19 April 2024
Tax Administration and Maintenance Day
The government held its Tax Administration and Maintenance Day yesterday, which saw the publication of a small number of technical tax policy proposals to support its “ambition to make the tax system fairer and tackle non-compliance”. The following announcements and consultations were set out in the government’s written ministerial statement and supporting HMRC policy paper:
Loan relationships – unallowable purpose and transfer pricing: Court of Appeal
The Court of Appeal has published its judgment in BlackRock HoldCo 5, LLC v HMRC. The taxpayer, a UK tax resident US LLC, entered into loans with its parent company to part-fund an investment in non-controlling preference shares as part of a third-party acquisition. HMRC challenged the corporation tax deductions for the interest arising on the loans under both transfer pricing and the loan relationship unallowable purpose rule (section 441 Corporation Tax Act 2009). The taxpayer won on both counts at the First-tier Tribunal in 2020, but lost on both at the Upper Tribunal in 2022. The Court of Appeal has agreed with the taxpayer on the transfer pricing matters but concluded in favour of HMRC that no deductions are available due to the application of the unallowable purpose rule. Whilst it found errors in the approaches taken by both Tribunals on the application of the unallowable purpose rule, the Court still held that, on a just and reasonable basis, all of the interest was attributable to an unallowable purpose and thus the deductions should be disallowed.
Withholding tax on interest – beneficial entitlement and yearly interest: Court of Appeal
The Court of Appeal has dismissed the taxpayer’s appeal in the withholding tax case Hargreaves Property Holdings Limited v HMRC, concerning interest paid by the taxpayer on financing originating from overseas. Changes were made to the terms on which the loans were advanced that saw the lenders repeatedly assigning rights to third parties shortly before the loans were repaid and then re-advanced by the original lenders. From 2012 onwards, the arrangements were further altered to assign the right to receive the interest to a UK-resident company. HMRC considered that, throughout, the taxpayer had an obligation to withhold tax under section 874 Income Tax Act 2007 (‘Duty to deduct from certain payments of yearly interest’).
Whilst the Tribunals considered and dismissed two additional grounds of appeal (in relation to whether the interest had a UK-source – yes; and whether a double tax treaty removed some obligations – no), the Court of Appeal addressed only two remaining grounds. It first dismissed an argument that an exception for payments to a UK-resident company within section 933 ITA 2007 applied from 2012. This applies only if the UK-resident company is ‘beneficially entitled to the income’. The Court of Appeal held that the relevant company was not beneficially entitled to the interest for section 933 purposes. Secondly, the Court of appeal held that, notwithstanding that the duration of individual loans was less than one year, the interest thereon was still ‘yearly interest’ subject to withholding: the loans were in the nature of long-term funding, and on a business-like assessment, could not be viewed in isolation as short-term advances.
First-tier Tribunal allows claim for entrepreneurs’ relief despite shareholding percentage error
The First-tier Tribunal has allowed a taxpayer’s appeal in Cooke v HMRC concerning a failure to satisfy the statutory conditions of a tax relief, caused by an unintended mistake. The taxpayer agreed to invest in a company with a clear intention of being entitled to capital gains tax entrepreneurs’ relief (since renamed business asset disposal relief) on a future disposal. This required, amongst other things, for the taxpayer to hold at least 5% of the ordinary share capital. However, due to a spreadsheet rounding mistake when the share issue was calculated, the taxpayer held only 4.99998% and HMRC denied a claim for relief following the disposal of the shares.
On the basis of the evidence before it, including the existence of an anti-dilution clause, the First-tier Tribunal agreed that all the relevant parties had a common intention that the taxpayer would receive the necessary 5%. Although the Tribunal does not have power to order rectification of the faulty legal documentation, it found that the facts and circumstances were such that there was a high degree of certainty that, if the parties were to apply for it, the High Court would grant rectification of the original share issue documents. Applying case law set out in the 2015 Upper Tribunal decision Lobler, the Tribunal proceeded as if such rectification had been ordered, which was sufficient to allow the tax appeal.
Revenue and Customs Briefs – VAT and excise law from 2024; TOMS and B2B wholesale supplies
Following the Retained EU Law (Revocation and Reform) Act 2023 (REULA), which removed the supremacy of EU law, and section 28 Finance Act 2024, which sets out how VAT and excise legislation should be interpreted in light of the REULA, HMRC have published Revenue and Customs Brief 4 (2024) on the interpretation of VAT and excise law from 1 January 2024. The brief states that “In short, UK VAT and excise legislation means the same as it did on 31 December 2023”.
HMRC have also published Revenue and Customs Brief 5 (2024) on the application of the VAT Tour Operators’ Margin Scheme (TOMS) for business-to-business (B2B) wholesale supplies of certain travel services. HMRC’s previous policy with respect to services supplied to other businesses for onward sale (B2B wholesale supplies) was that they were subject to the normal VAT rules, although tour operators could choose to include them in TOMS. HMRC have reviewed this policy, and concluded that B2B wholesale supplies are within the scope of TOMS, but by concession tour operators may opt out of TOMS with respect to these supplies if they wish. The change is to apply with immediate effect. (Contact: Andrew Clarke)
EMEA Dbriefs webcasts
The next EMEA Dbriefs Tax webcast is on Tuesday 30 April 2024 at 12.00 BST/13.00 CEST. Sustainable And Resilient Supply Chains – How Does Tax Play Its Part?, hosted by Gareth Pritchard, will discuss the importance of robust supply chain management for businesses to stay agile. By considering the tax implications in supply chain design, businesses can ensure cost optimisation, compliance with tax regulations, and obtain a competitive edge in the face of evolving economic landscapes.