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Midweek Tax News


A weekly update on tax matters to 29 July 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 do speak to the relevant contact listed at the end of this issue or to your usual EY contact.

On 24 July, the Court of Appeal released its judgment in the case of Airtours Holidays Transport Ltd concerning the recovery of VAT on professional fees relating to an independent financial appraisal of the taxpayer's business. The First-tier Tribunal had held that the taxpayer was the recipient of the services and, therefore, was entitled to deduct the VAT incurred on related costs. However, the Upper Tribunal reversed this decision, holding that the services were supplied to the financial institutions to whom the taxpayer was indebted (and not the taxpayer itself), with the result that the taxpayer was not entitled to recover the VAT. The Court of Appeal has now dismissed the taxpayer's appeal (by a 2:1 majority), holding that the taxpayer was not entitled to recover the VAT incurred on related costs. Our tax alert provides more detail on the judgment and its implications.

While this case relates specifically to independent business review costs, there is a risk that HMRC could seek to apply this judgment more widely to VAT recovery on acquisition costs. The judgment demonstrates the importance of drafting when agreeing engagement letters as well as the need to give due consideration to the contracting parties and the services that will be supplied. Any taxpayers who incur VAT on transaction/acquisition costs may wish to consider the VAT position up front.

As covered in Midweek Tax News to 15 July, HMRC has released a list of Disclosure of Tax Avoidance Schemes (DOTAS) reference numbers for which it may issue accelerated payment notices (APNs) under the new provisions which came into effect with the granting of Royal Assent to Finance Bill 2014. Our tax alert has further details.

We understand the following with regard to HMRC's approach:

A workflow governance panel has been established to oversee the process of issuing APNs and follower notices for all disputes cases no matter where within HMRC those are being handled.

HMRC's expectation is that a small number of APNs will be issued in July/August, building up to a larger number issued in September and each of the following months so as to divide the issue of notices fairly evenly over the remaining period to March 2016.

HMRC has indicated that it will be providing advance notice to recipients of APNs.

HMRC has put in place a dedicated helpline number with a team responsible for dealing with APN queries and/or quickly identifying and passing those queries on to the HMRC team responsible for the enquiries or dispute involved.

HMRC has confirmed that the fact that there are either settlement discussions or litigation hearings pending or imminent will not delay the issue of APNs and is not being used as a relevant criterion in determining the sequence in which APNs are issued. Furthermore, where an APN is issued HMRC will still be interested in having settlement discussions in appropriate cases.

Taxpayers will want to consider the potential impact of the above and whether to seek resolution of open issues and/or prepare for payment demands for disputed tax.

In Hancock & Anor, the First-tier Tribunal has considered the interpretation of the specific rules in section 116 TCGA 1992 on the reorganisation of securities involving capital gains tax exempt qualifying corporate bonds (QCBs).

The taxpayers sold a company in return for loan notes with an embedded currency option (this meant that the loan notes were not QCBs). Similar non-QCB loan notes were subsequently issued as additional purchase consideration. The currency option was removed from these later notes (such that those loan notes became QCBs). Both tranches were then exchanged for new loan notes the terms of which meant they were QCBs. Finally these new loan notes were redeemed.

It was accepted that the removal of the currency option meant that a capital gain would accrue on the ultimate redemption of that proportion of the loan notes. However, the taxpayers argued that the special rules for reorganisations involving QCBs did not apply to the exchange for new loan notes, with the consequence that the gain on the loan notes issued at the time of the original sale was rolled over into an exempt QCB which was subsequently redeemed tax free. This was on the basis that the provisions do not apply where the original assets subject to the reorganisation included a QCB, in this case the loan notes issued as further purchase consideration.

In finding for the taxpayers, the Tribunal held that on the facts and on the words of section 116 there was one conversion of QCBs and non QCBs into a new class of QCBs. While the Tribunal accepted that Parliament cannot have intended to allow an element of the conversion of securities to escape taxation, it found that this was the effect of the clear words of the operative provision. No purposive construction could fill the gap created by the drafting of that provision even if the transactions were entered into for tax avoidance purposes to exploit an anomaly in the application of those rules.

HM Treasury and HMRC have issued a consultation on draft legislation to implement changes to the liability to national insurance contributions (NICs) for share based reward earned by internationally mobile employees (IMEs).

Currently, the NICs legislation provides that the full, un-apportioned amount, of share based reward is treated as earnings and subject to NICs if the employee is within the charge to NICs at the time an income tax charge arises, effectively an ‘all or nothing charge’. The proposed draft law (which follows recommendations from the Office of Tax Simplification review of unapproved employee shares) extends the earnings exemption for NICs for periods when the employee was outside the scope of UK domestic NICs law, or subject to social security in another jurisdiction. In addition the share based reward is treated as having been earned over the same period as that which applies for income tax and as recently introduced in Finance Act 2014. If implemented as proposed, these changes will take effect for all transactions on or after 6 April 2015.

The closing date for comments is 16 October 2014.

Canada and UK sign new protocol to tax treaty

As reported last week, on 21 July, the Canadian and UK Governments signed a protocol to amend the tax treaty entered into between the two countries. The protocol includes a number of important changes, notably a withholding tax exemption (similar to that in Canadian domestic law) for interest payments in respect of persons dealing at arm's length. Our international tax alert provides further details regarding the main revisions.

Pension flexibility

On 21 July, the Government published its response to the consultation Freedom and choice in pensions issued on 19 March 2014. That consultation took forward the Budget announcement to provide greater flexibility for individuals with defined contribution (DC) pension savings. From April 2015, individuals will be entitled to withdraw cash from their DC fund, subject to paying income tax at their marginal rate on the withdrawals above the 25% cap, while still being able to opt for an annuity if required.

The consultation response and the accompanying ministerial statement provide details of the right to independent advice and the ability for individuals in private sector defined benefit schemes and funded public service defined benefit schemes to transfer into DC pension schemes before retirement so as to benefit from the new rules.

There will be amendments to the tax rules to allow providers to develop new retirement income products. There will also be anti-avoidance rules to prevent earnings being diverted into pensions, followed by an immediate withdrawal with 25% being tax-free. Finally, the Government will review the 55% tax charge on pension savings in a drawdown account at death.

Oil and gas consultation: New cluster area allowance

The Government has published a consultation paper on its proposal for a new cluster area allowance. The aim is to support investment in ultra-high pressure, high temperature oil and gas projects and to encourage exploration in surrounding areas (or 'clusters'). HM Treasury will be holding a series of working groups over the summer with commercial, exploration, tax and finance experts to discuss technical issues raised in the consultation and will publish a summary of responses to the consultation later in the year.

Where appropriate, legislation will be included in Finance Bill 2015. The closing date for comments is 30 September 2014.

Scottish land and buildings transaction tax

We have responded to the Scottish Government's consultation which sought views on draft subordinate legislation in respect of land and buildings transaction tax. This tax is designed to replace UK stamp duty land tax in Scotland and it is expected that it will apply to land transactions taking place on or after 1 April 2015.

The approach of the Scottish Government is to charge the new tax on licences to occupy retail property. This, therefore, potentially imposes an additional cost on a licence granted over property in Scotland, compared to a licence granted over a similar property in England. Amongst other points, in our response we note that there is a risk that making such licences taxable puts Scotland at a competitive disadvantage compared to the rest of the UK.

We have also made a suggestion to reduce the proposed level of the 'prescribed minimum amount' of taxation which will apply to claims for multiple dwellings relief in order to deliver a greater benefit for the affordable rental sector.

Consultation on annual tax on enveloped dwellings (ATED): Reducing the administrative burden

HMRC has published a consultation exploring ways to simplify compliance with ATED. ATED is charged on a company, partnership (with a corporate member) or collective investment scheme that owns UK residential property valued at more than £2mn. At Budget 2014, the Chancellor announced that the regime was to be extended to properties worth more than £1mn from April 2015 and to properties with a value greater than £500,000 from April 2016.

At present, a return for each property which a business owns must be completed and submitted by 30 April in the chargeable period (which runs from 1 April to 31 March). Unless relief is claimed in the return, tax is due and payable on 30 April. Further returns must be submitted if there is any change to the position during the period.

HMRC is consulting on how best to simplify this process and is exploring two options. The first, would allow those claiming the same relief for more than one property to submit a single return in respect of those properties to confirm their continued entitlement to a relief that reduces their ATED liability to nil. The second would enable those who are entitled to claim a relief which reduces their ATED liability to nil to apply to HMRC for 'exempt status'.

The closing date for responses to the consultation is 16 September 2014.

Contractor loan schemes settlement opportunity

HMRC has announced a new settlement opportunity in respect of schemes which involved individuals signing an employment contract with an offshore company and receiving a large proportion of income in the form of a loan. Users will have until 9 January 2015 to take up the settlement opportunity.

PAYE changes

HMRC has published draft legislation which proposes to make a number of changes to the PAYE regulations including permitting HMRC to delay the issue of PAYE codes to employees. However, the timing of the issue of PAYE codes to employers will not be changed. Our tax alert considers the implications of these changes.

Separately, HMRC has published two draft statutory instruments relating to the collection of debt using the tax code also known as ‘coding out’. The draft statutory instruments give effect to measures which, in summary, increase the debt limit from £3,000 to £17,000 via a graduated scale, and extend the 50% overriding coding out limit to all tax codes.

Oversea leasing rules/relevance of previous legislation in considering ‘rewritten’ Act

The Court of Appeal is scheduled to hand down its judgement today (30 July) in the case of Lloyds TSB Equipment Leasing (No 1) Ltd. This is an appeal against the decision of the Upper Tribunal which held that the taxpayer was entitled to 25% writing-down allowances under the Capital Allowance Act 2001 in respect of its purchase of two ships having regard to the fact that the ships were ultimately leased to non-UK resident lessees.

The First-tier Tribunal and Upper Tribunal in this case both considered an interesting point of statutory construction. They considered that it was legitimate to have regard to the corresponding provisions in the Capital Allowances Act 1990, particularly as there was an apparent absurdity that appeared to have arisen from the Tax Law Re-write project, and where (as the parties agreed was the case) there was no intention to change the law. It will be interesting to see if the Court of Appeal addresses this issue in its judgement.

US Senate Finance Committee hearing

The US Senate Finance Committee hearing on 22 July focused on international tax issues including discussion of inversions and the OECD Base Erosion and Profit Shifting (BEPS) initiatives. Robert Stack (US Treasury Deputy Assistant Secretary for International Tax Affairs) stressed the need for US to directly address the potential loss of federal tax revenues from corporate inversion transactions. In the wider tax reform context, Mr Stack suggested that the US should reform its business tax system by reducing the rate and broadening the base. He also noted a number of other areas that the US should look at, including a minimum tax on foreign earnings; a cap on interest deductibility; and the deduction of interest expense of US multinationals related to deferred foreign subsidiary income and hybrid arrangements.

In respect of the OECD BEPS Action Plan, Mr Stack explained that active participation by the US is crucial to protecting its own tax base from stripping by multinational companies, much of which occurs as a result of exploiting differences in national regimes. He reiterated the US commitment to the arm's length standard and to profits being attributable to the place of economic activity – that is, where the assets, functions, and risks of the multinational are located. He also advised that the US would continue to argue for a limitation on benefits provision as a solution to protect against treaty shopping.

Spanish Government proposes amendments to the ETVE and participation exemption regimes

A recently published draft bill includes proposed significant changes to the Spanish tax regime for foreign securities holding companies (the ETVE regime). The draft bill also contains substantial amendments to the participation exemption regime. It seems likely that there will also be amendments extending the scope of the Spanish controlled foreign companies regime

These amendments are intended to introduce more flexibility to the ETVE regime and align it with the OECD BEPS project.

French Parliament approves amended Finance Bill and Security Financing Bill

The French Parliament has approved the Amended Finance Bill and the draft Amended Social Security Financing Bill for 2014. Although the most significant tax cuts announced in April as part of a so-called “solidarity pact” are still to be included in future tax legislation, these Bills include some tax and social security provisions that may affect corporations.

The provisions are largely unchanged from the initial draft but additional provisions have been included during parliamentary debates, including an extension to the scope of transfer pricing rules to include transactions with any entity in a listed non-cooperative state or territory regardless of whether the latter entity is related to the French taxpayer.

The Bills are now final subject to a review by the Constitutional Council of France.

Our international tax alert provides further details.

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.

France: The Senate has approved the Intergovernmental Agreement entered into between the US and France to implement the US Foreign Account Tax Compliance Act (FATCA).

Pakistan: We summarise some of the key provisions in the Finance Act 2014 which became effective for taxable years beginning on or after 1 July 2014.

India: We summarise some of the key direct tax provisions of the Finance Bill 2014 which are likely to be of interest to foreign investors.

Albania: The Ministry of Finance recently issued an administrative instruction on the implementation of the new transfer pricing legislation introduced in June 2014.

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.

VAT recovery on independent business review costs

Email Fiona Campbell

+44 20 7806 9022

Follower notices and accelerated tax payments

Email Geoff Lloyd

+ 44 20 7951 8736

Reorganisation of qualifying corporate bonds

Email Tom Passingham

+ 44 20 7951 2846

Internationally mobile employees and earnings related securities: Proposed NIC change

Email Steve Hickson

+ 44 20 7951 1167

For other queries or comments please email

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