Business Tax Briefing

Upper Tribunal dismisses appeal on distributions from overseas company’s share premium

The Upper Tribunal has dismissed the appeal of the taxpayer in Beard v HMRC, concerning the tax treatment of distributions received by a UK-resident individual from a Jersey limited company derived from its share premium account. In 2022, the First-tier Tribunal agreed with HMRC that the distributions received were dividends subject to income tax under section 402 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), rather than capital distributions that were subject to capital gains tax.  

The Upper Tribunal considered first whether the distributions were ‘dividends’. Largely applying the approach set out in the corporation tax decision in First Nationwide, the Upper Tribunal considered the meaning of dividend under English law and then looked at how the foreign company law governed the relevant payment (in this case, Part 17 of the Companies (Jersey) Law 1991, which since 2008 has provided for a mechanism to make share premium amounts more freely distributable). After doing so, the Upper Tribunal agreed with the First-tier Tribunal’s conclusions that the distributions fulfilled almost exactly the example description of a dividend in First Nationwide, and there was nothing in Jersey law nor in the manner the payments were made to indicate that they could not be treated as fulfilling the English law meaning of a dividend.

The Upper Tribunal then considered whether the distributions fell within the specific exclusion for ‘dividends of a capital nature’ within section 402(4) ITTOIA 2005. The Upper Tribunal did not agree that ITTOIA 2005 had substantially altered the law and had limited the relevance of earlier authorities. After applying earlier case law, the Upper Tribunal rejected a contention that share premium has an “essential character as capital”. Based on the findings of fact made by the First-tier Tribunal, the Upper Tribunal agreed that the mechanism used to make the distributions meant that they did not have the character of capital. The Upper Tribunal also agreed that it was irrelevant to the analysis whether the distributions were paid in cash or were in specie distributions of other assets.

Government opens consultation on additional tax relief for visual effects costs

On 27 March 2024, HM Treasury published a consultation on amending the new audio-visual expenditure credit (AVEC) rules to allow for additional corporation tax relief for UK visual effects costs. The consultation follows a call for evidence last year, and the government’s confirmation at Spring Budget 2024 that it intends to provide additional tax relief for visual effects costs in films and high-end TV. From 1 April 2025, qualifying visual effects costs will receive tax credits under AVEC at a higher rate of 39%, compared to the basic rate of 34%. An 80% cap on qualifying expenditure will also be removed for visual effects costs. The consultation sets out further details about how this additional tax relief will work, and invites comments on the proposed policy design, including on the types of costs that will qualify. The consultation is open until 22 May 2024. The government intends to publish draft legislation for the additional tax relief in the summer.

The Prudential Assurance Company Limited: VAT groups and continuous supplies – Court of Appeal

In November 2007, Silverfleet Capital Limited completed a management buy-out and left the Prudential VAT group. Since 2002, it had been providing fund management services to one of Prudential’s with‑profits funds, and was entitled to an additional performance-related fee in the event that the fund exceeded certain benchmarks. Those benchmarks were eventually met in 2014 and 2015, triggering performance payments of £9.3 million. Given that Silverfleet carried out its fund management services before it left the VAT group, but received the performance-related payment several years afterwards, should it charge VAT? Silverfleet’s management qualified as a continuous supply of services, and HMRC therefore considered that VAT had to be charged by reference to when the performance fee was invoiced and paid. The Court of Appeal, by a majority, has agreed with HMRC. VAT rules on time of supply may have (based on the Court’s 1996 judgment in BJ Rice) been seen as determining “when, but not whether” VAT was due. However, that approach had been qualified by subsequent judgments of the, as was, House of Lords (in Thorn, Svenska, and RSA), to the point where BJ Rice should not be treated as binding precedent in Silverfleet’s appeal. The correct approach was to consider whether Silverfleet was still a member of Prudential’s VAT group when the rules on time of supply treated its services as supplied. By 2014 it was no longer a VAT group member, and must therefore charge VAT. Silverfleet’s appeal was dismissed. (Contact: Andrew Clarke)

Upper Tribunal dismisses taxpayer appeal on SEIS conditions

The Upper Tribunal has handed down its decision in Coconut Animated Island Limited v HMRC concerning a statutory condition that a company must satisfy for investors in it to be able to qualify for tax relief under the Seed Enterprise Investment Scheme (SEIS). In the present case, the taxpayer issued shares in 2017 and 2018 in connection with plans to exploit newly-acquired intellectual property rights for a new series of animated shorts. The bulk of the money raised would be used to pay a related entity, CHFE, to provide the necessary animation production services. In 2019, HMRC refused to issue certificates of compliance with the SEIS rules due to HMRC’s belief that several of the statutory conditions were not satisfied. The First-tier Tribunal upheld HMRC’s decision solely on the grounds that the arrangements for issuing the shares were “disqualifying arrangements” under Condition A of section 257CF Income Tax Act 2007. The Upper Tribunal dismissed arguments that the terms ‘arrangements’ and ‘party’ were to be construed narrowly. It agreed with the First-tier Tribunal’s conclusions that the production agreement with CHFE was part of the arrangements, and the degree of CHFE’s involvement was sufficient for it to be considered a party to them, with the outcome that Condition A was satisfied and relief under SEIS was unavailable. As this was sufficient to dismiss the appeal, the Upper Tribunal declined to rule on HMRC’s alternative arguments, rejected by the First-tier Tribunal, that other statutory SEIS conditions had not been satisfied.

EMEA Dbriefs webcasts

The EMEA Dbriefs programme is taking a brief break for Easter. In the meantime, you can catch up on demand with any recent EMEA Dbriefs tax webcasts you may have missed, including OECD Pillar One: Amount B Transfer Pricing Baseline Distribution Return, Carve Outs – Getting Tax And Legal Right, Leveraging Global Incentives To Drive Decarbonisation, Reforms To The Taxation Of Non-UK Domiciled Individuals, Mandatory Payrolling All Benefits In Kind – The End Of P11Ds, and UK Spring Budget 2024. If you want to be reminded about upcoming webcasts, please subscribe to receive our bi-weekly mailing.