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Midweek Tax News


A weekly update on tax matters to 28 July 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.

The Court of Appeal has overturned the Upper Tribunal decision in the Volkswagen Financial Services case. In doing so, the Court has disagreed with HMRC's longstanding policy that overheads relating to HP transactions are purely cost components of the exempt supply of credit, such that no residual input tax should be recoverable.

In reaching its decision, the Court of Appeal concluded that in order to operate, the taxpayer provided a service to customers who wished to purchase their vehicles on HP. To provide that service, the taxpayer had to make supplies both of the vehicles and of the finance required for their purchase. Neither could exist without the other. The Court of Appeal considered that once it is conceded that the taxable supply (motor vehicles) is part of the economic activities of the taxable person as a whole, the use of the overheads to fund that business is sufficient to establish a direct and immediate link with all the relevant supplies. Accordingly, the Court of Appeal held that nil recovery of VAT on overhead costs was unsustainable and refused a reference to the Court of Justice of the European Union on this point.

The Court of Appeal further held that although HMRC had challenged the taxpayer's proposed 50% attribution of input VAT as arbitrary, it had failed to put forward an alternative fair and reasonable methodology. On this basis, having rejected HMRC's point of principle that no residual input tax should be recoverable, the Court of Appeal held that the First-tier Tribunal had no alternative but to endorse the partial exemption special method proposed by the taxpayer and that its decision disclosed no error of law.

Any HP businesses, or businesses that supply goods on similar terms, may wish to review their existing partial exemption methods to ensure that they provide for a ‘fair and reasonable’ apportionment of residual input tax to taxable supplies. Affected businesses might want to challenge any existing HMRC assessments and may also be in a position to submit retrospective claims if they have not already done so.

The Court of Appeal has given its decision in favour of HMRC in the appeals by Reed Employment plc from the decision of the Upper Tribunal that payments made to employees under arrangements relating to travel expenses were taxable earnings and hence liable for PAYE and national insurance contributions.

The companies involved in the appeal had supplied temporary workers to customers' sites and engaged these workers directly as employees, paying them for each separate assignment. Arrangements were set up whereby their taxable salary was reduced and employees received tax-free expenses for travel and subsistence. HMRC initially agreed that these amounts could be paid tax-free, but after some years and further investigation, it concluded that the arrangement was ineffective.

The taxpayer argued that the payments were made to reimburse the employees' travel expenses in addition to paying their wages. However, HMRC contended that a single global payment was made, including the payment for travel expenses, as part of the employees' overall wages.

The Court of Appeal commented that the starting point is the contractual terms on which the employees were engaged and that this had received only passing mention in the decisions of the First-tier and Upper Tribunals. In addition, the Court found that example payslips adduced as evidence showed very clearly that the employees were paid by reference to their hourly rate multiplied by the number of hours worked. This was held to come “nowhere near showing that the employee had agreed to a reduced wage plus a tax free travel allowance”.Therefore, the appeal was unanimously dismissed.

This decision can be seen in the context of the Government's recently published consultations on Employment Intermediaries and on Tax Relief for Travel and Subsistence, as well as its policy to ensure a level playing field for tax in the temporary labour market.

As we reported in our special alert last Wednesday, HMRC has published a consultation document on a new approach for its engagement with large businesses. The consultation covers three separate strands:

  A requirement for large businesses to publish their tax strategy accompanied by a requirement that it must be owned by a named executive member of the board

  A voluntary Code of Practice on Taxation setting out the standards HMRC applies in its risk assessment and inviting businesses to adopt the same standards. This measure will not apply to banks which already have their own code of practice.

  A series of ‘special measures’ intended for large businesses that represent a significant risk to the Exchequer

Broadly, the proposals are meant to cover those businesses administered by HMRC's Large Business Directorate. One of the consultation questions is whether the threshold for companies to be within the new rules should follow that for the Senior Accounting Officer (SAO) requirement.

The proposal for businesses to publish their tax strategy covers not only attitude to tax risk but also a more granular disclosure of whether the group has a target effective tax rate, what this is, and what measures the business is taking to maintain or reach this target. This is an increased level of transparency and, unlike the proposed Code of Practice, it is mandatory for all large businesses. Although the Code is voluntary, businesses that sign it may wish to disclose that they have done so as a way of mitigating shareholder concerns about tax risk.

Our tax alerts Corporate Governance Code meets Tax Code of Practice and Improving large business compliance: Engaging with HMRC, which were distributed last Wednesday, have more details.

These proposals are unrelated to the measures in the consultation document Strengthening Sanctions for Tax Avoidance discussed below. The deadline for comments is 14 October 2015.

Consultation on strengthening sanctions for tax avoidance published

HMRC has released a consultation document on Strengthening Sanctions for Tax Avoidance which contains three new proposals to deal with persistent tax avoidance: a serial avoiders' regime; new penalties in respect of the general anti-abuse rule (GAAR); and a new threshold test to enter the promoters of tax avoidance schemes (POTAS) regime.

Under the serial avoiders' regime, a taxpayer who is party to a defeated scheme will be issued with a warning notice which advises of certain additional consequences of entering into further avoidance schemes that would apply for a period of, say, five years. Where an avoidance scheme is defeated in the warning period, HMRC would charge a surcharge. Avoiders might also be publicly named and denied access to certain statutory tax reliefs for a five-year period

Under the GAAR proposals, a penalty would be triggered where a taxpayer submitted a return, claim or other document that included a tax advantage arising from abusive tax arrangements. A penalty of 60% of the tax counteracted under the GAAR is proposed. HMRC intends to publish draft legislation for this measure at the Autumn Statement 2015 and is also considering further strengthening of the GAAR. This could include allowing a GAAR Advisory Panel opinion to enable counteraction of the same arrangement by other users.

Finally, HMRC proposes a new threshold condition under which promoters who have marketed multiple tax avoidance schemes which have been defeated will be entered into the POTAS regime.

The measures in this consultation, dealing with aggressive avoidance, are separate from the three consultations issued earlier this month which cover offshore tax evasion and the facilitation of evasion.

The deadline for responses to the consultation is 14 October 2015.

Simplification of the tax and national insurance contribution (NIC) treatment of termination payments

HMRC has published a consultation on reforming the tax and NIC treatment of termination payments. This follows the review of termination payments by the Office of Tax Simplification (OTS) in July 2014.

The OTS concluded that the system is fraught with uncertainty arising from employers and employees being unclear as to the applicability of the £30,000 exemption and the difference between contractual and non-contractual payments. Suggestions for reform included removing the distinction between contractual and non-contractual termination payments and aligning the tax and NIC treatment. It also suggested existing exemptions should be reviewed, with consideration given to removing some or all of these.

The options in the consultation include the removal of the blanket £30,000 exemption and its replacement with a new exemption which increases proportionately with the number of years of service the employee has completed. The availability of any tax relief could be limited to termination payments made in connection with redundancy as defined in the Employment Rights Act 1996 which would include voluntary redundancy.

With regard to existing exemptions which remove the liability to income tax, the Government intends to retain the exemption for injury or disability and for those payments made to the armed forces. The current exemption for foreign service may be removed but, if this happens, the territorial limits which apply to payments of employment income will be extended to termination payments.

The deadline for comments is 16 October 2015.

Government plans to extend data gathering powers to deal with the hidden economy

To help tackle the hidden economy, the Government has announced its intention, through legislation, to extend access to two types of data. These changes will apply to data held by electronic payment providers and business intermediaries. To this end, HMRC has launched a consultation on gathering data from these entities and seeks views on the scope of the changes; the best approach to legislating for them; and ways to minimise any costs for businesses to comply with the new requirements.

Electronic payment providers are businesses that handle monetary transactions. Electronic payments extend beyond those made through credit and debit cards and now encompass the increasing number of transactions executed on line. Business intermediaries take many forms. For example, they might allow customers to make orders, purchases or reservations, relating to goods, services or digital content. Again, these businesses increasingly operate on digital platforms.

The deadline for comments is 14 October 2015.

Proposed changes to partnership legislation for private equity investments

HM Treasury has published a consultation amending the Limited Partnership Act 1907 to more effectively accommodate the use of limited partnerships for private equity and venture capital investments. This follows the Government's announcement at Budget 2013 that it would consult on the changes needed to UK limited partnership legislation to achieve this aim.

The proposed amendments will apply to a UK limited partnership which is a collective investment scheme, as defined in the Financial Services and Markets Act 2000, and which exists under a written partnership agreement. The amendments cover registration issues and on-going filing and notification requirements; the role, function and rights of limited partners; and the obligations of, and restrictions on, limited partners in respect of capital.

The deadline for comments is 5 October 2015.

Recovery of VAT relating to foreign branches

HMRC has confirmed that the implementation of a Budget 2015 measure concerned with the recovery of VAT relating to foreign branches will be delayed.

At Budget 2015, a new measure was announced which will mean that supplies made by foreign branches will no longer be taken into account when calculating how much VAT incurred on overhead costs can be deducted by partly exempt businesses in the UK. This measure, therefore, seeks to restrict the ability of UK partly exempt businesses to recover VAT on overhead costs used to support foreign branches. It was intended that the new rules would have effect for partial exemption tax years beginning on or after 1 August 2015. HMRC subsequently published, for external comment, draft legislation in relation to this measure. Comments on the draft legislation were invited by 10 June 2015.

HMRC has now confirmed that the legislation will not be implemented to the original timetable commencing in August 2015. This follows concerns expressed by respondents to the consultation that the legislation as drafted may have ‘unintended consequences’. HMRC is reviewing the current draft and will make a further announcement once this review has been completed.

This measure will, in particular, affect financial institutions such as banks and insurers with establishments both within and outside the UK.

Reinstatement of certain aggregates levy exemptions

On 23 July, HMRC issued Revenue & Customs Brief 11/2015 concerning the reinstatement of certain aggregates levy exemptions and the repayment of levy paid since 1 April 2014.

The HMRC Brief confirms that the legislation to reinstate most of the exemptions from aggregates levy, which were suspended on 1 April 2014, was included in the summer Finance Bill. This follows the European Commission's decision in March 2015 that the aggregates levy regime and all of the exemptions (with the exception of part of the shale exemption) were lawful.

The HMRC Brief also sets out the steps businesses need to take to reclaim the tax they have paid. The lawful exemptions will be reinstated with effect from the day they were suspended, so that businesses can reclaim any levy paid since 1 April 2014 on the materials covered by the exemptions being reinstated. Claims for repayment of tax can be made from 1 August 2015.

Any businesses which have paid the levy on materials covered by a suspended exemption, which was subsequently found by the Commission to be lawful, will be able to claim a refund. Businesses which are no longer required to be registered for the levy following the reinstatement of an exemption will be able to deregister.

Australian Taxation Office (ATO) issues new guidance on corporate tax governance and advance pricing agreements (APAs)

The ATO has released a new tax risk management and governance guide making explicit the ATO's expectations for tax corporate governance as well as emphasising the importance of the involvement of the board of directors in managing tax risk. This has some similarities to HMRC's consultation on large business compliance reported above.

Corporate governance and associated controls are a factor in the ATO's risk rating of taxpayers, and are considered in the context of compliance activities relating to taxpayers. In this regard, the ATO's guide requires corporate taxpayers and boards to actively manage tax risk and assure themselves they have robust processes in place.

Please see our global tax alert for more details.

The ATO has also released revised policies and procedures for applying for APAs. It provides further clarity on the ATO's administrative approach and the necessary steps for an APA application to be accepted. The ATO has also reiterated that APA teams will be applying the ‘whole of tax code’ principle to APA applications, including collateral issues, and that it has the expectation that corporate profits will reflect the true economic contribution made by an Australian enterprise.

The revised guidance sends a strong signal that the ATO wants to encourage taxpayers to pursue APAs. However, it makes it clear that an APA is not appropriate for all taxpayers and that there will be a greater level of ATO due diligence than before.

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.

Spain: The Spanish Government has reduced income tax rates by up to 1% from the middle of the tax year, with further reductions from 2016.

Ireland: The Minister for Finance has launched a consultation on the tax treatment of travel and subsistence expenses.

China: The State Administration of Taxation has issued guidance on cost sharing agreements.

Hong Kong: A new law has been enacted which will enable private equity funds to invest in overseas private companies without exposure to tax in Hong Kong.

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.

Court of Appeal rules on VAT recovery in relation to hire-purchase supplies

Email Jamie Ratcliffe

+ 44 121 535 2255

Court of Appeal dismisses planning around salary sacrifice

Email Nigel Duffey

+ 44 20 7951 9586

HMRC launches consultation on tax compliance for large businesses

Email Mandy Pachol

+ 44 20 7951 9586

For other queries or comments please email

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