19 July 2024
Supreme Court dismisses taxpayer’s appeal in management expenses case
The Supreme Court has dismissed the taxpayer’s appeal in the corporation tax expenses of management case Centrica Overseas Holdings Limited. The taxpayer company had incurred professional fees, including vendor due diligence and banking fees, in connection with a disposal of a group business, and claimed relief as expenses of management under section 1219 Corporation Tax Act 2009. HMRC disputed the deduction, and in 2022 were successful at the Court of Appeal in arguing that these expenses were ‘expenses of a capital nature’ which, since a change in the law in 2004 now found in subsection 1219(3)(a) CTA 2009, are expressly prevented from being tax deductible for expenses of management purposes.
The Supreme Court has unanimously agreed with the judgment of the Court of Appeal. The Supreme Court agreed first that there is a clear distinction between the question of whether expenditure is an expense of management, and the separate question to whether it is also “of a capital nature”. The Court also agreed that when Parliament enacted this latter test, the term ‘expenses of a capital nature’ was intended to mean the same as ‘items of a capital nature’ in the equivalent rule for trading expenses (now section 53 CTA 2009), and subject to the same “well-established principles” already developed by the courts on this matter. After summarising these principles, the Supreme Court agreed that, on the basis of the facts found by the First-tier Tribunal, the services were incurred with the clear objective purpose to assist in bringing about a decision to dispose of an identifiable capital asset, and the money expended to achieve the disposal was correctly regarded as being of a capital nature. The fact that the taxpayer was an investment company and not a trading company did not affect that conclusion, and thus the expenses were not deductible.
King’s Speech 2024
As part of the State Opening of Parliament, the King’s Speech was delivered on 17 July 2024 setting out the new government’s legislative agenda for the first session of the new Parliament. Tax policy announcements are typically reserved for Budget statements and so taxation did not feature heavily in the speech. It did however refer to the government’s intentions to bring forward measures to remove the exemption from VAT for private school fees and reform the apprenticeship levy.
The speech set out 35 new Bills and 5 Draft Bills to be taken forward in this session, with further details included in background briefing notes. The Bills include a Budget Responsibility Bill, intended to ensure that all ‘fiscally significant’ permanent tax or spending change announcements made by the government will be subject to an independent assessment by the Office for Budget Responsibility (OBR). The text of the Bill was published yesterday and it is due to have its Second Reading on 30 July 2024.
Court of Appeal allows HMRC’s appeal on the UK/US double tax treaty meaning of ‘resident’
The Court of Appeal has unanimously allowed HMRC’s appeal in HMRC v GE Financial Investments. The case concerns the interpretation of the 2001 UK/US double tax treaty, and whether the taxpayer – a UK-incorporated company – was entitled to UK double tax relief for US federal income tax paid on US-sourced interest income that it was beneficially entitled to as a limited partner in a Delaware limited partnership. It was not disputed that the taxpayer was resident in the UK under the wording of Article 4(1) of the treaty’s residence article. The main dispute was whether it was also a resident of the United States under the same Article, as this would be sufficient to demonstrate its entitlement under Article 24 (relief from double taxation) to the UK double tax relief claimed. In the present case, the taxpayer company was ‘stapled’ to a US group company – meaning inter alia that its articles of association restricted share transfers unless shares in the US company were transferred at the same time. A US domestic federal tax rule on share-stapling meant that the taxpayer was treated like a domestic corporation and was liable to tax in the United States on its worldwide income. After analysing the wording of Article 4, US domestic law, and other relevant treaty materials and authorities, the Court disagreed with the Upper Tribunal and concluded that the company’s status as a stapled entity did not amount to a criterion connecting it to the United States per Article 4(1), and therefore it did not meet the treaty definition of a US resident company.
The parties agreed that, irrespective of the Article 4 position, the company would have had an entitlement to UK double tax relief on its interest income on an alternative treaty basis if it could show it had been carrying on a business through a US permanent establishment, with the interpretation of ‘business’ based largely on its meaning in UK domestic tax law. However, in line with the Upper Tribunal, the Court agreed that the First-tier Tribunal identified the correct principles and had made no material error in finding that the taxpayer was not carrying on a business through its limited partnership.
First-tier Tribunal allows research and development claim by software development company
The First-tier Tribunal has handed down a decision, in favour of the taxpayer, in the research and development (R&D) case Get Onbord Limited. The appeal concerns a claim for an R&D tax credit under section 1054 CTA 2009, in relation to a project undertaken to develop a novel, automated artificial intelligence (AI) analysis process for ‘know-your-client’ verification and risk profiling. HMRC rejected the claim on the basis that the project “did not advance overall knowledge or capability” per the relevant government guidelines and therefore the associated expenditure did not qualify for relief. The decision examines the application of the guidelines to software development and coding activities, and, amongst other matters, rejects a possible view that a software project would need to be completely novel, and avoid the use of existing open-source code components, to meet the definition of R&D. The decision also examines the meaning of the term ‘competent professional’, finding in this case that a key individual met the definition based on his relevant experience and up-to-date knowledge, despite not having relevant academic qualifications. Based on the evidence provided by witnesses for the taxpayer, including having the credible competent professional available to cross-examine, the Tribunal was satisfied that on the balance of probabilities the required conditions were satisfied and had been sufficiently proved, and the R&D credit claim was allowed.
Changes to VAT registration details – Form VAT484
There have been recent reports of attempts by fraudsters to use form VAT484 (‘changes to VAT registration details’) to change a business’s bank account details on HMRC’s systems to access the business’s VAT repayments. HMRC had taken some steps to address this issue, including writing to businesses to confirm changes made to their details. HMRC have now advised that, from 5 August 2024, any request to change VAT registration details should be made using the VAT online account, and not by using form VAT484 or other postal or electronic means. Businesses unable to use digital services will be able to contact HMRC to request a VAT484 form. HMRC will be updating their guidance to reflect this change at Change your VAT registration details. (Contact: Rob Holland)
EMEA Dbriefs webcasts
The next EMEA Dbriefs tax webcast – US 2024 Election forecast – What to expect – will be on Tuesday 23 July 2024, at 14:00 BST/15:00 CEST. Hosted by Richard Williams, our presenters will examine the upcoming elections in the United States this November and will discuss what kinds of tax legislative changes may be possible in a divided government this year, as well as looking ahead to tax policy decisions US lawmakers will face in 2025.
Then, on Friday 26 July 2024 at 14:00 BST/15:00 CEST, there will be an EMEA Dbriefs webcast titled Update on latest OECD developments: Pillar One and Pillar Two. Hosted by Alison Lobb, our speakers will discuss latest developments as the G20/OECD Inclusive Framework continue their work on both the allocation of taxing rights between countries (‘Pillar One’) and the global minimum tax rules (‘Pillar Two’).