dutch tax authorities in June articulating its position in that case.

As with the State Aid investigations relating to Ireland and Luxembourg, the Dutch letter centres on Advance Pricing Arrangements (APAs), where the Commission has stated it is examining whether the contested ruling complies with the arm's length principle and confers an advantage on the taxpayer.

At this stage, the Commission has not finally decided that there is State Aid, only that it is of the preliminary view that the measures may constitute State Aid and that it formally continues to examine these cases.

The Dutch government has responded with its view that the ruling in question is not State Aid since it is based on arm's length principles, in accordance with OECD guidelines.

No final decision is expected for some time.

For more details, see our international tax alert.

In the case of Fidex, the Upper Tribunal heard cross appeals brought by Fidex and by HMRC, finding for HMRC on both issues. In 2004, Fidex issued preference shares entitling the holder to 95% of the proceeds from some bonds it held. Under UK GAAP, the bonds continued to be recognised in the balance sheet of Fidex. However, Fidex converted to IFRS at the end of its 2004 accounting period which meant it had to derecognise 95% of the bonds from the beginning of 2005. It claimed a tax deduction equal to the amount derecognised on conversion to IFRS.

HMRC had not mentioned unallowable purpose in its closure notice but the First-tier Tribunal (FTT) had nonetheless admitted its arguments on this. On the basis of the Supreme Court decision in Tower MCashback, the Upper Tribunal decided that the FTT was entitled to allow HMRC to bring forward arguments on unallowable purpose. That the closure notice included the words “Further analysis may reveal additional grounds for supporting the conclusions I have reached” was found to be helpful to HMRC but not decisive.

The FTT had also found that Fidex had an unallowable purpose in 2004, but only for, at most, a ‘scintilla temporis’ of 2005. As the debit was claimed in 2005, a just and reasonable apportionment meant that, in practice, none of it should be disallowed. The Upper Tribunal decided that, on the facts, the FTT should have held that it was a main purpose of Fidex to hold the bonds to achieve a tax advantage for a definite time in 2005, not just a single moment. The Upper Tribunal concluded therefore that there was an unallowable purpose in 2005 and that the entire quantum of the debit related to that unallowable purpose. As a result, it held that all of the debit should be disallowed as attributable to an unallowable purpose.

The UK CFC rules provide a full or partial exemption for interest earned by offshore financing companies where certain conditions are met. Finance Act 2014 added an anti-avoidance rule that stops the exemption from applying where a main purpose of arrangements is to transfer existing finance income out of the UK.

HMRC has issued new guidance which sets out its view on the application of the anti-avoidance rule in Finance Act 2014 in light of recent developments. In particular, HMRC states that they have received a number of clearance applications where a refinancing transaction is being considered as a result of anticipated changes following the OECD’s Base Erosion and Profit Shifting (BEPS) project. It considers one particular common financing arrangement (called a Tower) that involves both a receivable and a payable amount in the UK. In the new guidance, HMRC states that where a group refinances a Tower arrangement to take advantage of the finance company exemption, the Finance Act 2014 anti-avoidance is likely to be triggered if a main purpose of the refinancing is due to a concern that future legislative changes might adversely affect the tax consequences of the transaction and consequently a UK receivable amount is taken out of UK tax.

Groups considering a refinance of their Tower arrangements should review the likely effect of the anti-avoidance rule in the light of this guidance from HMRC.

Office of Tax Simplification (OTS) suggests the abolition of the VAT default surcharge and other penalty improvements

The OTS has issued a report suggesting several improvements to the system of civil penalties for tax. The report includes recommendations that the people who consistently have no tax liability be given the opportunity to be removed from the self-assessment register. The requirement to submit a tax return to avoid a penalty (even when any tax liabilities are settled) should also be highlighted more clearly. In addition, the report calls for more consistency and transparency from HMRC on penalties, including through better training.

The report notes that there is a separate system of default surcharges for VAT. The OTS suggests that VAT should instead be included in the comprehensive penalty regime laid out in Finance Act 2009.

Revision of the regulations on interest distributions by authorised investment funds (AIFs) with property income

HMRC has announced its intention to amend the regulations on the tax treatment of AIFs. Under the current rules, a bond fund cannot pay an interest distribution where it receives property income. However, in recent years, some bond funds have invested in Real Estate Investment Trusts and Property AIFs. AIFs must treat distributions from these vehicles as property income. HMRC maintain that, under current rules, this prevents AIFs from making interest distributions.

The regulations will now be revised so that an AIF can still make an interest distribution where it receives property income but must subject the income to corporation tax. Where interest distributions that include property income have been made in the past, HMRC will not require that these should be unwound, although it continues to believe that the technical position is that they were incorrectly paid.

Fund managers will be pleased that the rules are being amended going forward and that HMRC is taking a pragmatic approach to previous distributions.

Draft FRS 104 – Interim Financial Reporting – released for comment

On 12 November 2014, the Financial Reporting Council (FRC) published “Exposure Draft, FRED 56: Draft FRS 104 - Interim Financial Reporting”. The Exposure Draft is intended to replace the Statement “Half-yearly financial reports” issued by the Accounting Standards Board (ASB) in 2007.

Draft FRS 104 applies to interim financial reports prepared by entities that apply FRS 102 to prepare annual financial statements. Entities applying other sets of accounting standards to prepare annual financial statements may also use Draft FRS 104 as a basis for the interim financial reports, provided that this is appropriate and not prohibited by law or regulation.

The consultation period on the draft standard closes on 12 January 2015 and the FRC expects to publish the final standard by the end of the first quarter of 2015. The interim reporting requirements are proposed to come into effect for interim periods commencing on or after 1 January 2015.

Aggregates levy credits in Northern Ireland

The Government has confirmed its plans to re-introduce the aggregates levy credit scheme (ALCS) in Northern Ireland, and will also be introducing a tax credit for aggregate commercially exploited in Northern Ireland following its importation from another EU Member State.

Aggregates levy is an environmental tax on the commercial exploitation in the UK of rock, sand and gravel. The ALCS, which originally ran from 1 April 2004 to 30 November 2010, gave an 80% tax credit for commercially exploited aggregate originating in Northern Ireland, in return for quarries meeting specified environmental standards. The European Commission investigated the ALCS after it was claimed that the scheme provided unlawful State Aid. The ALCS was suspended from 1 December 2010 pending the outcome of the Commission's investigation.

On 7 November 2014, the Commission published its decision, confirming that the ALCS was broadly in line with the prevailing State Aid rules. However, in response to the Commission's decision, HMRC has announced that legislation will be introduced to provide for an 80% aggregates levy credit for aggregate commercially exploited in Northern Ireland between 1 April 2004 and 30 November 2010 following its importation from another EU Member State.

The Government has confirmed that it is committed to reinstating the ALCS as soon as possible. However, this can only be done if the ALCS receives further approval from the Commission on whether it meets the latest State Aid rules, as there is currently a further State Aid investigation into the levy.

Our team of environmental tax specialists are able to advise on the full range of UK environmental taxes. For further details, please speak to your usual EY contact.

Review of employment status rules by the Office of Tax Simplification (OTS)

The OTS has published a number of key questions as part of its review of employment status with a view to gathering evidence of where the complexities lie in determining whether someone is employed or self-employed for tax purposes. We have already had broad-ranging discussions with the OTS with regard to employment status and the OTS has a positive view of our feedback to date. However, we will be responding formally in writing before the deadline of 31 December 2014. In the interim, if this is an area that impacts your business, please speak with your usual EY contact.

New State Pension and contracted-out defined benefit pension schemes

From 6 April 2016, contracting-out of the additional State Pension will end and the new State Pension will be introduced. The Department of Work and Pensions and HMRC have now published guidance that explains the impact of this change for employers, employees and trustees. The guidance is aimed specifically at the 2,500 private sector employers who offer an open contracted-out salary-related pension scheme. It explains what the changes are and what employers must do to prepare for the closure of the additional State Pension and the end of contracting-out for defined benefit pension schemes from April 2016.

Employers can supplement their own information with the additional guidance for employees when making changes to their salary-related pension scheme and preparing for the end of contracting-out. The guidance explains how the closure of the additional State Pension from April 2016 will affect those employees in contracted-out pension schemes. The guidance also explains how trustees with open, contracted-out defined benefit pension schemes must prepare for the closure of the additional State Pension.

The French Government introduces draft Second Amended Finance Bill for 2014

The draft bill, which will be discussed in Parliament over the next few weeks, contains a number of proposed tax reforms. These include the following proposals:

• French companies and permanent establishments will be able to form part of a French tax consolidation when they are 95% owned, directly or indirectly, by an entity subject to the equivalent of French corporate income tax in another EU or EEA country. The rules requiring that all consolidated entities have the same fiscal year are carried over from the current tax consolidation regime

• The dividend exemption for foreign Collective Investment Vehicles (CIVs) will only apply to CIVs in the EU or in a territory where France has a treaty that allows it to obtain information to show the CIV meets the conditions for the exemption

• There will be an extension of the reverse-charge mechanism for import VAT and a toughening of the rules on VAT fraud in the second-hand car and construction sectors

• Certain financial sector and regional taxes will be non-deductible for the purposes of corporate income tax, and

• A special regime will allow tax exemptions for certain international sports events

For more details, see our international tax alert.

Proposed changes to Japanese consumption tax in 2015

The rate of consumption tax in Japan had been expected to increase from 8% to 10% in October 2015, however, the Japanese Government has just confirmed within the last day that this tax rate increase will now be postponed. This is just one aspect of the proposed changes to Japanese consumption tax in 2015 as it is also anticipated that changes will be made to the place of supply rules for cross-border services.

Our international tax alert provides further details on the proposed changes.

Other international tax alerts

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

United States: Congress has returned after the mid-term elections for a “lame duck” session expected to consider extending expired tax provisions.

The Netherlands: The Government has announced changes to the innovation box regime to deal with transfers of intellectual property between permanent establishments and head offices.

China: The Ministry of Finance has announced accelerated fixed assets depreciation for various manufacturers and other industries.

Hong Kong and China: A new program has been launched improving mutual stock market access between Hong Kong and Shanghai, as well as related reforms to Chinese withholding tax.

India: The Central Board of Direct Taxes has issued internal guidelines to the Indian tax authority to improve customer service in line with its strategy to provide a non-adversarial regime.

Sri Lanka: The Budget 2015 statement includes a package of tax incentives, as well as a reduction in the current VAT rate to 11% and an exemption from tax for certain investment income.

Argentina: The tax authorities are examining foreign trade transactions where they claim that transfer pricing has been used to facilitate “foreign trade harmful planning”.

Panama: A tax amnesty program has been launched which ends on 31 December 2014 and is coupled with the introduction of new penalties for late paid tax.

Other publications

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.

G20 signals continuing support for tax transparency and the Base Erosion and Profit Shifting project

Email Chris Sanger

+ 44 20 7951 0150

European Court decides UK rules on taxing capital gains of non-resident companies are unlawful

Email Jane Scott

+ 44 1159 542 099

European Commission publishes its letter to the Netherlands on State Aid

Email Jelger Buitelaa

+ 44 20 795 15648

Upper Tribunal finds for HMRC on whether a company held bonds for an unallowable purpose

Email James Hannam

+ 44 20 7951 2686

HMRC issues additional guidance on refinancing a US hybrid arrangement

Email Fiona Thomson

+ 44 20 7951 3913

For other queries or comments please email

Back to the top

Contact us

Find your nearest Tax contact:

Connect with us

Stay connected with us through social media, email alerts or webcasts. Or download our EY Insights app for mobile devices.