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A weekly update on tax matters to 15 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.

Yesterday, 15 July, HMRC released a list of approximately 1200 of the DOTAS SRNs for which it may issue accelerated payment notices under its new powers expected to become operative later this week or early next week. Starting in August 2014, HMRC will phase the issuing of notices to current users over approximately 20 months.

This means that those taxpayers who have implemented schemes referenced in the list who have open enquiries or appeals for the relevant years may shortly receive a letter from HMRC seeking payment of the disputed tax. Taxpayers who have implemented a disclosed scheme which is included on this list may wish to consider what action, if any, they might wish to take in advance of receiving such a letter.

Over the last week, follower notices and accelerated payment notices have been receiving considerable press attention, including coverage of HMRC's release of a list of DOTAS SRNs (for which see the article above). As a reminder, EY's Tax Controversy and Risk Management team is hosting a web seminar on Wednesday 23 July, 10:00 to 11:00, regarding these new HMRC powers.

The provisions in the Finance Bill 2014 which allow HMRC to demand upfront payment of disputed tax before tax enquiries and disputes have been resolved will be in force very shortly. With HMRC set to issue 43,000 accelerated payment notices to individuals and companies, taxpayers may wish to consider the potential impact of these new measures and whether to seek resolution of open tax planning issues, and/or prepare for payment demands for disputed tax.

Please register here to hear Jim Wilson, Geoff Lloyd and Jonathan Richards discuss the latest developments on these important changes in tax administration, including:

• An introduction to the new regime, including key practical issues

• Case studies illustrating the application of the measures

• HMRC's guidance on the intended operation of the measures

• Current considerations and actions suggested in advance of any follower notice and/or accelerated payment notice being issued

Yesterday's reshuffle saw the promotion of Treasury minister Nicky Morgan MP from her position as Financial Secretary to the Treasury to Education Secretary. David Gauke MP has been appointed as the new Financial Secretary to the Treasury and Priti Patel MP has been brought into the Treasury to fill his post as the new Exchequer Secretary. As of yesterday, the precise allocation of responsibilities across the junior ministerial team was yet to be announced.

As expected, on 8 July, the Council of the European Union formally adopted an amendment to the Parent-Subsidiary Directive. This amendment is targeted at cross-border hybrid loans and seeks to ensure that distributions are not exempted from tax in the parent where they are tax deductible in the subsidiary. This follows political agreement to the measures on 20 June 2014. Member States will have until 31 December 2015 to transpose the amendment into national law if that is necessary.

The UK already has domestic law provisions that deny the benefit of the dividend exemption in certain situations where the distribution is deductible in a territory outside the UK. In addition, the UK denies relief for underlying tax suffered on a dividend in any case where a dividend is paid by a person in a foreign jurisdiction and a tax deduction is given to any person in that jurisdiction calculated by reference to the amount of the dividend.

Minutes of a meeting of the Council specifically address arguments raised by some Member States that the amendments could not compel Member States to tax dividends noting that “while direct taxation falls within the competence of Member States, all Member States agree that the tax loophole generated by hybrid loans arrangements resulting in a double non-taxation should be addressed by the amending Directive.”

The Council agreed to split this amendment from a broader proposal to introduce a general anti-abuse rule in the Directive to prevent groups from claiming the benefit of the Directive where there are artificial arrangements used for tax avoidance purposes. It was previously agreed that this proposed rule would require more work which would be taken forward under the Italian presidency.

Our international tax alert provides more detail regarding the amendment and its implications.

In last week's Midweek Tax News, we covered the appearance by Dr Vince Cable MP, Secretary of State for Business Innovation & Skills, before the House of Lords Economic Affairs Committee taking evidence on takeovers and the public interest.

Subsequently, in press and television interviews, Dr Cable has said he will tighten the rules to deal with foreign takeovers of UK firms. This will include possible fines for firms that renege on promises made during the deal. He noted that legal changes would probably be needed to enforce such commitments. He also suggested that as a “last resort” the Government needed to be able to intervene in the public interest. As recognised by Dr Cable in the session with the Economic Affairs Committee, such a test would raise issues around compliance with EU law, the need to ensure transparency in any Government decision and the need to ensure that there is no impact on the UK's future competitiveness.

The Upper Tribunal (UT) has upheld the decision of the First-tier Tribunal (FTT) in favour of the Murray Group (including Rangers Football Club). The decision has attracted significant press coverage (for both its tax and commercial implications). HMRC has indicated that it is considering an appeal.

The case relates to a series of disputed assessments arising out of the funding and operation of an Employee Benefit Trust (EBT) established by the Murray Group for the benefit of its employees and their families. Group companies paid monies into the EBT with a direction to the trustees that a sub-trust be established and funded for the family of a particular employee. A loan facility (at commercial rates on a discounted basis) was made available to the employee.

The FTT considered the tax implications of the benefits to the employees; there was no consideration of the corporation tax consequences of the payments. The majority found the trusts were valid and that the sums advanced by the taxpayer companies were not at any time held absolutely or unreservedly for or to the order of the individual employee.

The UT found that the majority in the FTT had been entitled to apply the Ramsay doctrine of purposive construction in the way they chose, provided that the end result was a proper application of the criteria (which in the UT's view it was). The majority identified the applicable law, applied a purposive construction to the relevant statutory provisions and endeavoured to take a realistic view of the facts. Having done that, the majority in the FTT held that the end result was that the employees received loans, not earnings.

The majority in the FTT held that the loans were recoverable, and that recovery was not a remote contingency of the sort that ought to be ignored. They did not accept HMRC's suggestion that the trustees were ciphers. They did accept that there was an element of orchestration between employer and employee but they held that such orchestration as there was did not result in it being within the employee's power to obtain anything greater than a loan. The UT found this to be a conclusion which was open to the FTT to make (distinguishing this case from the position taken in Aberdeen Asset Management).

HMRC's appeal was, therefore, dismissed except in so far the UT found that the FTT needed to resolve points of detail. The UT, therefore, remitted back to the FTT questions in relation to the termination payments, the payments in respect of guaranteed bonuses, and any related questions of grossing up.

On 10 July, the Court of Justice of the European Union released its judgment in the Portuguese case of Banco Mais SA. This case concerns the inclusion of the value of taxable leasing transactions within the partial exemption pro-rata calculation. Our international tax alert provides more detail on the judgment and its implications.

This case has been keenly followed by the automotive industry and HMRC in respect of hire-purchase transactions. More generally, it may have implications for any businesses involved in the supply of goods on lease, hire-purchase or similar terms. We await to see HMRC's response to the judgment. In the interim, affected taxpayers may wish to review their input tax recovery position in the light of this decision.

The European Commission has launched a short public consultation on the country-by-country reporting requirements within the Capital Requirements Directive IV (CRD IV). The questionnaire contains questions about the potential economic consequences of the public disclosure by financial institutions on a country-by-country basis of their profit and loss before tax, tax on profit or loss and public subsidies received, with the aim of highlighting, in particular, the effects on competitiveness, investment and credit availability and the stability of the financial system.

The Commission is obliged to carry out a general assessment as regards potential negative economic consequences of the public disclosure of certain country-by-country information. The stated purpose of this consultation is not only to receive views on any potential negative effects of disclosure, but also on the positive effects, so that a balanced picture of the consequences can be formed.

The responses will be taken into account in preparing the Commission's assessment and report, in parallel with the results of an economic survey commissioned by the Commission. Responses should be submitted by 12 September 2014.

Oil and gas fiscal regime

On 14 July, the Government published a call for evidence asking stakeholders to submit their thoughts on the future of the UK oil and gas tax regime. The Government's objective in undertaking this review is to ensure that the UK's tax treatment of the UK Continental Shelf (UKCS) continues to support maximising economic recovery as the basin matures. The Government will publish an initial report alongside Autumn Statement 2014. In the period to Autumn Statement, the review will comprise a strategic look at the future shape of the fiscal regime in its totality, including petroleum revenue tax, ring fence corporation tax, supplementary charge, capital allowances, field allowances and the ring fence expenditure supplement. Other elements of the UK tax system, including income tax, national insurance, VAT and mainstream corporation tax will not be within the scope of the review.

The call for evidence sets out key issues and questions and asks for comments by3 October 2014. The Government will establish four working groups with the upstream oil and gas industry and look to meet with a wide range of stakeholders.

We view this call for evidence as the first stage in a journey that may take a few years but which can have a lasting beneficial impact on the successful exploitation of the UKCS. We hope that the consultation will give rise to a ‘route map’ that sets out a timetable for positive changes to the UK oil and gas fiscal regime.

Tax advantaged venture capital schemes consultation

On 10 July, HM Treasury and HMRC released a joint consultation document on the rules of the various venture capital schemes: venture capital trusts schemes (VCTs); the enterprise investment scheme (EIS); and the seed enterprise investment scheme (SEIS).

The consultation document notes that the EU State Aid rules that apply to risk finance measures such as VCTs and EIS have been updated. The Government is looking for evidence that the existing rules continue to be compliant with the new State Aid rules such that no changes are required to the regime. In addition, the Government is looking for feedback following the recent changes to the tax-advantaged venture capital schemes referred to above, to ensure that they continue to work effectively and to confirm that the schemes continue to be well-targeted in supporting small and growing companies access finance where they need it most.

The Government also wants to better understand cases where the scheme rules may not be working as intended; and to assess whether improvements can be made to continue to maintain the effectiveness of the tax reliefs. In particular, the Government is interested in considering changes to the scheme rules, to introduce a more principled approach to reduce investment into lower-risk companies and to explore options for EIS and SEIS to accommodate the use of convertible loans. The deadline for responses is 19 September.

Social investment tax relief (SITR) consultation

The Government has published a consultation paper on SITR, which is intended to encourage private investment in social enterprise and is being introduced in Finance Bill 2014 for investments from 6 April 2014.

This document sets out proposals for the expansion of SITR and a new tax relief for social investment via an intermediary. The consultation aims to gather views on the most appropriate and effective way to increase the investment limit and bring in a wider range of investors, while keeping the relief well targeted and effective and minimising opportunities for tax avoidance. It also asks for views on the approach to community farms, renewable energy and social impact bonds. The deadline for responses is 18 September 2014.

Upper Tribunal considers meaning of “enquiry”

The Upper Tribunal (UT) has considered whether a taxpayer met the conditions for an appeal to the First-tier Tribunal (FTT) on a stamp duty land tax repayment dispute. This depended on whether or not HMRC had opened an enquiry or issued a closure notice.

HMRC and the taxpayer entered into correspondence where HMRC disputed the taxpayer's claim. The UT held that whether or not HMRC had opened an enquiry or issued a closure notice (which would determine whether the taxpayer had a right of appeal to the FTT) was to be determined by construing the term “enquiry” (which took its ordinary meaning) broadly, and was a question of degree. On the facts in question, the UT held that HMRC had both opened an enquiry into a land transaction and issued a closure notice during the course of corresponding with the taxpayer despite no formal notice having been issued.

HMRC Brief 27/14: VAT relief for the transfer of a business as a going concern (TOGC)

HMRC has announced a number of changes in policy concerning the TOGC VAT relief. Following the First-tier Tribunal's decision in the case of Robinson Family Ltd, HMRC now accepts that both the grant of a lease and the surrender of a lease can, in some circumstances, be a TOGC for VAT purposes, provided all the normal conditions are met. These changes in policy apply generally, and are not confined to property letting businesses. HMRC has also announced a change in policy concerning TOGCs of new residential and relevant charitable buildings.

Any taxpayers who have undertaken a TOGC in the past four years may wish to review the VAT treatment of that transaction in the light of HMRC's revised policy and consider whether a retrospective claim for overpaid VAT and/or stamp duty land tax is appropriate.

Indian Budget 2014-15

On 10 July, the Indian Finance Minister presented the Union Budget 2014-15 before the Indian Parliament. The Finance Minister has committed to provide a more stable and predictable tax regime that is intended to be investor friendly and spur growth. As part of that, one immediate imperative on the agenda of the new Government is the need to find a faster and better way to resolve tax disputes.

Our budget website for India has a wide range of materials including a general alert looking at key features of the budget announcements as well as sector specific alerts. Alerts are also available looking at the proposed amendments to the Indian transfer pricing regime and the personal tax and human capital aspect of the budget.

France extends deadline for large companies to file new transfer pricing statement

In December 2013, the French Government adopted a new, additional transfer pricing documentation requirement obliging certain taxpayers to file ‘reduced’ transfer pricing documentation within six months of the official deadline for filing their tax return. In June 2014, the French tax authorities released an unofficial draft version of this statement for comment. To date, no final version has been issued.

On 2 July 2014, the French tax authorities issued a communication that provided for the postponement of the filing date of the statement. The new deadline is now 20 November 2014 for all companies that had to file the statement between June 2014 and November 2014.

Our international tax alert has further details.

European Commission expert group on automatic exchange of financial account information

The European Commission is establishing a new expert group which will provide advice to allow the Commission to assist the Council and Member States to ensure that EU legislation on automatic exchange of information in direct taxation is effectively aligned and fully compatible with the new OECD global standard on automatic exchange of financial account information (also known as the Common Reporting Standard). Organisations may make an application to be represented in the expert group by 8 August 2014.

European Commission investigates tax exemptions for Dutch state owned companies and ports

The European Commission has opened an investigation to verify whether exemptions from corporate tax granted under Dutch law to state owned companies, including port operators, are in line with EU State Aid rules. The Commission has concerns that exempting certain companies merely because they are state owned may give them an advantage over their competitors. Separately, the Commission is also gathering information on taxation of ports in other Member States, including France, Belgium and Germany.

Cooperative compliance regime for Russian large taxpayers

The Russian State Duma has approved a draft law which establishes a new cooperative compliance regime of tax administration for the largest taxpayers. The new regime will be based on the principles of trust and transparency in the relationship between the tax authorities and taxpayers: tax authorities will have online access to accounting information and information on significant transactions, and the relevant companies will gain the opportunity to agree their tax positions with the Federal Tax Service and will be released from traditional field tax audits. The draft law is expected to come into force on 1 January 2015.

Mid-term review of pilot system of cross-border EU VAT rulings

The EU VAT Forum, set up by the European Commission to bring together Member States' VAT authorities and business representatives, has made a first evaluation of the pilot system of cross-border EU VAT rulings that started in June 2013. This pilot system, which is scheduled to run until the end of 2014, allows taxpayers to obtain advance rulings on the VAT treatment of complex cross-border transactions involving two or more of the participating Member States. At present, 15 Member States participate in this project, including the UK. Feedback from those who participated in the mid-term review was positive, and the participants favoured extending the pilot to other (if not all) Member States as well as beyond 2014. The participants also agreed on a voluntary basis to publish those cross-border rulings where agreement was obtained from all VAT authorities concerned. A further review of the pilot will take place at the end of 2014.

Any taxpayers facing cross-border challenges in different EU Member States may wish to consider the pilot system as a means of obtaining clarification and certainty over their VAT issues and obligations.

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.

Luxembourg: A detailed discussion of the new corporate exit tax deferral rules, introduced following the Court of Justice of the European Union rulings in the Hughes de Lasteyrie du Saillant, N and National Grid cases.

Italy: The Italian Government has issued a decree which is intended to increase the benefits associated with the notional interest deduction regime.

Italy: A tax credit has been introduced for companies investing in new plant and equipment in the period from 25 June 2014 to 30 June 2015. The credit is equal to 15% of the amount of qualifying expenses.

Italy: The Government has issued a decree amending the income tax treatment of the migration of Italian companies.

Mexico: Following the 2014 tax reform, which introduced a requirement for taxpayers to file accounting information with the tax authorities on a monthly basis, the tax authorities have now issued detailed rules for the electronic filing of accounting records.

Mexico: Final rules on the types of revenue that maquiladoras may continue to earn in order to qualify for the permanent establishment exemption and provisions relating to VAT relief have been published by the Mexican Tax Administration Service.

Other publications

Please speak to your usual EY contact, or email us at eytaxnews@uk.ey.com, 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.

HMRC publishes list of DOTAS Scheme Reference Numbers

Email Jim Wilson

+ 44 20 7951 5912

Web seminar on follower notices and accelerated payments: 23 July

Email Geoff Lloyd

+ 44 20 7951 8736

Ministerial reshuffle

Email Chris Sanger

+ 44 20 7951 0150

Parent-Subsidiary Directive amendments

Email Mark Persoff

+ 44 20 7951 9400

Takeovers and the public interest

Email Jason Lester

+ 44 121 535 2998

Upper Tribunal finds against HMRC in the Rangers EBT case

Email Mike Gibson

+ 44 20 7951 0568

Overhead VAT recovery in relation to taxable leasing transactions

Email Jamie Ratcliffe

+ 44 121 535 2255

European Commission publishes consultation on impact of CRD IV reporting

Email Neil Harrison

+ 44 113 298 2596

For other queries or comments please email eytaxnews@uk.ey.com.

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