Tax news

Midweek Tax News

A weekly update on tax matters to 9 August 2022

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.
From September, we will be looking to include links to source material where relevant. Please let us know should this disrupt your receipt of Midweek Tax News in any way.
  • Upper Tribunal considers anti-avoidance rules on exchange of shares

    The Upper Tribunal has rejected HMRC's appeal in the case of Euromoney Institutional Investor PLC. The case looked at whether an exchange of shares (otherwise falling within s135 TCGA 1992) formed part of a scheme or arrangements of which the main purpose, or one of the main purposes, was avoidance of liability to capital gains tax or corporation tax. In particular, the case considered what constituted the scheme or arrangement in question.

    Instead the Upper Tribunal summarised the position as follows:

    • The first question to be addressed is whether the exchange “form[s] part of” a “scheme or arrangements” and, if so, what the scheme or arrangements consist of. These questions involve ordinary words of the English language and it is a question of fact for the First-tier Tribunal to determine how they should be answered in any particular case.
    • If an exchange forms part of a scheme or arrangements, there is then a second question of fact for the First-tier Tribunal to determine, namely whether the main purpose, or one of the main purposes of that scheme or those arrangements is avoidance of liability to capital gains tax or corporation tax. That requires an examination of the purpose or purposes of the totality of the scheme or arrangements. Identification of the purpose or purposes of individual steps or constituents of the scheme or arrangements is not irrelevant as it may help to ascertain the purposes of the scheme or arrangements as a whole. However, it is the purpose or purposes of the overall scheme or arrangements that matter.
    • The Upper Tribunal expressed no view as to whether ascertaining the “purpose” of any scheme or arrangements involves a subjective test, an objective test, or a combination of the two. That issue was not argued in this case, both parties accepting it was a subjective test.

    The Upper Tribunal found that the First-tier's task was simply to make findings on the nature and extent of any scheme or arrangements of which the exchange formed part and the purpose or purposes of that scheme or those arrangements. In this case, the First-tier Tribunal was entitled to reach the conclusions that it did.

  • Upper Tribunal addresses meaning of ‘incidental’ and looks at weight to be given to contractual terms over oral evidenc

    The case of Dolphin Drilling Limited looks at the particular issue of whether a vessel is a “relevant asset” for the purposes of determining whether deductions are available under the oil contracting activities rules. However, the case is of wider interest as, in reaching a decision on this issue, the Upper Tribunal reviewed both the meaning of ‘incidental’ and the rules on determining the intention of the parties from the construction of written contracts.

    The Upper Tribunal agreed that there was no definition of ‘incidental’ or ‘more than incidental’ for the purpose of the test under consideration, and that these words should bear their ordinary meaning. It also agreed that the question of whether one thing is incidental to another is a qualitative rather than a quantitative test. However, it noted that it is possible to contemplate situations in which the sheer quantity of one thing relative to another might call into question whether the former could be properly described as incidental to the latter.

    In the Upper Tribunal’s view the critical element is the element of subordination. The fact that a use is desirable, sought-after or important (by whatever measure) may on its face suggest that it is unlikely to be incidental; but whether it is incidental depends on all the facts and whether such use is (or can reasonably be supposed to be) subordinate or secondary to another use.

    As a separate ground of appeal, HMRC argued that the First-tier Tribunal took an incorrect approach to interpretation of the contract in question by giving weight to what the taxpayer’s witnesses of fact said about it and not regarding the written terms of the contract as determining the issue.

    The Upper Tribunal noted that it is an over-simplification to say that it is a rule of contractual construction that matters outside a written contract can never be taken into account (with reference made to ABC Electrification Limited v Network Rail Infrastructure Limited). In any event, the Upper Tribunal noted that the evidence given by the taxpayer’s witnesses as to various issues in relation to the contract was not given in aid of interpreting the contract but as to the likely use of the asset in question.

Other UK developments

  • HMRC late payment interest rates to be revised

    Following the vote by the Bank of England Monetary Policy Committee to increase the Bank of England base rate to 1.75%, HMRC late payment interest rates will increase from 3.75% to 4.25% (debit interest on quarterly instalment payments will increase to 2.75%). This change will come into effect on 15 August for quarterly instalment payments and 23 August for non-quarterly instalments payments. By contrast to previous announcements, the repayment interest rate will also increase, in this case to 0.75% (with credit interest on quarterly instalment payments increasing to 1.5%).

  • Upper Tribunal considers taxation of limited partnership

    In the case of BCM Cayman LP & Anor, the Upper Tribunal has considered an acquisition by a Cayman Islands limited partnership (of which a Cayman Islands limited company was the general partner) of a 19% interest in a UK limited partnership financed through borrowing.

    As a limited partnership, BCM Cayman LP did not have separate legal personality and one of the key points in the case was to determine the effect of the arrangement whereby BCM Cayman LP became a partner in the UK limited partnership and, in particular, whether all of the partners of BCM Cayman LP also became partners in the UK limited partnership.

    The Upper Tribunal found that the Cayman general partner was not entitled to a tax deduction for interest on the borrowings as they were not trading loan relationships.

    The Upper Tribunal also found that the Cayman general partner was liable to UK corporation tax on certain profit allocations without allowance for the profits allocated to the partners in the Cayman partnership. The Upper Tribunal found that it was open to the First-tier to conclude that partners in the Cayman limited partnership did not become members of the UK limited partnership (the fact that a Cayman limited partnership has no separate legal personality did not determine the issue). Furthermore, Part 17 CTA 2009 contained an entirely separate free-standing regime for the taxation of profits arising under a partnership, which meant that it was not possible to sustain an argument based on s6(1) CTA 2009 that the general partner should not be taxed on profits it received and held in a fiduciary capacity.

  • First-tier Tribunal follows strict interpretation of CJRS rules

    The case of Carlick Contract Furniture Limited appears to be one of the first cases to reach the Tribunal in relation to the attempted clawing back by HMRC of payments made to employers in respect of the furloughing of employees during the early phases of the COVID-19 pandemic. As a reminder, when the Coronavirus Job Retention Scheme (CJRS) was introduced at the start of the pandemic, it was designed to apply only in relation to employees who were taken on before the emergency started.

    The case concerns the clawing back by HMRC of payments made in respect of two employees from the taxpayer’s workforce whose employment with it commenced in February 2020 (before the COVID-19 emergency started), but whose commencement date was too late for them to be included in the February payroll (and associated RTI reporting of the taxpayer). They were included in the late March payroll run, at which time they were paid their wages from February as well as March. HMRC claimed that this meant that all the payments to them did not count as “qualifying costs” under the CJRS. The taxpayer argued that the CJRS claims had been “in the spirit that the support was intended”.

    The Tribunal held that it had no option but to dismiss the appeal. The CJRS directions included a clear line for eligibility and there was no power for it to exercise any discretion over the matter.

    Separately, HMRC has recently issued Q&As on common errors in the calculation of CJRS grants. In that guidance HMRC states that an error has been made that must be corrected if the employer has failed to take reasonable care in following HMRC guidance available at the time of the claim. Where the guidance has changed, HMRC would expect employers to have taken changes in to account in claims made from the start of the following calendar month. However, if an employer has spoken to HMRC, was asked questions by HMRC, provided HMRC with an honest answer and can evidence having received unambiguous advice, the employer can stand by that advice and a correction does not have to be made.

  • HMRC updates uncertain tax treatment guidance for CEST

    Under the Uncertain Tax Treatment (UTT) regime, an amount is notifiable under the second criterion if the tax treatment applied in arriving at the amount relies (wholly or in part) on an interpretation or application of the law that is not in accordance with the way in which it is known that HMRC will interpret or apply the law (‘known position’).

    HMRC has now updated its manual page dealing with HMRC’s known position to add the outcome of the HMRC Check Employment Status for Tax (CEST) tool, where the result is not indeterminate, and the information provided is accurate to the list of circumstances in which HMRC’s position may be known through dealings with HMRC in respect of the business.

    HMRC notes that there is no ‘compulsion’ to use CEST. However, if a business uses CEST, the results provide HMRC’s known position in relation to a set of facts for a specific engagement (in response to a series of answers that the business has provided). If the business treats the status in accordance with the results of CEST, then no notification is required. Similarly, as the results of CEST produce HMRC's known position on the engagement, a notification is required if the business treats the relationship contrary to these results.

Other International developments

  • IRS concludes that termination fees in failed merger were capital losses

    In a recent IRS Office of Chief Counsel Legal Memorandum (CCA 202224010), the IRS has concluded that termination fees paid by a taxpayer in two failed transactions should be treated as Internal Revenue Code (IRC) Section 165 losses that are capital under Section 1234A instead of business expenses under Section 162.

    In the CCA, the IRS determined that:

    • The termination of each transaction resulted in a loss under Section 165, not a business expense under Section 162.
    • The Section 263(a) regulations do not require termination fees to be deducted under Section 162.
    • Relevant case law does not require the IRS to accept Taxpayer's treatment of the termination fees as Section 162 expenses.
    • Section 1234A applies to characterize the termination fees as capital losses because they are attributable to assets in the hands of Taxpayer.

    This CCA makes it clear that the IRS is scrutinizing the deductibility of termination payments stemming from capital transactions. A global tax alert is available which looks at the IRS approach in more detail.

  • Australian Treasury releases discussion paper following on from Labor Government’s tax integrity package to address tax avoidance and improve transparency

    The Australian Treasury has released a discussion paper on Multinational Tax Integrity and Tax Transparency, following on from the Labor Government’s election proposals to address tax avoidance practices of multinationals and improve transparency through better public reporting of tax information.

    The discussion paper seeks to consult on the implementation of proposals to:

    • Amend Australia’s existing thin capitalization rules to limit interest deductions for multinationals in line with the OECD recommended approach under BEPS Action 4
    • Introduce a new rule limiting a multinational’s ability to claim tax deductions for payments relating to intangibles and royalties that lead to insufficient tax being paid
    • Ensure enhanced tax transparency by multinationals, through measures such as public reporting of certain tax information on a country-by-country basis, mandatory reporting of material tax risks to shareholders and requiring tenderers for Australian government contracts to disclose their country of tax domicile

    The discussion paper does not consult on the following:

    • Implementation of the OECD two-pillar solution. A consultation paper on Pillar Two is expected to be issued in the coming weeks
    • Implementation of a public registry of beneficial ownership to improve transparency on corporate structures, to show who ultimately owns or controls a company or legal vehicle

    Responses to the discussion paper are requested by 2 September 2022. A global tax alert is available which has more details on the proposals.

  • Indian Tax Administration mandates electronic filing to access tax treaty benefits

    The Indian Tax Administration (ITA) has issued a notification mandating non-resident taxpayers to electronically furnish specific information in a specified form (Form 10F) to access benefits under a relevant Double Tax Treaty. The notification comes into force immediately and non-resident taxpayers can electronically file Form 10F for the Fiscal Year 2021/22. The notification may effectively require non-resident taxpayers to obtain an Indian Tax Identification Number (PAN), register on the Income Tax E-filing Portal (Portal) and file Form 10F electronically. Our global tax alert looks at the details of the notification.

  • Other global tax alerts

    We have included links to a selection of our tax alerts below. Additional articles are available in our global tax alert library.

    Egypt: Egypt has introduced a tax amnesty law under which 65% of any outstanding delay interest, additional taxes, and duties is waived if the principal amount of taxes and duties are paid in full before 31 August.

    Ireland: Ireland has published guidance confirming that certain Digital Services Taxes, including the UK’s, incurred wholly and exclusively for the purposes of a trade are deductible for Irish corporation tax purposes.

    Luxembourg: The Luxembourg Tax Authority has issued an updated administrative circular containing clarifications and examples in relation to the Luxembourg Controlled Foreign Company rules.

    United States: The US Treasury Department has published technical corrections to January’s final regulations on foreign tax credits. The corrections limit the foreign taxes taken into account for the GILTI high-tax exclusion limit and broaden the scope of permissible disallowances under the cost recovery requirement.

    Uruguay: Uruguay has published a draft bill which would bring certain foreign-source income within the scope of corporate income tax, in order to comply with EU requirements.

    Uruguay: Against a background of the Uruguay/Belgium double tax treaty, the Uruguayan Tax Authority has confirmed that profit repatriations received by the head office from its permanent establishment in Uruguay are not subject to non-resident income tax in line with the business profits article of the treaty.

Publications

  • TradeFlash: July 2022

    TradeFlash provides a roundup of EY global trade materials, including insights, tax alerts and webcasts and podcasts, so as to help clients stay up to date and identify the key developments that impact their business. This newsletter is a companion to EY’s TradeWatch. The latest July edition is now available and provides the facility to sign up to receive future editions directly.

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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, Nicola Sullivan (+44 20 7951 8228) or your usual EY contact.

Upper Tribunal considers anti-avoidance rules on exchange of shares
Mike Gibson (+44 20 7951 0568)

Upper Tribunal addresses meaning of ‘incidental’ and looks at weight to be given to contractual terms over oral evidence
Elyse Waller (+44 20 7951 4209)

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