19 July 2024
New government formed
The Labour Party won a majority of seats in the UK general election of 4 July 2024 and has formed the new government.
Labour’s leader, Sir Keir Starmer MP, was appointed as the new Prime Minister on 5 July 2024. Ministerial appointments at HM Treasury were subsequently announced including Rachel Reeves MP as Chancellor of the Exchequer; and James Murray MP as Exchequer Secretary to the Treasury, the junior treasury minister with a primary focus on taxation holding responsibilities for the UK tax system in general, tax administration policy and HMRC. Details of the full HM Treasury team are available here.
The new Chancellor has confirmed that she will announce the date of the government’s first Budget, to be held this autumn, before the House of Commons rises for its summer recess on 30 July 2024.
Supreme Court dismisses taxpayer’s appeal in management expenses case
The Supreme Court has dismissed the taxpayer’s appeal in the corporation tax expenses of management case Centrica Overseas Holdings Limited. The taxpayer company had incurred professional fees, including vendor due diligence and banking fees, in connection with a disposal of a group business, and claimed relief as expenses of management under section 1219 CTA 2009. HMRC disputed the deduction, and in 2022 were successful at the Court of Appeal in arguing that these expenses were ‘expenses of a capital nature’ which, since a change in the law in 2004 now found in subsection 1219(3)(a) CTA 2009, are expressly prevented from being tax deductible for expenses of management purposes.
The Supreme Court has unanimously agreed with the judgment of the Court of Appeal. The Supreme Court agreed first that there is a clear distinction between the question of whether expenditure is an expense of management, and the separate question to whether it is also “of a capital nature”. The Court also agreed that when Parliament enacted this latter test, the term ‘expenses of a capital nature’ was intended to mean the same as ‘items of a capital nature’ in the equivalent rule for trading expenses (now section 53 CTA 2009), and subject to the same “well-established principles” already developed by the courts on this matter. On the basis of the facts found by the First-tier Tribunal, the Supreme Court agreed that the expenses were correctly regarded as being of a capital nature, and thus not deductible, and the fact that the taxpayer was an investment company and not a trading company did not affect this conclusion.
Court of Appeal allows HMRC’s appeal on the UK/US double tax treaty meaning of ‘resident’
The Court of Appeal has unanimously allowed HMRC’s appeal in HMRC v GE Financial Investments. The case concerns the interpretation of the 2001 UK/US double tax treaty, and whether the taxpayer – a UK-incorporated company – was entitled to UK double tax relief for US federal income tax paid on US-sourced interest income that it was beneficially entitled to as a limited partner in a Delaware limited partnership. The main dispute was whether the UK resident company was also considered a resident of the United States under Article 4(1) of the treaty’s residence article, as this would be sufficient to demonstrate its treaty entitlement to the double tax relief claimed. In the present case, the taxpayer company was ‘stapled’ to a US group company – meaning, inter alia, that its articles of association restricted share transfers unless shares in the US company were transferred at the same time. A US domestic federal tax rule on share-stapling meant that the taxpayer was treated like a domestic corporation and was liable to tax in the US on its worldwide income. The Court disagreed with the Upper Tribunal and concluded that the company’s status as a stapled entity did not amount to a criterion connecting it to the United States per the wording of Article 4(1), and therefore it did not meet the treaty definition of a US resident company.
The judgment separately considered and dismissed an alternative argument put forward by the taxpayer relating to whether it was “carrying on a business” in the United States. The Court agreed that the First-tier Tribunal had made no material error in finding that the taxpayer was not carrying on a business through its limited partnership.
First-tier Tribunal allows research and development claim by software development company
The First-tier Tribunal has handed down a decision, in favour of the taxpayer, in the research and development (R&D) case Get Onbord Limited. The appeal concerns a claim for an R&D tax credit under section 1054 CTA 2009, in relation to a project undertaken to develop a novel, automated artificial intelligence (AI) analysis process for ‘know-your-client’ verification and risk profiling. HMRC rejected the claim on the basis that the project “did not advance overall knowledge or capability” per the relevant government guidelines. The decision examines the application of the guidelines to software development and coding activities, and, amongst other matters, rejects a possible view that a software project would need to be completely novel, and avoid the use of existing open-source code components, to meet the definition of R&D. The decision also examines the meaning of the term ‘competent professional’, finding in this case that a key individual met the definition based on his relevant experience and up-to-date knowledge, despite not having relevant academic qualifications. Based on the evidence provided by witnesses for the taxpayer, including having the credible competent professional available to cross-examine, the Tribunal was satisfied that on the balance of probabilities the required conditions were satisfied and had been sufficiently proved, and the R&D credit claim was allowed.
OECD releases additional guidance on the Pillar One Amount B transfer pricing approach
On 17 June 2024, the G20/OECD Inclusive Framework published two additional guidance documents on Amount B. The Inclusive Framework’s February 2024 report set out the new approach for pricing baseline marketing and distribution activities, which seeks to streamline and simplify the application of the arm’s length principle from 1 January 2025. All businesses that sell goods, regardless of size, are potentially in scope if they carry out suitable marketing and distribution activities. This additional guidance finalises work on three elements of the February report. See our alert for further details.
OECD publishes further Pillar Two global minimum tax rules administrative guidance
Also on 17 June 2024, the Inclusive Framework published a fourth set of administrative guidance on the implementation of the Pillar Two global minimum tax rules to further clarify their interpretation and operation. The Pillar Two rules are intended to ensure that large multinational groups pay corporate income taxes at a minimum level of 15% in every country in which they operate. The new guidance covers six distinct areas: recapture of deferred tax liabilities; divergences between Pillar Two basis and accounting carrying values; allocation of cross-border current taxes; allocation of cross-border deferred taxes; allocation of profits and taxes in groups including flow-through entities; and the treatment of securitisation vehicles. For further details, please see our alert.
Pillar Two and Belgium – mandatory registration deadline deferred
The Belgian tax authorities have issued an update regarding the obligation of groups within the scope of the Pillar Two global minimum tax rules with a presence in Belgium to comply with Belgium’s Pillar Two registration requirements. The new update announces that, for groups that do not need to make Pillar Two tax prepayments in Belgium during 2024, the deadline has been extended to 16 September 2024. For in-scope groups that decide to make prepayments in 2024, the registration deadline remained 15 July 2024. Prepayments are not mandatory under Belgian’s Pillar Two rules, but if they are not made, any eventual top-up tax amounts due may be subject to an increase of 9%. Please see Deloitte Belgium’s alert for further details.
Changes to VAT registration details – Form VAT484
There have been recent reports of attempts by fraudsters to use form VAT484 (‘changes to VAT registration details’) to change a business’s bank account details on HMRC’s systems to access the business’s VAT repayments. HMRC had taken some steps to address this issue, including writing to businesses to confirm changes made to their details. HMRC have now advised that, from 5 August 2024, any request to change VAT registration details should be made using the VAT online account, and not by using form VAT484 or other postal or electronic means. Businesses unable to use digital services will be able to contact HMRC to request a VAT484 form. HMRC will be updating their guidance to reflect this change at Change your VAT registration details.
EMEA Dbriefs webcasts
We have a number of Dbriefs webcasts over the next month including: US 2024 Election forecast – What to expect (23 July 2024), Update on latest OECD developments: Pillar One and Pillar Two (26 July 2024), and Mandatory payrolling all benefits in kind (30 July 2024). For more information, and to view recent webcasts on demand, please visit our Dbriefs website.