Business Tax Briefing

A weekly round-up of corporate, employment and indirect tax news


'L' day: draft legislation and other announcements

Draft clauses for the next Finance Bill were published for technical consultation on Tuesday 20 July 2021 (‘L’ day). These include measures on:

  • Tax treatment of asset holding companies in alternative fund structures.
  • Notification of uncertain tax positions by large businesses.
  • Income tax basis period reform.
  • Real Estate Investment Trusts (REITS) amendments.
  • Changes to the hybrid rules in respect of certain transparent entities.
  • Capital allowances: amendment to allowance statement requirements for structures and buildings allowance.
  • Increasing the normal minimum pension age.
  • Pensions: ‘Scheme Pays’ reporting deadlines.
  • VAT: powers to tackle electronic sales suppression.
  • Insurance Premium Tax: location of risk. 
  • Tobacco Duty: sanctions to tackle evasion.
  • Clamping down on promoters of tax avoidance. 
  • Plastic Packaging Tax: secondary legislation and guidance.

The Financial Secretary to the Treasury gave a Written Ministerial Statement on the draft clauses, consultations, consultation responses and other statements issued. There is a useful summary here. The consultation on the draft clauses will close on 14 September 2021.

The announcement of reforms to income tax basis period rules was unexpected. The proposal would change the rules to a ‘tax year basis’ – requiring affected taxpayers to calculate time-apportioned results for each tax year. The changes would fully come into effect for the 2023/24 tax year, with 2022/23 being a transition year.  Although the Treasury press release refers only to the self-employed and ‘small businesses’, it seems that partnerships, including LLPs, of all sizes would be affected. A consultation has been launched on implementing the reform of the basis period; this closes on 31 August 2021. 

Supreme Court judgment in FII GLO

The Supreme Court has given judgment in Test Claimants in the Franked Investment Income Group Litigation v HMRC (1) and (2). These are the latest judgments in the Franked Investment Income Group Litigation Order (FII GLO), which concerns long-running litigation on claims brought by UK multinational groups who argued that the (now repealed) advance corporation tax (ACT) and franked investment income (FII) rules imposed higher tax burdens on UK groups with foreign subsidiaries compared to UK groups without foreign subsidiaries, and hence infringed EU law. Two key points in today’s judgment that may have application to many companies in receipt of pre-July 2009 dividends (whether involved in the group litigation or not) are:

  • that UK law breached EU law so far as it prevented the carrying forward of unused double tax relief (DTR) credits (for example due to the offset of management expenses or group relief in any particular period).  Any unused DTR credits (calculated on a foreign nominal rate  basis) must, in principle, be regarded as remaining available to be applied against other income in subsequent years, notwithstanding any statutory provisions or other domestic rules of law to the contrary effect.
  • that the standstill provision ceased to have effect  from 31 March 2001 when the Eligible Unrelieved Foreign Tax (EUFT) rules were brought into operation..  This is of particular significance in considering the taxation of third country (non-EEA) dividends from group companies (ie non-portfolio holdings of 10% or more).  The tax treatment of third country (non-EEA) dividends for portfolio dividends (sub 10% holding) had previously been decided in the Prudential case in favour of the taxpayer.

The issues covered in this judgment (taken from the Supreme Court's summary) are:

1. Are HMRC barred from contesting an award of compound interest for tax paid prematurely by the claimants?

2. On what basis are the claimants entitled to recover interest for tax paid prematurely?

3. What is the nature of the remedy required by EU law in respect of the set off of DTR?

4. Were HMRC enriched as a matter of English law given the interaction of ACT with shareholder credits?

5. Does it make any difference that the UK group had a non-resident parent which received double taxation treaty credits?

6. Are the DV provisions permitted by the standstill provision of Article 64(1) TFEU in light of the EUFT Rules?

7. When and to what extent should unlawfully charged ACT be regarded as 'surrendered'?
The Supreme Court has ruled in favour of HMRC in relation to issues 1, 2 and 7, and in favour of the claimants in relation to issues 3, 4, 5 and 6.

The decision will have wider application, in particular to funds, asset management and insurance companies. The judgment may also affect a pending decision from the First-tier Tribunal on questions from other taxpayers about the procedure for making claims for DTR and the calculation of those claims. 

Office of Tax Simplification:  Annual Report 2020-21; forthcoming webinar

The Office of Tax Simplification (OTS) has published its fifth Annual Report, covering the year to 31 March 2021. OTS Chairman Kathryn Cearns observes that this has been another productive year for the OTS, with major reports published on claims and elections and capital gains tax.

The OTS is holding an online webinar from 2.00 to 3.00pm on Wednesday 15 September 2020 to highlight key areas of its work. The webinar will be led by Kathryn Cearns, Director Bill Dodwell and members of the OTS staff team. You can register here

Date of joining VAT group cannot be amended: First-tier Tribunal 

Dollar Financial UK Ltd (Dollar), a payday lender, applied to include Dollar Financial Group Inc (DFGI), its US parent, in its UK VAT group. DFGI had seconded staff to Dollar in 2011-12, but only applied to join the VAT group from June 2013. In 2016 Dollar asked for DFGI's VAT group membership to be backdated (on the basis that DFGI had a UK establishment from 2011, and would have joined Dollar's VAT group at that time). If VAT grouping could be amended in this way, then Dollar should not have accounted for VAT of £2.2m on charges from DFGI under the reverse charge. The First-tier Tribunal (FTT) noted that VATA 1994 refers to four specific types of VAT grouping application, including an application for another person (i.e. a company outside the VAT group) to be included in the VAT group. However, there is no statutory provision which states that an existing member can change the date on which it joined a VAT group. The FTT has therefore ruled that the request submitted by Dollar in 2016 was not a valid VAT grouping application. The FTT also rejected Dollar's attempt to present its case as relating to VAT registration or overpaid VAT, as HMRC had not made any decision on these issues. In the absence of an appealable decision, the FTT struck out Dollar's appeal. There was therefore no need for the FTT to consider whether the presence of the US secondees meant that DGFI has a UK establishment, an issue that will come before the Upper Tribunal in October 2021 in HSBC.  

NHS and government salary sacrifice car schemes:  draft legislation

In RCB 19(2020) HMRC announced their intention to revoke SI 1992/630 (the “De-Supply Order”) which had allowed the NHS not to account for VAT on salary sacrifice employee car schemes, even though it could recover VAT on acquiring the cars under s.41 VATA 1994. Draft legislation has now been published, under which the De-Supply Order would be revoked in relation to any supplies made after 21 October 2021, except where they arose from a salary sacrifice agreement of up to three years entered into before that date, and the employer agreed to pass any VAT reclaimed under s.41 to the employee. The draft legislation and TIIN make it clear that HMRC do not expect this measure to have any impact on salary sacrifice schemes in the private sector.