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A weekly update on tax matters to 26 August 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.

The EU Accounting Directive, which was agreed in April 2013, includes a requirement for companies in the extractive industry or involved with the logging of primary forests to disclose, in a separate report on an annual basis, material payments over €100,000 made to governments in the countries in which they operate, including taxes on profits, royalties and licence fees. The disclosures are to be made both on a country-by-country and project-by-project basis.

In March 2014, the Department for Business, Innovation & Skills (BIS) launched an open consultation on how the requirements of the Directive should be implemented into UK domestic legislation, and on 21 August 2014 the results of that consultation were published, including a further draft of the regulations necessary to bring the requirements into effect in the UK.

Member States are required to implement the Directive into their relevant legislation within two years of it coming into force, with a requirement that the legislation should apply to financial statements beginning on or after 1 January of the following year. This means that the Directive will be of mandatory application by 2016, with possible early adoption by some Member States. In relation to the UK, the Government has restated its commitment to the early introduction of the transparency requirement, and, following the consultation, has decided that the new reporting requirements should apply to financial years beginning on or after 1 January 2015.

On 20 August 2014, the Revenue Scotland and Tax Powers (RSTP) Bill had its Stage 3 hearing before the Scottish Parliament. The motion to pass the Bill was agreed and the Bill now moves forward for Royal Assent.

The Bill establishes Revenue Scotland as the tax authority responsible for the collection and management of the Scottish land and buildings transaction tax (LBTT) and the Scottish landfill tax. These two devolved taxes have already been enacted and come into operation on 1 April 2015. However, as the Cabinet Secretary for Finance, Employment and Sustainable Growth, John Swinney, made clear in the course of the Stage 3 debate, the RSTP Bill has another purpose in laying down how Revenue Scotland will operate in the case of the Scottish Parliament becoming responsible for a wider range of taxes.

The RSTP Bill has the potential to provide major change in the way tax is approached and administered in Scotland. It will, however, be necessary to see both what taxes are ultimately regulated by the Bill and how that regulation develops in practice. It is important to note that from 1 April 2015, taxpayers will need to consider not only the application of two new taxes in Scotland but the differences in the administration of those taxes from the administration of their equivalents south of the border. In particular, transaction warranties and indemnities may need to adapt to the different Scottish enquiry period and the possibility of mediation.

Separately, the impact on the property market and the wider economy of the Scottish Government's approach to the devolved taxes is to be examined by the Scottish Parliament's Finance Committee as it begins its scrutiny of the 2015-16 draft Budget. The draft budget, which is due to be introduced in early October, will this year include proposals for setting rates and bands for the devolved taxes, including LBTT. The Finance Committee has launched a call for evidence to get views on these proposals and the likely impact on the property market and the wider economy. The call for evidence is open until Friday 24 October 2014. We understand that the aim is for the LBTT bands and tax rates to be announced on 9 October 2014.

We understand that HMRC will shortly be publishing guidance to clarify its views on a number of specific issues that have arisen on the application of section 731 ITA 2007 (often known as the “benefits charge”) to employee benefit trusts (EBTs) in the context of the EBTSO. In particular, HMRC considers the circumstances in which a settlement under the EBTSO could give rise to a benefit on the EBT beneficiaries to be taxed under the provision.

The benefits charge imposes a charge to income tax on an individual who is resident in the UK, where, broadly, a relevant transfer occurs and the individual receives a benefit which is provided out of assets which are available as a result of the transfer. It only applies where the individual is not liable to income tax as the person who made the relevant transfer and the individual is not otherwise liable to income tax on the amount or value of the benefit. As such, a liability arises where the individual has not made or procured the transfer into the EBT.

The guidance looks how a liability can arise in the context of an EBT arrangement and how entering into an EBTSO settlement with HMRC might impact on future capital distributions and what would constitute a benefit for the purposes of the provision. It also looks at what constitutes relevant income for the purposes of the provision and whether, if the trustees use accumulated income to settle the PAYE and national insurance contribution liabilities arising under a settlement agreement, this reduces the amount of relevant income available. Finally, it considers whether a liability arising under the provision can be included as part of a settlement under the EBTSO.

We have been provided with an advance copy of the guidance which should be read in conjunction with the frequently asked questions issued in August 2012. We are considering whether the guidance may require any further additional clarification. Meanwhile, if you would like to discuss HMRC's view on the above issues, please speak to your usual EY contact or that listed below.

2014 Tax Risk and Controversy Survey Report and webcast

Increased reputational, legislative and enforcement risk are putting additional pressure on tax resources, processes and technology for businesses large and small. Every company has to deal with operational tax risk but few do so with absolute certainty or complete confidence in a fast-changing landscape.

In the second report of our 2014 Tax Risk and Controversy Survey series which launches on 9 September, we highlight sources of operational risk and describe leading practices companies may want to institute to help achieve regulatory compliance while driving business performance. At 3:00pm (BST) on Thursday, 11 September, please join our panel of professionals as we discuss key findings and drivers of increased operational risk. In our report we find that:

• 68% of survey respondents say there are insufficient resources to cover tax function activities.

• 62% of the largest companies surveyed have either created or refreshed their tax risk policy in the last two years.

• Only 25% of companies say their internal controls are documented in all jurisdictions, regardless of whether or not it is required by regulators.

• Only 19% of respondents use dedicated software tools to enable and support notice information, data request and tax audit management. The remainder use email, spreadsheets or no technology at all.

To register for the webcast please click here.

Sustainable Cash: Webinars commencing 16 September

A recent EY survey of the top 2,000 US and European firms indicated that a staggering $1.3tn remains unnecessarily tied up in working capital – equivalent to a cash sum of nearly 7% of sales.

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The first webinar takes place on Tuesday, 16 September at 11:00am, and will run every two weeks until 11 November.

Register here to hear Mike Mills from EY's UK restructuring team consider:

• What is sustainable cash improvement?

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In the case of Fisher & Ors, the First-tier Tribunal has considered the transfer of a telebetting bookmaking business to Gibraltar and the application of the tax anti-avoidance code on transfer of assets abroad (section 739 TA 1988). Over the course of 1999/2000, a number of telebetting businesses based in the UK moved their operations to Gibraltar. At the time, the betting duty regime was considerably more favourable in Gibraltar than in the UK.

The Tribunal considered the following issues and concluded that none of them prevented the anti-avoidance provisions applying:

• Whether the anti-avoidance provision requires there to have been actual avoidance of income tax before it can apply

• Whether it is possible for the provision to apply to situations where there are multiple shareholders of the transferor company

• hether it is possible to apply the provision to the context of the income of a trading company whose business evolves into areas distinct from the business which was transferred

• Whether the fact that competing businesses were also moving to Gibraltar had an impact of the operation of the motive defence

The Tribunal found as a fact that the purpose of the transfer was the avoidance of UK betting duty.

It also considered whether the EU freedoms of establishment and movement of capital were applicable in this case, especially given Gibraltar’s particular status under the EU Treaty. In relation to two of the taxpayers, the Tribunal found that the EU freedoms did not apply as between the UK and Gibraltar. Under the relevant European legislation, the situation was one which was to be regarded as wholly internal to the Member State (ie, the UK).

However, one of the taxpayers was an Irish national. The Tribunal allowed the appeal in this case on the basis that the taxpayer's Irish nationality meant that the European freedoms of establishment and movement of capital applied in relation to the taxpayer’s ability to establish and move capital to Gibraltar. The UK anti-avoidance legislation which applied at the relevant time was held to operate to restrict those rights, without justification, and was not proportionate. The Tribunal applied a conforming interpretation to the UK legislation, to widen the scope of the motive defence, so as to consider the purpose for which the transfer took place in respect of that particular taxpayer. This case confirms that an EU defence is, in principle, available in respect of the provisions as they applied in this case. Although the legislation has been amended since then there is still an open question as to its current compatibility with European law.

The transfer of assets abroad provisions are a broad spectrum anti-avoidance rule that can sometimes apply in surprising circumstances and this case could have important ramifications for the detailed application of these provisions. This is particularly the case where a company with multiple shareholders makes a transfer.

In the case of the British Film Institute, the Upper Tribunal considered the scope of the VAT exemption for cultural services. The disputed matter concerns whether the taxpayer, a non-profit-making body and a registered charity, was required to account for VAT on the sale of tickets for admission to films that it showed. The taxpayer contended that its supplies were VAT exempt as cultural services within the meaning of EU law.

In finding for the taxpayer, the First-tier Tribunal had held that the relevant provision of EU law had direct effect, and that admission to a cinema or other venue showing films was a cultural service for the purposes of EU law. It further held that all cultural services qualify for exemption under EU law (ie, Member States cannot choose which cultural services to exempt), provided they are supplied by an eligible body (as defined by the Member State concerned). The Upper Tribunal agreed that the relevant provision of EU law was sufficiently clear and precise for it to have direct effect, and it did not allow Member States any latitude or discretion in its application. As a consequence, the corresponding provision of UK VAT law, which only exempts some cultural services and, therefore, contains limitations (including the omission of cinemas), is arguably in breach of EU law.

Any eligible taxpayers who supply cultural services, but have been refused exemption by HMRC on the ground that the services in question are not listed in UK law (eg, cinemas), may wish to consider the implications of this decision and the possibility of submitting a retrospective claim for overpaid VAT.

Tax avoidance and Government contracts

HMRC and the Cabinet Office have undertaken a review of the tax and procurement policy which came into effect from 1 April 2013. These rules require potential suppliers under Government contracts to certify, as part of the procurement process, that they have not been involved in certain tax avoidance arrangements. The potential cost of not being able to certify is exclusion from the bidding process.

The review explored whether the policy is having the intended effect of encouraging tax compliance from Government suppliers. It found that of the 65 bids applying for central Government contracts of £5mn or more, one potential bidder failed the overriding mandatory procurement test. This failure, however, was due to the bidder being unable to provide and deliver services that would fulfil the procurement department's contract, rather than an issue of whether or not they were tax compliant. The remaining 64 potential bidders declared that they had been tax compliant.

Groups bidding for Government contracts within the rules will want to ensure that they continue to comply with the requirements.

New HMRC guidance on foreign branch exemption, including anti-diversion rule

HMRC has published an updated chapter on the foreign permanent establishment (PE) exemption in its International Manual. The changes include new guidance on the anti-diversion rules applying to foreign PEs beginning on or after 1 January 2013. The anti-diversion rules broadly align the exemption regime with that of the controlled foreign company rules to prevent the diversion of profits from the UK to exempt PEs. These rules were updated to reflect the reform of the UK controlled foreign companies regime which came into effect (subject to transitional provisions) for accounting periods of controlled foreign companies commencing on or after 1 January 2013.

Other issues addressed in the new guidance include:

• The disapplication of the restriction on the exemption for certain chargeable gains of close companies for accounting periods beginning on or after 1 January 2013

• The operation of the provision which prevents profits or losses from investment business from qualifying under the branch exemption

• The treatment of certain PE profits or losses from a leasing business

Patent Box Survey

HM Treasury and HMRC are trying to determine the impact of the introduction of the UK Patent Box regime and would like to increase their stakeholder engagement. To that end they are seeking input from businesses on a number of questions regarding their ownership of patents and use of the UK Patent Box. There was a limited time to respond to the initial request with input due by 15 August 2014. However, we now understand from HMRC that the deadline has been extended to early September.

Whether a building was used for the purposes of a trade

In the case of Thomson, the Upper Tribunal considered whether expenditure incurred by the taxpayer on fitting out a building as a laundry qualified for an initial industrial buildings allowance of 100%. The optimum size for the laundry was in excess of the requirements of Lanarkshire Primary Care NHS Trust (the principal user) and the excess capacity was taken up by two other health boards.

The allowance was only available if the building was used for the purposes of a trade. The First-tier Tribunal held that the building met this condition and the Upper Tribunal has now agreed that the First-tier Tribunal's finding that the laundry activity fell within the scope of trading was one that it was reasonably entitled to make.

The Upper Tribunal found that most of the arguments presented on behalf of HMRC came down to either the absence of a profit motive (given the purpose was only to use up excess capacity through recharges) or to the fact that the laundry activity was carried on by three health boards all of whose costs come out of the public purse.

The Upper Tribunal held that neither of these features precluded a finding that a trade was being carried on. Even if HMRC's description of the laundry arrangements as a cost-sharing exercise were accurate, that would not address the question whether what was done amounted to trading.

Whether landfill material producing methane gas subject to landfill tax

The taxpayer is seeking permission to appeal the Upper Tribunal's decision in favour of HMRC in Patersons of Greenoakhill Ltd to the Court of Appeal. This case concerns the application of landfill tax where some of the material deposited in a landfill site decomposed and produced landfill gas which was captured and used by the taxpayer (the operator of the site) to generate electricity. The disputed issue is whether the taxpayer was entitled to reclaim the landfill tax paid on that biodegradable material, which the Upper Tribunal answered in the negative.

New Russian sales tax and VAT return

A new federal sales tax has been proposed for introduction by the 85 federal regions within the Russian Federation. Details of the sales tax are still being confirmed but draft legislation is being drawn up to allow the regions to introduce the tax with effect from 1 January 2015. There is still uncertainty over the details of the new legislation (it will be for each federal region to implement the tax) and the practical implications of its introduction.

Under the proposals, organisations and individual entrepreneurs carrying out activities in federal regions where a sales tax has been introduced will be liable to charge and account for the tax. The current draft provides for the implementation of a sales tax at a maximum rate of 3% on goods, services and works supplied to individuals. Businesses making supplies to consumers in Russia will be most directly affected by the introduction of the proposed sales tax. These businesses may wish to consider the associated commercial and practical implications (pricing, systems, processes, compliance etc). In addition, other businesses operating in Russia may also find that costs are increased and/or processes need to be reviewed to identify whether any sales tax incurred has been correctly charged.

Our international tax alert has further details.

Separately, the Russian tax authority is developing a new VAT return which is intended to be adopted from 1 January 2015. Our understanding is that the new return will require additional sales and purchase data and, particularly for taxpayers that act as intermediaries, additional invoice data. The final details regarding the changes are still being confirmed. Clearly a new VAT return will require changes to existing processes and systems to ensure the necessary information is recorded and VAT is paid accordingly. Some of these changes are likely to be significant in what is already a complex VAT regime.

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.

Italy: The Italian Parliament has converted a series of tax incentives provisionally introduced by the Government into law. These include an increase in notional interest deduction benefits, a new tax credit for plant and equipment, a new withholding tax exemption on interest and an extension of the scope of the substitute tax on medium and long term loans.

US: The IRS has released general guidelines and ‘rules of engagement’ for transfer pricing issues which highlight the importance of confirming with the IRS that the correct staff are involved at the outset of any audit.

Hungary: The legal regulations which govern the implementation of employee share plans in Hungary have been relaxed.

Chile: The Ministry of Finance has presented amendments to the tax reform bill which includes a proposed series of increases in the corporate tax rate from the current 21% to 27% by 2018.

Brazil: The Revenue Service has clarified that certain amounts paid to foreign legal entities as consideration for providing data centres are payments for the provision of services subject, inter alia, to withholding tax.

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.

2014 Global Oil and Gas Tax Guide

The latest edition of the guide summarises the oil and gas corporate tax regimes in 80 countries and also provides a directory of EY oil and gas tax contacts.

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.

Extractive industry reporting: Conclusion of BIS consultation

Email Neil Strathdee

+ 44 20 7951 4017

Scottish devolved taxation

Email Paul Gallagher

+ 44 13 1777 2822

Transfer of assets abroad legislation: Implications for the Employee Benefit Trust Settlement Opportunity

Email Jim Wilson

+ 44 20 7951 5912

Upcoming webcasts

2014 Tax Risk and Controversy Survey Report and webcast

EmailRob Thomas

+ 1 202 327 6053

Sustainable Cash: Webinars commencing 16 September

EmailKasia Oberc

+ 44 20 7951 9824

Application of transfer of assets abroad legislation

Email Carolyn Steppler

+ 44 20 7951 4968

VAT exemption for cultural services

Email Damian Shirley

+ 44 12 1535 2622

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

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