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Midweek Tax News


A weekly update on tax matters to 26 July 2016

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 Government has published a series of amendments to the hybrid rules in Schedule 10 to Finance Bill 2016 to be included at the report stage of the Bill on 5 September 2016. As a reminder the rules are intended to counteract arrangements involving hybrid entities, instruments or transfers where either the same payment gives rise to deductions in two different jurisdictions or where a payment is deductible for the payer but does not give rise to any taxable income in the hands of the payee.

The amendments deal with a number of issues that arise in respect of hybrid mismatches that involve companies with branches. A major concern had been the way that payments or deemed payments made from a foreign branch to a UK head office were treated, but such payments are no longer within the scope of the rules. Likewise, payments from a non-UK entity to either a UK branch or a non-UK branch of a UK company are no longer in scope. Nor, in most circumstances, are payments made to a branch of a UK company in certain tax free jurisdictions. The amendments also mean that losses from a company's foreign branch can be set off against other UK profits as currently, unless the losses are set off against profits of a different entity in the branch's jurisdiction.

Other changes provide that, in certain circumstances, a hybrid entity in a tax-free jurisdiction receiving a payment can now give rise to a mismatch even where the entity would not have been taxable if it was not a hybrid.

New exclusions from the rules are provided by the amendments for payments to genuinely diversely held investment funds while the financial trader exclusion from the rule on hybrid transfers (e.g. stock loads and repos) is widened slightly so it no longer matters if the financial trader treats a payment as a manufactured dividend or interest, as long as it is taxed as trading income.

There are some further issues that we have highlighted to HMRC that have not been addressed by the amendments released so far and we hope the Government will reflect on these and release further amendments in due course.

Groups may wish to consider the extent to which the amendments affect their structures and whether further representations to HMRC should be made.

In the case of Leekes, the Upper Tribunal has allowed HMRC's appeal against a decision by the First-tier Tribunal. The taxpayer, which runs department stores, purchased a lossmaking company with a similar trade and then hived that trade up to combine it with its own operations.

The trade from the purchased company had given rise to trading losses brought forward and the Tribunal was asked to consider whether these losses could be used against profits from the taxpayer's existing trade, or whether the losses were to be streamed so that they could only be used against profits generated from the trade that was hived up.

The First-tier Tribunal had decided the case hinged on the interpretation of the statute that provided for losses of a trade to be preserved when it was transferred to another company under common ownership. It found the legislation did not specifically require streaming, and that streaming presented practical difficulties and was at variance with commercial reality. The Upper Tribunal disagreed. Allowing HMRC's appeal, the Upper Tribunal found that there was “no real room for doubt” that the legislation did require streaming. It said that the purpose of the legislation was to allow the losses from the lossmaking trade to continue to be used against future profits from that trade. It was not the intention that the losses could be used against profits of a different trade.

The Upper Tribunal also rejected the arguments on commerciality and stated that it is not permissible to disregard the words of statute because of a perceived practical difficulty.

This decision, unless reversed on appeal, restores the position on loss streaming to the long-established practice of HMRC.

The Scottish Court of Session (equivalent to the Court of Appeal) has released its decision in the case of Taylor Clark Leisure concerning HMRC's decision to refuse a number of Fleming claims, for overpaid VAT. The claims were made in 2007, covering the period 1973 to 1996, by what was previously a subsidiary of the taxpayer. However, no claims were made in time by the taxpayer itself. As the representative member of a VAT group, of which the subsidiary was previously a member, the taxpayer contended that the claims made by the subsidiary should be repaid to it.

The First-tier Tribunal had held that as the taxpayer had never made a claim, it could not rely on the claims made by its subsidiary and further, that it was the subsidiary, rather than the taxpayer, which would have been entitled to any VAT repayment. The Upper Tribunal held that the taxpayer, as the representative member of the VAT group, would have been entitled to claim repayment of output tax overpaid. However, as the taxpayer made no claims before the expiry of the limitation period, its claims were time-barred. The Court of Session has now ruled in the taxpayer's favour, holding that a claim can be made on behalf of the representative member of a VAT group by a current or former member of the VAT group, just as it could be made by a professional adviser. In this case therefore, the claim made by the subsidiary was in the capacity as agent of the representative member and it therefore constituted an in-time claim by the taxpayer.

There are currently a number of ongoing cases concerning this issue including Standard Chartered and Lloyds Banking Group which were recently heard at the Upper Tribunal, so as a broader issue, the ‘fiction’ of a VAT group is not yet settled. Any business which has outstanding or new claims for overpaid VAT with HMRC, which may be affected by a change in VAT grouping, may wish to consider the impact of this decision and the ongoing litigation.

Finance Bill scheduled to be considered by the House of Lords on 13 September 2016

As we reported in last week's Midweek Tax News, the report stage for Finance Bill 2016 has been scheduled for 5 September 2016. We now understand that the Lords have scheduled 13 September 2016 as the date to complete all Finance Bill stages. This suggests that Royal Assent could be sought on 14 or 15 September 2016, otherwise it would have to wait until Parliament returned from the recess for the party conferences on 10 October 2016.

HMRC extends transitional relief for certain disguised remuneration schemes

HMRC has published guidance confirming that the Government intends to extend the date for withdrawal of transitional relief on investment growth under the disguised remuneration legislation. The changes to the disguised remuneration rules were announced at Budget 2016 and one of these changes was to restrict a transitional relief on investment returns accruing on disguised remuneration in order to encourage users of certain types of disguised remuneration schemes to settle their liabilities.

A Government amendment has been published to be included in Finance Bill 2016 at the report stage, to change the date on which transitional relief is withdrawn from 1 December 2016 to 1 April 2017. The intention is to enable those who want to reach a settlement with HMRC to have sufficient time to do so.

EY has been engaging with HMRC on this matter and the amendments are in line with our specific proposals and recommendations.

First-tier Tribunal decides sub-lessee can claim industrial buildings allowances (IBAs)

In the case of David Wellstead, the First-tier Tribunal has held that the sub-lessee under a long sub-lease could claim IBAs, even though the necessary conditions in the Capital Allowances Act 2001 for the taxpayer to elect to be treated as holding the ‘relevant interest’ in the property to qualify for IBAs were not met. The Tribunal considered that a purposive construction of the relevant provisions would, alone, be insufficient for the taxpayer's claim to succeed. However it identified, within the statutory provisions, a single ambiguous word ‘merely’ which, along with the Tribunal's inability to discern any parliamentary purpose in restricting IBAs to assignees of leases, led the tribunal to conclude that the appellant had acquired the relevant interest and could claim IBAs.

On the basis of this decision, the courts have had much more discretion than previously understood in determining whether the grant of a sub-lease gave rise to a ‘relevant interest’. As the decision appears to contradict common practice and hinges on a single word, it may be subject to appeal.

First-tier Tribunal decides there is no time limit for making VAT repayment claims after change in HMRC policy

The First-tier Tribunal has released its decision in the case of K E Entertainments. The issue considered in this case was whether bingo operators were entitled to make adjustments and reclaim excess VAT paid when HMRC changed the basis of calculation of the VAT payable on bingo takings.

A bingo session typically consists of a number of games for which the customer pays a single price. Prior to 2007, HMRC required certain fees to be calculated on a game by game basis. However, HMRC changed its policy in that year to a session basis.

Agreeing with the taxpayer, the First-tier Tribunal held that the change in HMRC policy amounted to a change in the consideration paid by customer, meaning that no time limits applied to the VAT repayment claims. The First-tier Tribunal considered that an internal credit note was sufficient as an audit trail, recognising that the issue of individual credit notes to each bingo customer would have been impossible.

Bingo operators may wish to consider submitting a repayment claim if they have not already done so. For businesses outside the sector, the decision may, in some cases, support a wider interpretation of ‘regulation 38’ on adjustments to consideration.

Office of Tax Simplification (OTS) publishes discussion documents on the taxation of small companies

Following its report on small company taxation in March 2016, the OTS has published discussion documents on look-through taxation and on a sole enterprise protected assets business model.

The OTS notes that look-through taxation, whereby small companies are treated as transparent for tax purposes, eliminates the corporation tax computation but taxable profits still need to be calculated and all the accounting and regulatory aspects for the company remain. Consequently, the OTS concluded that look-through taxation would not be a general simplification even if it could see advantages for some companies.

A sole enterprise protected assets business model would make provision for protecting one or more of the assets of a self-employed individual without them having to incorporate a limited company. The OTS discussion document sets out a possible model and poses various questions to find out if it would actually be used by businesses and if it would prove to be a simplification.

The OTS has invited comments on the discussion documents and will publish its conclusions in a final report in early October.

International developments

Slovak presidency of the European Council sets out taxation policies

The Slovak presidency of the Council of the EU, which lasts until the end of 2016, has set out a roadmap on how it intends to conduct work in relation to the challenges in the area of BEPS in the EU.

In the short term, the Presidency will aim at reaching agreement during the next few months on the following work items:

• Interest and Royalties Directive: It intends to reach a political agreement on the directive by the end of the year. It will use the result of the previous discussions as a basis and take into account the possible impact of the agreement reached on the anti-tax avoidance directive

• Transparency: It will start technical work on amending the directive on administrative cooperation to allow tax authorities to access anti-money laundering data

• Non-cooperative jurisdictions: It will take forward work on producing a list of countries to be screened and the criteria to be used

• Hybrids: When they are published, it will work on the Commission's proposals for dealing with hybrid mismatches with territories outside the EU

The Presidency will also support work in the areas of: patent boxes; improving the code of conduct group; dispute resolution mechanisms; the common consolidated corporate tax base; taxation of payments made to outside the EU; mandatory disclosure rules; and guidelines for issuing tax rulings.

Luxembourg State Aid investigation details published in the Official Journal

In June 2016, the European Commission published a public version of the letter it had sent to the Luxembourg tax authorities in December 2015 setting out its decision to open an investigation into whether Luxembourg provided State Aid to a multinational enterprise in respect of certain tax rulings. That letter was published in the Official Journal of the European Union on 15 July 2016 and interested parties have a month from then to submit any comments to the Commission.

EU consultation launched on VAT rates for electronic publications

The European Commission has launched a consultation on reduced VAT rates for electronically supplied publications such as e-books. Under current EU VAT rules, electronic publications must be taxed at the standard VAT rate, whereas Member States are allowed to apply a lower VAT rate to printed publications.

The consultation will seek views on:

• the commitment by the European Commission in its 2016 Action Plan on VAT to allow Member States to apply reduced rates, super-reduced rates and zero rates to electronic publications

• the definition and scope of electronic publications, and

• the potential impact of reduced rates

The Commission has taken infringement proceedings against a number of Member States in recent years in relation to this issue, so this consultation may indicate a welcome change in policy. Affected businesses may wish to submit a response by the closing date of 19 September 2016.

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.

Australia: A new capital gains regime has been introduced for high value real property such that 10% of the purchase price must be paid to the Commissioner of Taxes as a non-final withholding tax.

Uruguay: The Ministry of the Economy has proposed a Bill with measures including a restriction to corporate loss relief, and increases in capital gains and income tax, while reducing VAT on some transactions.

Taiwan: Legislation has been passed to introduce CFC rules in line with BEPS Action 3 and to ensure companies with a place of effective management in Taiwan are taxed there.

Austria: Parliament has approved the introduction of country-by-country reporting, and transfer pricing master files and local files, in line with OECD recommendations.

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 our employment, reward and mobility newsletter, as well as 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.

Government publishes amendments to hybrid rules in Finance Bill 2016

Email Fiona Thomson

+ 44 20 7951 3913

Court of Session decides subsidiary can make a VAT repayment claim on behalf of its parent

Email Andrew Bradford

+ 44 20 7951 4963

For other queries or comments please email

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