24 January 2025
Court of Appeal allows taxpayers’ appeal on the deductibility of redress payments
The Court of Appeal has unanimously allowed an appeal by the taxpayers in ScottishPower (SCPL) Limited and others, concerning the corporation tax deductibility of payments made pursuant to settlement agreements with regulators. The taxpayers, regulated by the UK energy regulator, Ofgem, entered into agreements in settlement of a number of regulatory investigations. They paid penalties in nominal amounts, together with agreed ‘redress’ payments to consumers, consumer groups and charities totalling approximately £28 million.
The Upper Tribunal agreed with HMRC that none of the disputed expenditure was deductible. It considered that the principles established in case law, such as Von Glehn and McKnight, denying trading deductions for penalties or fines incurred under a statutory regime even when incurred in the course of trading activities, applied to all expenses which have the nature or character of a penalty. The Court of Appeal disagreed. Citing the Supreme Court’s judgment in NCL, in the Court’s view there was no support for the extended application of the principles to amounts which are not, in fact, fines or penalties. Nor was there support for a proposition that the deductibility of a payment should be determined by reference to the nature of a payment it may replace. As the redress payments were incurred in the course of the trade, and were properly accounted for, the Court considered there was nothing else in law preventing their deductibility as trading expenses.
Court of Appeal allows HMRC’s appeal on LLP salaried members legislation
HMRC’s appeal in the LLP ‘salaried members’ legislation case BlueCrest Capital Management (UK) LLP and others has been unanimously allowed by the Court of Appeal. The case concerned the rules, enacted in 2014, which, if three statutory conditions are all met, can lead to certain individual members of an LLP being treated for income tax and NIC purposes as an employee receiving a salary, rather than as a self-employed partner. The appeal focussed on ‘Condition B’; whether the relevant “mutual rights and duties” of the members and the LLP give an individual “significant influence over the affairs of the partnership.” The Court of Appeal found that the lower Tribunals had misinterpreted Condition B when, in addition to considering the LLP Agreement and any other sources of legally enforceable rights and duties, they unduly considered influence derived from more informal or de facto arrangements in place (whether or not enforceable). The Court has remitted the case back to the First-tier Tribunal to reconsider the application of Condition B based on the Court’s analysis of the law. The Court also dismissed an argument raised in cross-appeal in relation to ‘Condition A’; the extent to which amounts received were fixed or variable by reference to the LLP’s overall profits. The Court held that the Tribunals were right to hold that Condition A was satisfied by the members.
Finance Bill – Committee Stage update
Selected clauses and schedules of Finance Bill 2024-25 will be considered by MPs in a Public Bill Committee next week, with the first hearing taking place on Tuesday. Proceedings are due to conclude by 4 February 2025 at the latest (but may conclude sooner). In addition to the 14 Committee stage amendments and new clauses published last month, the government has tabled an additional 41 amendments, labelled ‘Gov 15’ to ‘Gov 65’:
· Amendments Gov 15 to 19 relate to Clause 21 of the Finance Bill (Application of PAYE in relation to internationally mobile employees)
· Gov 20 relates to Clause 37 (Replacement of special rules relating to domicile: claim for relief on foreign income)
· Gov 21 to 37 relate to Schedule 4 (Pillar Two)
· Gov 38 to 43 relate to Schedule 6 (Employee-ownership trusts)
· Gov 44 to 54 relate to Schedule 8 (Relief on foreign employment income)
· Gov 55 to 58 relate to Schedule 9 (Income tax and capital gains tax: remittance basis and domicile)
· Gov 59 relates to Schedule 10 (Temporary repatriation facility)
· Gov 60 and 61 relate to Schedule 12 (Trusts: connected amendments, transitional provision etc.)
· Gov 62 to 65 relate to Schedule 13 (Inheritance tax)
HMRC have published Explanatory Notes covering the effects of the government amendments tabled so far on gov.uk here (albeit, at the time of writing, the numbering of the amendments used on gov.uk differs from the underlying numbering of the amendments above that is used on Parliament’s website).
Guidelines for Compliance 12 – Help with labour supply chain assurance
On 16 January 2025, HMRC published Help with labour supply chain assurance (GfC12). According to HMRC, the guidance in GfC12 aims to promote the importance to businesses of effective labour supply chain (LSC) assurance. Amongst the tax risks highlighted by HMRC that can arise are non-compliance with rules on off-payroll working, the Construction Industry Scheme, and VAT self-billing.
Upper Tribunal: VAT tour operators’ margin scheme and short-term accommodation
Sonder Europe Limited leased apartments from landlords for between two and ten years, which it supplied to travellers for periods of one night to a month. Sonder furnished some apartments, and in some cases undertook minor decorating work. The First-tier Tribunal (FTT) held that Sonder’s services were subject to VAT under the tour operators’ margin scheme (TOMS). The Upper Tribunal has upheld HMRC’s appeal against the FTT decision, and held that TOMS did not apply. For TOMS to apply, the EU Principal VAT Directive requires that a supply acquired by a travel agent must be supplied onward “for the direct benefit of the traveller” and the Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806) requires that the onward supply must be made “for the benefit of a traveller without material alteration or further processing”.
The FTT decision was based on its finding that Sonder did not materially alter or process the apartments. The Upper Tribunal (UT) found that the FTT was in error, as it did not have regard to whether the services bought in by Sonder were supplied to it for the direct benefit of travellers. The UT also considered that the FTT had mischaracterised the nature of the supplies, focusing on the physical alterations to the apartments, rather than the underlying interests in land supplied by landlords to Sonder and by Sonder to travellers. The UT proceeded to remake the decision, and considered that the services supplied by Sonder (short term leases to occupy property as holiday accommodation) were materially altered from those supplied to Sonder by the landlords (interests in land for a period of years). Accordingly, the services supplied by landlords to Sonder were not for the direct benefit of Sonder’s customers, and Sonder’s services were not supplied for the benefit of the traveller without material alteration and further processing. Sonder was not making onward supplies of bought-in services, but was making supplies of its own ‘in-house’ services, which fell outside the ambit of TOMS. (Contact: Ed Knight)
EMEA Dbriefs webcasts
On Tuesday 28 January 2025 at 12.00 GMT/13.00 CET, there will be a webcast from our global mobility and employment taxes series titled Legislative forces for change impacting global talent and mobility. Hosted by James Macpherson, our panel will discuss legislative changes affecting the talent and mobility landscape in the UK and across the European Union, including legislative reforms for non-domiciles, the need for increased transparency for pay equity, and changes to employment rights.