27/10/2023
Supreme Court allows HMRC’s appeal in deemed employment-related securities option case
The Supreme Court has unanimously allowed the appeal of HMRC in Vermilion Holdings Limited. The judgment concerns the correct interpretation of section 471 Income Tax (Earnings and Pensions) Act 2003, which, along with related sections, imposes a liability to income tax following the exercise of an ‘employment-related securities option’. Subsection 471(1) brings a securities option into scope where the right to acquire it was “available by reason of an employment”. Subsection 471(3) includes a deeming rule whereby, if the right was made available to a person by their employer, it is deemed as being available by reason of their employment. In the present case, an option (‘the 2007 Option’) was conferred at a time when the relevant individual had only recently become an employee of the appellant. The 2007 Option had been issued as part of a rescue funding exercise, which inter alia involved replacing an earlier similar 2006 Option that had been conferred at a time when the individual was not yet an employee. The 2006 Option lapsed once the new 2007 Option agreement was in place. The 2007 Option was exercised by the individual in 2016 and HMRC assessed Vermilion to income tax and NICs, under PAYE, in line with their view that it was an employment-related securities option.
The Supreme Court agreed with HMRC that the deeming rule in subsection 471(3) applied, and disagreed with an earlier conclusion of a majority of the Court of Session. In the Supreme Court’s view, the deeming rule was intended by Parliament to be a ‘bright line’ test to circumvent difficult issues that could otherwise arise in deciding whether the causal test in section 471(1) applies to an option right made available by an employer. The statutory conditions of the deeming rule were satisfied and in the Supreme Court’s view, there was no anomaly, absurdity or injustice in giving effect to the rule in the taxpayer’s circumstances.
HMRC update on CT600 filing issues for R&D expenditure credit claims by SMEs
HMRC have updated their guidance page Changes and issues affecting the Corporation Tax online service to add details of a new IT issue potentially preventing the completion of the appropriate boxes of a Company Tax Return (CT600) by small and medium-sized enterprises (SMEs) claiming R&D Expenditure Credit (RDEC) as an subcontractor to a large company. The new guidance highlights an error message, which filers affected by this issue may receive, and sets out a workaround to be used before the service is fixed. HMRC stress that the new requirement, applicable since 8 August 2023, to submit a supporting ‘additional information form’ in order for an R&D claim to be valid, continues to apply.
Upper Tribunal dismisses consideration received under a sale and purchase agreement appeal
The Upper Tribunal has dismissed the taxpayers’ appeal in the capital gains tax case McEnroe and another v HMRC. The individual taxpayers entered into a sale and purchase agreement (SPA) to sell shares they held in a company to a third-party buyer. The consideration, as defined in the SPA, was £8 million (subject to a working capital adjustment and an earn out), but on completion, an amount of £1.1 million was paid by the buyer directly to a bank to repay a loan owed by the company, and only the remaining £6.9 million was paid to the taxpayers. In their tax returns, the taxpayers treated the consideration received as £6.9 million (subject to adjustments). HMRC issued closure notices stating that the starting point for the calculation of the consideration received should have been the full £8 million. Before the First-tier Tribunal, the taxpayers unsuccessfully argued that, when the SPA was properly construed, the payment to the bank was not part of the consideration. The First-tier Tribunal found that there was no ambiguity in the SPA, and that no reference to the bank debt was made in any clause relevant to the consideration.
At the Upper Tribunal, the taxpayers argued, inter alia, that the First-tier Tribunal had erred by failing to consider a key clause of the SPA covering completion accounts. The Upper Tribunal rejected this submission, noting that the First-tier Tribunal had demonstrated its awareness of that clause’s provisions, and that, as neither party argued that the clause did, or should adjust the amount of consideration, it was reasonable for the First-tier Tribunal not to have given it further consideration. Furthermore, the Upper Tribunal found that there was no reason for the First-tier Tribunal to consider, of its own motion, the possibility of there having been an adjustment for the bank loan due under the clause. It agreed with HMRC that the argument amounted to a disguised attack on the First-tier Tribunal’s previous findings of fact on the matter of the consideration received, and that there was no error in law in the First-tier Tribunal’s decision that the burden of proof to displace the amounts used in HMRC’s closure notices had not been discharged.
Deloitte Global Pillar Two Legislative Tracker
With the first Pillar Two global minimum tax rules starting to apply from the end of 2023, Deloitte’s proprietary digital tool – the Global Pillar Two Legislative Tracker – is designed to assist tax departments to monitor and navigate Pillar Two legislative developments in jurisdictions worldwide. The Tracker includes high-level summaries of Pillar Two proposals, enacted laws, and details of relevant dates in over 40 jurisdictions, together with interactive maps and country-by-country comparisons for easy review. The Tracker also includes details of Deloitte Pillar Two specialists, who you can contact for tailored advice on the status of legislation and compliance requirements in a particular jurisdiction. You can register for the Tracker here.
OECD publish updated FAQs for Model Reporting Rules for Digital Platforms
The OECD has released an October 2023 update to its frequently asked questions (FAQs) document, originally published in January 2023, regarding the application of its model reporting rules. The rules require digital platform operators to report information to tax authorities with respect to certain income realised by sellers through their platforms. The questions included in the FAQs document were received from business and government delegates, and the answers are intended to clarify the model rules and to help ensure consistency in relation to their application. See here for further details of the updates.
Interpretation of VAT and excise legislation
HMRC have issued a policy paper and draft legislation “which clarifies how VAT and excise law should be interpreted in the light of changes made by the Retained EU Law (Revocation and Reform) Act 2023 (REUL Act)”. The REUL Act ended the supremacy and special status afforded to retained EU law in the UK. With regards to VAT and excise duty, a “bespoke” approach is proposed. The proposed legislation confirms that UK law cannot be quashed or disapplied on the basis it was incompatible with retained EU law. However, EU rights and principles will continue to have effect for the purpose of interpreting VAT and excise law, including the continued relevance of general principles of EU law. “This ensures the stability of the VAT and excise regimes and provides legal certainty.” Draft legislation has been published for a technical consultation open until 17 November 2023.
Dbriefs webcast
The next EMEA Dbriefs Tax webcast is on Tuesday 31 October 2023 at 12.00 GMT/13.00 CET. Global Mobility’s Role In Diversity, Equity And Inclusion (DE&I) is from our Global Mobility and Employment Taxes series and will be hosted by Teji Susheela Vishwanath. During this webcast our panel will discuss the value of a diverse and inclusive work culture, which is clearly recognised by organisations focused on attracting and retaining critical talent. Our webcast will include guest speakers from Standard Chartered and Included who will discuss the Global Mobility function’s role in advancing diversity, equity and inclusion (DE&I) efforts and practical steps that can be taken now.