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Midweek Tax News

A weekly update on tax matters to 13 November 2018

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 consultation on the detailed design and implementation of an interim UK digital services tax (DST) ahead of its inclusion in the 2019-20 Finance Bill. The proposal is to tax revenues arising from the provision of social media, search platforms and online marketplaces, whatever the character of those revenues, subject to certain thresholds. The consultation document provides more information on the scope of the tax, including examples of which revenues would be included, and the proposed payment and collection of tax mechanisms.

Groups should assess the impact of the proposals on their business as well as the impact on others in their supply chain and their competitors. Following that they may want to participate in discussions with HM Treasury on the proposals, consider whether changes to their business model are desirable and engage with stakeholders on the impact of the proposals (as we are seeing an increasing interest from investors in the impact of the rules on businesses' financial performance).

We will be hosting a webcast on the taxation of the digital economy at 10am on 11 December, where we will provide an update on the latest developments in this area, including the UK consultation, and consider what groups are to respond. Please look out for the invite in next week's Midweek Tax News and hold the date in the interim.

The consultation document reiterates that the UK would prefer a global solution and states that in the event that international agreement is reached, the UK will assess whether the UK DST is still needed. The discussions at the ECOFIN meeting on 6 November 2018 highlighted some of the difficulties in reaching agreement amongst the EU Member States on the European Commission's DST proposals. In particular, Ireland, Sweden and Denmark continued to speak out against an interim DST.

The next stage in the process is to see if political agreement can be reached at the Council meeting on 4 December 2018. The German position on how to tackle perceived issues with the taxation of the digital economy has been seen as critical in whether the EU can get agreement in December. The German Finance Minister Olaf Scholz has now said that a solution at OECD level must be reached by summer 2020 and that if “international understanding fails, I believe that we should take the lead at European level and introduce, from January 2021, minimum rates of taxation and effective taxation of digital companies.” In the same interview he said that Germany will support France in trying to reach a deal by the end of this year and that the proceeds from the EU DST should go to the EU to increase the EU's ‘own resources’. Germany and France are working together to develop a set of international standards to enable countries to react to other countries' tax competition – this is the reference to ‘minimum rates of taxation’ above. We will also consider these proposals in our webcast on 11 December.

The Government has published a response to the consultation on the corporate intangible fixed assets regime which confirms its intention to introduce a targeted relief for goodwill arising on the acquisition of businesses with eligible intellectual property from 1 April 2019 and make changes to the de-grouping rules from 7 November 2018.

The intention is that the new rules will apply in respect of goodwill arising on acquisitions of businesses occurring on or after 1 April 2019. Goodwill arising on acquisitions prior to that date will continue to be subject to the tax treatment that applied at the time it was acquired.

The draft legislation to enact these changes has not yet been released, but after a brief consultation on the detailed design of the policy, the Government intends to legislate for the changes in Finance Bill 2018-19 through Government amendment.

The proposal is to allow relief for the cost of acquired goodwill (but not customer related intangibles) up to the accounting value of the eligible IP in the acquired business. Whilst additional relief for goodwill will be broadly welcomed by many groups, many will have hoped that it would go further.

Draft legislation on the de-grouping changes is included in the Finance Bill. From 7 November 2018, a de-grouping charge will not arise under the IFA regime where the de-grouping is the result of a share disposal that qualifies for the substantial shareholding exemption.

You can read our detailed alert on the proposed changes here.

On 7 November 2018, Finance Bill 2018-19, formally Finance (No.3) Bill, was published. The second reading of the Bill took place on 12 November, and certain parts of the Bill will now be considered in a Committee of the Whole House which will meet over two days. The date for this has yet to be confirmed but it is expected to be at the beginning of next week.

The proposals for the taxation of offshore receipts in respect of intangible property will be one of the clauses considered before the Whole House along with most of the clauses in the International Matters section of the Bill. Other clauses to be considered before the Whole House include the proposed amendments to entrepreneurs' relief, the provision on stamp duty and stamp duty reserve tax arising on the transfer of listed securities to connected persons and the provisions on remote gaming duty and gaming duty (in respect of which cross-party amendments have already been tabled). The clause on international tax enforcement: disclosable arrangements will also be considered.

The remainder of the Bill will be considered in a Public Bill Committee which is due to conclude on Tuesday 11 December 2018.

As we covered in last week's Midweek Tax News, in addition to the Budget announcements, the Bill contains measures for which draft clauses were published in July. Some of the key measures in the Bill include:

• Making amendments to reflect the EU Anti-Tax Avoidance Directive (ATAD) – covering changes to the UK CFC rules, amendments to the anti-hybrid rules and changes to the corporation tax exit tax rules

• Updating the corporate interest restriction (CIR) rules

• Introducing minor changes to the corporate loss relief rules (the restriction on corporate capital losses will be included in next year's Finance Bill)

• Applying corporation tax to non-residents' property income – including non-trading profits on loan relationships and derivatives entered into for the purposes of the non-resident's UK property business

• Taxing non-residents' gains on immoveable property

• Implementing a tax response to the changes to accounting standards for leases (IFRS 16)

• Introducing enabling legislation for the Structures and Buildings Allowance (SBA) – the detailed secondary legislation will follow

• For the Diverted Profits Tax (DPT), providing for the extension of the DPT ‘review period’ from 12 months to 15 months, from 29 October 2018 and making it clear that profits subject to DPT will not also be subject to corporation tax (the relieving provisions being deemed always to have had effect)

• Removing the current permanent establishment exemptions for preparatory/auxiliary activities in UK domestic law where the business activities have been fragmented within the UK, unless the overall activity carried on may be seen as preparatory or auxiliary

It was announced yesterday that a deal between the UK and the EU on the UK's withdrawal from the EU had been agreed at a ‘technical level’. It seems that the Cabinet was to be briefed in advance of a special cabinet meeting to be held later today, Wednesday.

The agreement of the text before the deadline of Wednesday 14 November, means that there would seem to be time for an EU summit to be called in late-November to get formal agreement amongst EU leaders for both the Withdrawal Agreement and a future relationship framework.

The Prime Minister will be looking to get Cabinet approval to any deal prior to a ‘meaningful vote’ in the UK Parliament. This can then happen before Christmas. It is not however clear what the vote will entail. The Government will push for a straight decision as to whether the deal should be approved. MPs, however, may seek to amend the motion.

It is far from clear whether, even though the UK and EU have agreed to a deal, the Government will be able to get a majority in the UK Parliament. It is also not clear what will happen if the deal is voted down. The Government is committed to making a Parliamentary statement by 21 January and setting out a plan of action. The suggestion is that no plan of action currently commands a majority in the House of Commons. The Labour party would prefer a general election but, while Conservative MPs may vote against the Prime Minister's Brexit plan, it is another thing for them to vote against the Government in the confidence vote necessary to bring the Parliamentary session to an end.

Even if the UK and EU can agree to a Withdrawal Agreement and transition, the final trading and regulatory terms of the UK/EU's future relationship will be decided as part of a separate deal, negotiated during 2019 and 2020.

We will be hosting the second in our series of Brexit webcasts at 2.00pm on 20 November. We will take stock of where the negotiations have ended up and look at the prospects for successful ratification of the deal. Please follow this link to register for the webcast.

The Court of Justice of the European Union (CJEU) has released its decision in the Danish referral of C&D Foods Acquisition (C&D). The case asks whether the holding company, C&D, may deduct VAT on costs incurred in relation to an aborted share sale in a subsidiary.

The acquisition or holding of shares alone does not constitute an economic activity for VAT purposes. However, C&D also supplied taxable services to a subsidiary and therefore had an economic activity. In 2009, Kaupthing Bank bought the group with the intention of selling all of the shares in one of C&D's subsidiaries in order to settle a debt.

In reaching its decision, the CJEU focused on the intention behind the share sale. The CJEU held that repaying a debt could not be considered to have a direct link with the taxable economic activity of C&D or a transaction which constitutes a direct, permanent and necessary extension of C&D's taxable economic activities. The CJEU held that this could only be the case where a share sale is carried out with a view to allocating the proceeds directly to the taxable economic activity of the parent company or to the economic activity of the group. The CJEU held that here, there was simply a sale of shares to repay a debt and consequently, this could not fall within the scope of VAT. The VAT incurred on costs relating to the transaction was therefore not deductible. The fact that the sale of shares would have resulted in the cessation of C&D's taxable activities did not impact this conclusion. Further, even if the transaction had not been aborted, the CJEU held that it would still have fallen outside the scope of VAT with no right to deduct the VAT incurred.

The CJEU's decision seems at odds with current UK practice as it suggests that the intended use of anticipated funds drives the VAT recovery position – an approach which goes against earlier case law. Interestingly, the CJEU did not consider the potential impact of the Specified Supplies rules (which allow VAT recovery on share sales when supplied to non-EU parties) which apply in the UK. Groups involved in aborted share sales may wish to review the VAT recovery position, especially if the intended use of the anticipated funds can be shown to have a link with the wider business purpose.

As expected, on Budget Day, the Chancellor announced that the IR35 rules for the private sector will be changed in line with the current public sector rules from April 2020, although the amended rules will only apply to large and medium sized businesses. There will be a further consultation on the operational details over the coming months with the intention of informing the Finance Bill to be published in summer 2019.

Affected businesses will have 17 months to plan for, implement and test any necessary changes to how they engage and pay contractors whilst also managing a degree of uncertainty over the final rules until the newest consultation is complete. Whilst 2020 seems a long time in the future, 17 months does not allow for any time to be wasted when planning for the changes.

At 11:00am today, Wednesday 14 November, we are hosting the first in a series of webinars in which we start to explore some of the challenges that businesses can expect to face in preparing for this change and to give some thoughts on how to address them. You can register for this webinar here.

Other UK developments

We recently met with the team at HMRC that oversees policy in respect of the Senior Accounting Officer (SAO) legislation. HMRC confirmed that they had issued just under 140 penalties in 2017/18 in respect of SAO failures, and commented that there are still a very large number of penalties due to simple failures to notify HMRC of the name of the SAO for a qualifying company and due to a number of SAOs failing to file their certificates in a timely manner with HMRC.

HMRC highlighted that there has been an increase in the number of referrals to the penalty consistency panel in respect of main duty failures – i.e. where it is argued that the SAO did not take reasonable steps to establish and maintain appropriate tax accounting arrangements, and confirmed that they have recruited a number of former SAOs to help with identifying higher risk businesses and those that are likely to fail their SAO obligations.

Whilst to date, HMRC has typically challenged the tax function over its role in overseeing SAO compliance, HMRC indicated that it has started to directly interview SAOs (typically CFOs and financial controllers), in order to understand what level of assurance they are requesting from their tax and internal audit functions respectively, in advance of approving the SAO certificate.

During the meeting HMRC confirmed that the apprenticeship levy is within the scope of the SAO legislation on the basis that it is governed by the PAYE regulations. Businesses therefore need to consider whether their controls over the apprenticeship levy are appropriate. The national minimum wage was confirmed to not be within scope of the SAO rules. It was also confirmed that there are no plans at present to expand the scope of the SAO legislation to cover partnerships or UK tax resident corporates and none to include additional taxes.

On 7 November 2018, the Government published this long-awaited consultation exploring whether amendments should be made to the way trusts are taxed. The document provides examples of areas where the Government believes the key principles of transparency, fairness and simplicity may not be fully met, and seeks views and evidence on the case for and against reform to these and other areas. It will be of interest to people who create, manage or benefit from trusts. In addition to widening the existing Trust Registration Service, the consultation seeks views on other ways that transparency of trusts could be increased. The consultation also highlights a number of areas where the Government considers taxation is ‘not neutral’ with regards to trusts and where amendment might therefore be considered, including inheritance tax private residence relief, management expenses and the legal treatment of some trust income as capital. The consultation is open until 30 January 2019.

Our quarterly Board Matters webcast on 29 November will focus on the topic of Governance: Staying ahead in today's changing environment. Speakers Ken Williamson (EY Partner, Corporate Governance), Rupal Patel (EY Partner, People Advisory Services – Strategic Reward Advisory) and Amy Wilson (Associate Director, Engagement, Hermes Equity Ownership Services) will discuss the wide ranging governance changes that have come into force in the last few months and those that will come into effect shortly.

The webcast will cover some of the most pertinent areas facing Non-Executive Directors, including stakeholder and work force engagement, executive remuneration and a need for boards to establish a purpose. As well as hearing from the experts, there will also be the opportunity for you to participate through polls and a Q&A. Please register for this webcast here.

International developments

On 8 November 2018, the European Commission announced that it has implemented infringement proceedings in relation to tax practices being applied in the pleasure craft industries of Italy and the Isle of Man. The Commission's investigation started as a result of revelations in the Paradise Papers. These new infringement proceedings follow the initial package of infringements launched against Cyprus, Malta and Greece on reduced VAT basis for the lease of yachts.

The Commission also announced that it was sending a letter of formal notice to Italy for not levying the correct amount of VAT on the leasing of yachts, and a reasoned opinion to Italy because of its system of exemptions for fuel used to power chartered yachts in EU waters. A letter of formal notice was also sent to the UK concerning the Isle of Man's abusive VAT practices with regard to supplies and leasing of aircraft.

In Midweek Tax News to 23 October we reported that the Spanish Supreme Court of Justice had held that Stamp Duty due on mortgage loans was payable by the lender instead of by the borrower, and had declared that the provisions of the Property Transfer Tax and Stamp Duty Regulation that established the liability of the borrower were null and void.

By a 15 to 13 majority, the Supreme Court has now reversed the previous ruling and held that the liability should be that of the borrower. This was almost immediately followed by a Government announcement that it would introduce a change in the law to transfer the liability back to the lenders for future registrations. This change came into effect on 10 November and applies to mortgages registered from that date. Lenders will not be able to treat the stamp duty as a deductible expense for tax purposes as from their financial year beginning from that date (so in the case of a lender's financial year coinciding with the calendar year, deductibility will not be allowed from 1 January 2019 onwards).

In Sauvage and Lejuene, the CJEU has ruled that a taxpayer's income in respect of his employment duties outside of Luxembourg was taxable in Belgium. From a UK perspective the case may be narrow in its application, however it will be of wider application to employees mobile between two EU Member States which apply ‘exemption with progression’ rather than a tax credit mechanism to relieve double taxation.

The taxpayer was resident in Belgium, however the remuneration in question was provided by a Luxembourg company, and the terms of his employment required him to work on behalf of the employer outside Luxembourg from time to time. The individual declared his wage as taxable income in Belgium but declared all of the income from the Luxembourg company as exempt, due to the job being centred in Luxembourg. The Belgian tax authorities revised this assessment and taxed the portion of income that related to the days the individual worked outside of Luxembourg.

The taxpayer appealed against the decision on the basis that the employment income article of the Belgium-Luxembourg double tax treaty must be interpreted as meaning that a limited number of occasional business trips did not restrict the exclusive right of taxation in Luxembourg since the activity concerned was pursued mostly in that State and the services that were provided outside that State were part of the paid employment income in Luxembourg. Secondly, the taxpayer claimed that the freedom of movement of workers and freedom to provide services guaranteed by the Treaty on the Functioning of the European Union (TFEU) had been infringed.

The CJEU dismissed the taxpayer's appeal, making the point that Member States were free to determine, in the framework of double taxation treaties, the connecting factors for the purpose of allocating the powers of taxation. In addition the objective of a double taxation treaty is to prevent the same income from being taxed in each of the contracting States, it is not to ensure that the tax to which the taxpayer is subject in one contracting State is no higher than that to which he or she would be subject in the other State. Therefore, the CJEU ruled that a less favourable tax treatment which arises from the allocation of taxation powers between Belgium and Luxembourg, and from the differences existing between the tax schemes of these two States, cannot be regarded as constituting discrimination of a difference in treatment prohibited by the virtue of the free movement of workers.

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.

Belgium: Belgium has approved a draft law on the ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). Belgium intends to apply Article12 of the MLI, which tackles artificial avoidance of permanent establishment status through commissionaire arrangements.

Colombia: Colombia has proposed a tax reform bill that would reduce the corporate income tax rate, modify international tax rules, reduce the rate of VAT and increase individual income tax rates, among other changes. This bill will be debated in Congress and even though the bill is subject to change during the debates, it is expected that some form of this law will be enacted.

Finland: Finland's Ministry of Finance has issued a government bill on amendments to the Finnish CFC rules to implement the EU ATAD CFC provisions. The new rules would enter into force as of 1 January 2019 and would be applied for the first time in the 2019 tax assessment.

Israel: The Israeli Tax Authority (ITA) recently released a circular on business restructurings in multinational groups. It suggests that a business restructure, from the ITA's perspective, is perceived as a capital gain transaction.

Panama: Panama's National Assembly has approved a bill that establishes the method for calculating income derived from the ‘transfer or exploitation’ of intellectual property assets. The bill was originally proposed in July 2018. Once published in the Official Gazette, the bill will be effective from 1 January 2019.

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.

Digital services tax consultation and progress on European-wide agreement

Email Claire Hooper

+ 44 20 7951 2486

Corporate intangible fixed assets reform

Email Robert Peers

+ 44 113 298 2259

Other Finance Bill measures

Email Claire Hooper

+ 44 20 7951 2486

Brexit: Upcoming webcast on agreement reached between UK and EU negotiators

Email Mike Gibson

+ 44 20 7951 0568

European Court holds that VAT is not deductible on aborted share sale costs where proceeds were intended to repay a debt

Email Tony Bullock

+44 20 7951 3408

IR35 webinar – Preparing for the challenges to come: 11.00am today, 14 November 2018

Email John Chaplin

+ 44 20 7951 4654

For other queries or comments please email


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