A weekly update on tax matters to 27 July 2021
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.
29 April 2021, the Government launched a consultation on the design of a new residential property developer tax (RPDT) to be introduced as part of its Building Safety Package. It is proposed that RPDT would be included in the next Finance Bill, and that it would apply from 1 April 2022, to profits recognised in accounting periods ending on or after that date (with a deemed period ending on 31 March).
In our response to this consultation, we have focused on the issues arising around build to rent (BTR) and purpose-built student accommodation (PBSA) asset classes, as we believe these raise the greatest issue in terms of policy design. In our detailed comments we address four areas of concern regarding the proposed design of the tax:
- Issues of fairness with a tax which, in some cases, would apply a tax liability where the taxpayer does not have a receipt of funds in order to settle the liability
- Risk of discrimination between business models due to the ‘one size fits all approach’. This can only be mitigated by accepting an increase in the complexity of the tax
- Poor tailoring of the proposal to key sectors with its scope. The proposal does not accurately reflect the development lifecycle of UK residential property and the different types of build and sale arrangements
- Concern that the proposal does not align with existing tax principles
If you would like to discuss our response to this consultation, please get in touch with Russell Gardner, whose details are at the base of this newsletter, or your usual EY contact.
Other UK developments
The Government announced in February 2021 that, as part of its Building Safety Package, it intended to introduce a new levy that would apply when a developer seeks permission to develop high-rise buildings in England (the ‘Gateway 2’ levy). Powers to create and set the terms of the levy are included in the Building Safety Bill, which was introduced to Parliament on 5 July 2021.
On 21 July, the Government launched a consultation on the Gateway 2 levy. The consultation, which is open until 15 October 2021, requests views on the design of the levy, and evidence of possible impacts on housing supply and regeneration, and the housebuilding industry.
The Gateway 2 levy will be separate from, but sit alongside, the new RPDT which is discussed above.
As a reminder, the Franked Investment Income Group Litigation Order (FII GLO) considers the claim that the previous UK dividend taxation regime, by differentiating between dividends from UK companies and those from EU companies, breached the freedoms of establishment and movement of capital in the EC Treaty.
The most recent decision in the Supreme Court was handed down on 23 July 2021 and covers appeals from the 2016 Court of Appeal judgment and the 2010 Court of Appeal judgment. The issues covered in the judgment included both issues of principle and issues relating to the quantification of the Claimants’ claims.
In respect to interest for the periods when the Claimants paid tax prematurely, the Supreme Court rejected the Claimants’ arguments that HMRC should be barred from being able to challenge the award of compound interest. It then went on to hold that the interest in question should be calculated on a simple interest basis under section 85 of the Finance Act 2019 (with a six-year limitation period). The Court highlighted that although EU law confers a right to the payment of interest, it does not prescribe a period of limitation and that, following Prudential, claims to interest are not restitutionary in nature.
In relation to the set off of double taxation relief (DTR), the Court considered the position where order of the utilisation of various reliefs by the Claimants, including double taxation relief, had the effect that DTR was not fully utilised and was consequently lost. The Court has granted the Claimants’ appeal, noting that it was clear that the DTR provisions, in preventing the carrying forward of unused DTR, gave rise to indirect economic double taxation and a difference in treatment as between domestic-source and foreign-source dividends in breach of EU law.
The Court then went on to reject HMRC’s argument that although it had received unlawfully levied advance corporation tax (ACT) from the Claimants, those payments triggered a corresponding obligation on HMRC to pay out shareholder tax credits. The Court noted that the obligation to pay ACT on the one hand and entitlement to shareholder tax credits on the other were set out in independent statutory provisions, neither of which was conditional on the other. This position was not affected where the UK group had a non-resident parent which received double taxation treaty credits (FCE Bank plc). Here again, the payment of the tax credit was not conditional on FCE incurring a liability to pay ACT.
In relation to arguments based on the free movement of capital provisions, relevant for ‘third country (non-EU) dividends, the Court considered the applicability of the ‘standstill provision’ of Article 64(1) TFEU in light of the Eligible Unrelieved Foreign Tax (EUFT) rules? The standstill provision provides for a derogation from the free movement of capital for restrictions existing on 31 December 1993. The Supreme Court agreed with the Claimants that it was clear that the adoption of the EUFT rules altered the tax regime governing foreign source dividends. The rules introduced materially different procedures for the calculation of tax credits and did nothing to reduce the pre-existing restriction on the free movement of capital. As a result, the benefit of the standstill provision was lost as from 31 March 2001 when the EUFT rules were brought into operation.
Finally, in looking at when and to what extent unlawfully charged ACT should be regarded as ‘surrendered’ to a subsidiary, the Court found that there was no basis for treating a parent company’s surplus ACT which was actually surrendered to a particular subsidiary other than as partly lawful and partly unlawful on a pro rata basis.
This recent decision is separate to the Supreme Court’s decision in November 2020 which addressed the time limits for bringing claims for restitution. That issue requires a further High Court hearing to resolve the question of when the claimants discovered or could with reasonable diligence have discovered their mistake in the sense of recognising that they had a worthwhile claim.
In the case of Wilhunter UK Limited, the First-tier Tribunal has considered whether a fee paid for the early termination of an agreement for the provision of an oil rig arose from ‘oil contractor activities’, and, therefore, whether it should be taxed as part of the ring-fence trade such that losses on other activities could not be offset against it.
Wilhunter leased an oil rig from an associated company. Through a drilling contract entered into by its parent company, it provided the rig to a third party for use in a decommissioning programme in the UK continental shelf (UKCS). That programme completed early and a termination agreement was subsequently entered into providing for payment of a termination fee to the taxpayer.
The Tribunal considered that the making of the contract and the activities in the UKCS were oil contractor activities carried on by Wilhunter. It considered that the termination fee could be treated as arising from more than one source. While the immediate source of the income was the termination agreement, the fee also had as its source the fixed-term provision of the rig for the decommissioning work under the contract. The total of the sums payable under the contract was payable for the decommissioning works (whether finished or unfinished within the contract period) and the right to the payments and the termination fee arose from the contract and that work.
The Tribunal therefore held that the fee was taxable as part of a ring-fence trade and losses from other activities could not be set against it.
Historically, HMRC’s view on the liability of payments received in relation to lens replacement and aftercare schemes was that such payments were the consideration for benefits which may or may not be taken up, not for the consideration for medical care and as such treated them as taxable supplies. HMRC now recognises that the payments are for the benefits to be received and not just for the right to receive those benefits and accepts that schemes as prepayment for future supplies of both exempt professional services and standard rated goods, are apportionable (unless the replacement scheme entitles the wearer to no more than the replacement of lenses or supplies of disposable lenses with no sight tests or check-ups, in which case the whole supply is standard-rated). Businesses operating in this space may wish to consider the implications of the update.
Other International developments
We are now 6 months beyond Brexit and businesses are beginning to establish a “new normal” for their trade between the UK and EU. EY Global Trade is running a short summer campaign in July and August to assist businesses to understand the precise impact of Brexit and to identify any potential duty or cost savings that are not being claimed. Our post Brexit customs data analytics offering can provide a rapid view on all UK imports and exports since 1 January 2021. Moreover, using HMRC import and export data means there is little input required from the business. Whether you currently have poor visibility of your business’s customs footprint since Brexit, or whether you simply want to cross check expectations against actual, this tool and its outputs can provide detailed insight and help inform future strategy.
Please see our flyer for further details.
Please see below links to a selection of our tax alerts. Additional articles are available in our global tax alert library.
United States: The IRS has issued a memo setting out its views on the treatment of stock-based compensation costs in cost sharing agreements that include a ‘reverse claw-back’ provision, but do not share stock-based compensation costs. The IRS asserts that it can make certain allocations to make the cost sharing transactions consistent with an arm's length result.
Germany: Germany has published transfer pricing administrative principles which, following the recent legislatives changes, aim to align the German interpretation of the arm’s-length principle to international standards. They are effective immediately without any grandfathering provisions and for all open cases.
Germany: As part of the above administrative principles, the new German guidance states that the acceptable interest margin for a foreign financing company is limited to the current risk-free market return unless the financing company is ‘able and authorised’ to control the financial investment and bear the corresponding risks. A separate global alert is available discussing this aspect of the administrative principles.
Gibraltar: Gibraltar has announced its 2021/22 budget measures which include an increase in the corporate tax rate to 12.5%, a series of tax measures to encourage business investment and personal tax changes for those taxed under a special tax status.
Ireland: As highlighted in last week’s Midweek Tax News, the Minister for Finance has announced a public consultation on the OECD’s two-pillar BEPS 2.0 proposals on international taxation. A global tax alert is now available providing further details on this consultation.
Poland: The Government has announced plans to introduce a new measure – an investment agreement – for strategic investors. The agreement (commonly referred to as ‘Interpretation 590’) concluded with the Ministry of Finance will set out certain tax consequences of the investment that a given investor intends to carry out in Poland. It will be binding on the tax administration and should enable the business to obtain comprehensive tax clearance regarding its investment in Poland.
Our executive pay alert for the 2021 FTSE 350 AGM season is now available. In the alert, we discuss the key executive remuneration topics so far in 2021. We summarise investor hot topics in respect of reward decisions against the backdrop of COVID-19, as well as some other interesting executive remuneration and governance insights from the season.
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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, Nicola Sullivan (+44 20 7951 8228), or your usual EY contact.
Consultation on residential developer property tax: EY response
Russell Gardner (+44 20 7951 5947)
For other queries or comments please email firstname.lastname@example.org.