Tax Services

  • Share

Midweek Tax News

A weekly update on tax matters to 19 March 2013

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.

At lunchtime today, the Chancellor, George Osborne, will deliver this year's Budget. The latest news and our thoughts on the announcements will be available throughout the next few days. Our Budget Alert will be issued later today, covering the whole tax spectrum, while specialist alerts will be mailed to those who have shown an interest in particular areas.

Tomorrow, 21 March at 14:00, we will be hosting our Budget 2013 web seminar, with our thoughts as to what the Budget is likely to mean for the coming months. The seminar will be chaired by Claire Hooper, Tax Partner. She will be joined by Chris Sanger, Head of Tax Policy; Patrick Stevens, Tax Partner; and Andrew Goodwin, Senior Economic Adviser to the EY ITEM Club.

You can register for the seminar by clicking here.

The EY ITEM Club Budget Preview provides more detail on the economic background against which the Chancellor will be presenting his Budget. ITEM believes that the UK will escape further austerity, but is calling for investment in infrastructure and housing to boost short term growth. Please click here to read the preview.

In an increasingly competitive global marketplace, the focus for the Chancellor as he prepares his Budget speech will be ensuring that the UK is seen as a strong location for investment and that UK businesses have a stable platform from which to compete.

The response from our pre-Budget survey shows that, while businesses are extremely supportive of recent measures to build competitiveness for the UK, they consider that more needs to be done to ensure that the Government's approach continues to build investment. There is concern that recent discussions on whether particular tax treatments are consistent with an unspecified ‘moral’ framework have generated uncertainty which is threatening business confidence. Business is looking for certainty that the UK will play an active role in developing any new cross-border standards and that the Government will look to maintain the competitiveness of the UK as a location for investment.

Our thought leadership paper Keeping the UK open for business considers the extent to which the Chancellor's ‘Corporate Tax Roadmap’ is still on track and considers how he could use the Budget to fix any potential bumps in the road.

The Finance Bill sub-committee of the House of Lords Economic Affairs Committee is established each year to explore the provisions in the Finance Bill relating to tax administration, clarification and simplification. In its report issued on 13 March 2013, the sub-committee focused on the proposed general anti-abuse rule (GAAR), the annual residential property tax (ARPT) and the cap on income tax reliefs.

On the proposed GAAR, the sub-committee is concerned that the fact that the GAAR is narrowly defined means that it will not address the current public issues about international arbitrage-based tax planning undertaken by multinationals. The sub-committee believes that these issues can only be dealt with at EU, OECD, G8 and G20 levels and calls for an acceleration of the review of OECD rules on taxation.

The sub-committee suggests that the scope of the GAAR should be independently reviewed after five years to ensure it is having the appropriate deterrent effect and, in particular, whether the ‘double reasonableness’ test is working effectively. To assist in the operation of the GAAR, the sub-committee considers that as many examples of abusive and non-abusive arrangements as possible should be provided by both HMRC and the GAAR Advisory Panel (particularly in relation to inheritance tax planning), and that anonymised opinions of the Advisory Panel should be published so that taxpayers can see how the application of the GAAR is developing. The sub-committee comments that, given the importance of guidance in this area, progress needs to be made on clarifying the existing draft guidance as a matter of urgency. In relation to the composition of the Advisory Panel, it is of the view that it is not appropriate that the decision on appointments lies solely with HMRC Commissioners, and suggests that the Government should consider introducing a selection and appointment process that is independent of HMRC.

In respect of ARPT, the sub-committee has concerns about the workability of the ARPT proposals as they stand currently and whether their length and complexity justify the problem that they seek to address. It suggests HMRC should set out clearly how it intends to implement the provisions, and that a review should be undertaken after three years to evaluate how effective the provisions have been in delivering the objectives behind the policy.

Finally, in relation to the cap on income tax reliefs, the sub-committee considers that the effects of the cap on genuine trading losses could have a significant adverse effect on economic growth at a time of austerity and recommends that the Government should carry out a more detailed review to understand better the impact of these measures on business investment.

On 14 March, the Department for Business Innovation and Skills published its report entitled Employment Law 2013: Progress on reform. Included in this report are the proposals for employee shareholder status under which employees agree to reduced employment rights and protections in return for receiving between £2,000 and £50,000 worth of shares (which have capital gains benefits).

Previously the official message was that the new status would be introduced from April 2013. However, within the newly published document is a timeline for all the various employment law reforms. This shows that the legislation introducing the new employee shareholder employment status is now timetabled for autumn 2013, a delay mirrored later in the report by a statement merely that the Government intends to introduce the new status in 2013.

It remains to be seen whether there will be any parallel changes to the tax reliefs accompanying the employee shareholder status, either in the Budget or in the draft Finance Bill clauses due on 28 March.

The case considers a capital loss which the taxpayer agued arose by virtue of the application of the identification rules in section 106 TCGA 1992. At the First-tier Tribunal level, HMRC advanced two lines of argument.

Firstly, a Ramsay argument, that on a purposive construction section 106 did not apply to the facts as viewed realistically (this included the proposition that the shares would inevitably be reacquired as part of the arrangements) .Secondly that section 30 TCGA 1992 (the value shifting rules) operated so as to diminish or eliminate the loss. The First-tier Tribunal found for the taxpayer on the Ramsay point but found that the value shifting rules were in point.

The Upper Tribunal has now rejected the taxpayer's appeal against the decision reached by the First-tier Tribunal. In relation to the application of the value shifting provisions the Upper Tribunal accepted the taxpayer's view that section 106 did not apply to deem the value shifting provision in section 30(9) TCGA 1992 to apply to the transaction. However, the Upper Tribunal held that section 30(9) would apply to the disposal and subsequent re-acquisition of the shares without the need for reliance on section 106. The Upper Tribunal found that, when read purposively and in the context of the section 30 as a whole, section 30(9) applied to the tax avoidance arrangement in this case, that was comprised of the disposal and subsequent re-acquisition of shares. The Upper Tribunal held that the just and reasonable adjustment required should be to eliminate the whole of the loss.

In view of its conclusion on the value shifting point, the Upper Tribunal did not come to a view on the Ramsay argument, though it did see considerable force in the reasoning of the First-tier Tribunal on this point.

On 13 March, the Supreme Court delivered its judgment in HMRC v Aimia Coalition Loyalty UK Limited (formerly known as Loyalty Management UK Limited) (LMUK). It found in LMUK's favour by a 3-2 majority, which means that LMUK is entitled to recover input tax in respect of payments made to suppliers of reward goods (redeemers) who in turn provided those goods to collectors of Nectar points.

The Supreme Court judgment follows on from a reference to the Court of Justice of the European Union (CJEU). The CJEU leaned towards the payment by LMUK being third party consideration for supplies of reward goods to the collectors and, therefore, not giving rise to any input tax recovery by LMUK. However, the CJEU held that it was for the national court to determine the facts of the case, and specifically whether LMUK had received any separate service from redeemers.

The Supreme Court noted that the important aspects of the CJEU judgment include the consideration of economic realities as a fundamental criterion for the application of the common system of VAT and the need, in the case of a transaction comprising a bundle of features and acts, to have regard to all the circumstances in which a transaction takes place.

The case could have wider implications for loyalty reward programmes and the circumstances under which input tax can be recovered by the parties involved. However, every case must be examined individually on its full facts. Please see our Indirect Tax Services alert for more details.

New UK GAAP standard (FRS 102) published

As we trailed in last week's Midweek Tax News, on 14 March, the Financial Reporting Council released FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. FRS 102 brings clarity for preparers over the framework for their future statutory reporting. It will be applied by many companies, particularly those without current or likely future IFRS reporting requirements within their group. Entities adopting the standard will benefit from the simplified accounting principles and some disclosure reductions, compared to UK GAAP.

Whilst the new framework is not mandatory until periods beginning on or after 1 January 2015, the opening balance sheet presented under the new framework for those converting at this latest date will be 1 January 2014 (for December year ends); less than a year away. By planning now, companies will be able to understand better the impact on systems and processes, taxation payable and distributable reserves. Additionally companies will have the opportunity to consider whether early adoption is advantageous, thus ensuring any possible benefits of conversion are maximised whilst risks are managed and mitigated as far as possible.

The impact of the new standard will vary from group to group. Tax issues requiring attention may arise particularly in the financing and treasury area as well as other areas including intangible assets, expenses and thin capitalisation/transfer pricing positions. Groups are encouraged to allow plenty of time to implement change as there are significant steps to be addressed and a wide range of issues to be considered in determining which framework to adopt.

Tax transparency and the FTSE 100: Responses sought by 21 March 2013

In November 2012, Christian Aid enlisted Stephen McPartland, Conservative MP for Stevenage, to write to the Chief Executives of all FTSE 100 companies to ask:

• if they will support corporate tax transparency and how their company is demonstrating corporate tax transparency

• if they will support a new international accountancy standard to report company financial information on a country-by-country basis

The responses have been published by Mr McPartland. He has now advised that companies have until 21 March to respond, after which the intention is to name the non-responders and to publicly write to the company's biggest shareholders to ask them to put pressure on these companies to adopt a more transparent approach. Companies that are planning to respond but have not, as yet, might, therefore, like to respond before 21 March.

UK/Spain double tax treaty signed

On 14 March 2013, a new tax treaty between the UK and Spain was signed. The treaty will enter into force once the necessary legislative procedures have been completed.

The new treaty provides that no withholding tax should apply to interest and royalty payments and to dividend distributions from UK or Spanish companies to a resident in the other state where the beneficial owner of the dividend controls at least 10% of the distributor's capital or is a pension scheme. This is a welcome reduction down from the previous treaty rates of 15% for dividends, 12% for interest and 10% for royalties. Dividends to portfolio investors benefit from a reduced 10% withholding tax (subject to rules for real estate investment trusts or their equivalents).

There are changes to the mechanism for relief of double taxation, with the result that dividends received by a Spanish entity from a UK subsidiary which do not meet the requirements for the Spanish participation exemption will no longer be exempt. Instead the recipient will be entitled to a foreign tax credit equal to the lower of the tax effectively paid abroad or the rate of Spanish tax on such income.

The new treaty does contain updated anti-abuse measures and also makes potentially significant changes to the capital gains tax position of land-rich companies. Spain generally taxes gains derived by non-Spanish residents from the sale of Spanish land-rich entities. The current UK/Spain treaty does not permit Spain to impose tax on capital gains derived by a UK resident from the transfer of the shares of a Spanish entity, whether land-rich or not. The new treaty will however enable Spain to impose tax on capital gains deriving from the transfer of shares (or comparable interest) of an entity when more than 50% of its value derives, directly or indirectly, from real estate properties located in Spain. Such capital gains tax does not apply to the transfer of shares that are substantially and regularly traded on a Stock Exchange, even if other than a Spanish or UK stock exchange. Groups may wish to review their current group structure in light of the proposed changes.

UK/Norway double tax treaty signed

Also on 14 March, a new tax treaty between the UK and Norway was signed. Key features include a zero withholding tax on dividends received by pension funds and by companies that have a 10% or more control of the paying company. The treaty also contains the latest OECD provisions on business profits, exchange of information, assistance in collection and arbitration. There is a change to the pension's article so that pensions will be taxed at source. Existing pensioners have the safeguard of being able to elect to continue to be taxed in their state of residence as provided by the current treaty. As with the UK/Spain treaty, the new UK/Norway treaty will enter into force once the necessary legislative procedures have been completed.

Year-end pensions actions

As the 2012/13 tax year draws to a close, it is important that taxpayers consider their pension position to ensure any available reliefs are not being inadvertently lost. Our Tax Services alert considers the tax reliefs available in respect of pension contributions and raises a number of key issues which individual taxpayers should consider as part of their overall pension planning.

Offshore intermediaries: Government action

On 18 March, the Government announced that it will strengthen legislation to block tax avoidance involving offshore intermediaries. The Government defines an offshore intermediary for these purposes as a structure that is put in place between a worker and a business using their labour. The Government notes that, by having no presence, residence or place of business in the UK, the offshore intermediary is not currently obliged to remit payroll taxes or pay national insurance contributions. Some intermediaries are in place for legitimate commercial reasons but the Government believes many are put in place with a view to avoiding tax, in particular employer national insurance contributions.

The Government is proposing that employment taxes will be payable for all employees in the UK, irrespective of where their payroll is located. It estimates that addressing this avoidance will benefit the Exchequer by almost £100 million a year. HMRC will issue a consultation document on the design and operation of the measure in May this year. Legislation will be included in the 2014 Finance Bill. It is envisaged that the new measures will come into force on 1 April 2014.

Capital allowances guidance

On 14 March, HMRC issued draft guidance on plant and machinery allowances in respect of qualifying expenditure on second-hand fixtures. Legislation was introduced in Finance Bill 2012 to make the availability of capital allowances to a purchaser of second-hand fixtures conditional on the pooling of relevant expenditure prior to a transfer, and on the seller and purchaser formally agreeing a value for fixtures within two years of a transfer, or on formal proceedings being commenced within that time to agree the value.

Any comments on this draft guidance should be made to HMRC by 15 May 2013. HMRC aims to publish this guidance in the Capital Allowances Manual as soon as possible after any comments received have been considered.

OECD: Report on after-tax hedging

The OECD issued a report on Aggressive Tax Planning based on After-Tax Hedging on 14 March 2013. After-tax hedging is an approach designed to ensure that the hedging arrangement achieves a neutral position once the effect of tax in respect of an arrangement is taken into account. In the report, the OECD acknowledges that after-tax hedging is not of itself aggressive; it is recognised as a frequently used risk management technique to achieve a post-tax effective hedge.

The report expresses concern with regard to transactions where the foreign currency exposure is created as part of the transaction, rather than being a pre-existing exposure for the taxpayer.

The report describes these transactions as enabling the taxpayer to make higher returns through effectively borrowing in lower coupon currencies and depositing in higher coupon currencies, while eliminating the relevant risk by transferring that risk to the tax authority. Recommendations as to how tax authorities might respond to the use of such arrangements are contained in the report, although the report recommends that tax authorities take care in designing a balanced response in this area.

Please see our Global Tax Alert for more details.

Russia: Proposed deferral of key transfer pricing deadlines

The new Russian transfer pricing regime has been in force since 1 January 2012. The first statutory deadlines for taxpayers in relation to this regime are in May and June 2013. However, the Russian Government has now proposed allowing more time for the submission of notifications and the preparation of transfer pricing documentation in relation to controlled transactions in 2012. A corresponding amendment is also proposed to the deadline by which the tax authorities may adopt a decision to audit the proper calculation and payment of taxes in connection with such transactions. Our Global Tax Alert provides details of the new proposed deadlines and considers the cut-off point in determining which intra-group financing arrangements fall within the new regime.

Argentina/Spain: New double tax treaty agreed in principle

On 11 March 2013, Argentina and Spain signed a new tax treaty. Although the treaty has not been released, it has been reported that the countries intend to apply it retroactively to 1 January 2013. It should be noted that a treaty was signed in 1992, but was terminated by Argentina on 29 June 2012, with effect from 1 January 2013 for taxes withheld at source and for tax periods beginning on or after that date for other taxes. See our Global Tax Alert for more details.

India/Mauritius: Progress expected on double tax treaty

Reports in the press recently have speculated that India and Mauritius will sign a revised double tax treaty after the next round of talks scheduled for April 2013. The existing double tax treaty provides a popular route for investment into India and groups with interests in India may wish to monitor developments.

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.

Budget web seminar

Email Claire Hooper

+ 44 20 7951 2486

Keeping the UK open for business: Response from our 2013 pre-Budget survey

Email Jason Lester

+ 44 20 7951 2998

House of Lords sub-committee report on Finance Bill 2013

Email Chris Sanger

+ 44 20 7951 0150

Potential delay in introduction of new employee shareholder status

Email Nigel Duffey

+ 44 20 7951 9586

Upper Tribunal decision in Land Securities case

Email Andrew Drysch

+ 44 20 7951 7076

Nectar programme: Input tax recovery allowed by the Supreme Court

Email Simon Baxter

+ 44 20 7951 3966

For other queries or comments please email

 Back to the top

Contact us

Find your nearest Tax contact:


Find out about our Law services.

Tax guides and resources

Global Tax Alerts

Connect with us

Stay connected with us through social media, email alerts or webcasts.