In This Issue - Pinsent Masons · PDF file · 2013-03-02In This Issue Editor:...

In This Issue

Editor: Cathya Djanogly

People

Our perspective on recent casesProcedure•HMRC v Abdul Noor [2013] UKUT 071

Substance•The partners of the Vaccine Research LTD v HMRC [2013] UKFTT 073•HMRC v George Anson [2013] EWCA civ 63•Tui Travel PLC and Others v HMRC [2013] UKFTT 75•Hubbard v HMRC [2013] UKFTT 78 (TC)•Antiques Within LTD v HMRC [2013] UKFTT 89•Birmingham Hippodrome Theatre Trust LTD v HMRC [2013] UKUT 057

Recent Articles•Changes to UK HMRC tax-advantaged employee share plans

– the practical implications by Suzannah Crookes

Events 14

News and Views from the Pinsent Masons Tax team

Combining the experience, resources and international reachof McGrigors and Pinsent Masons

PM-TaxIssue 19 Wednesday 27 February 2013

15

9

5

Our Comment•DOTAS and discovery

Ray McCann considers the recent Charlton decision•The UK and Isle of Man will cooperate to combat tax evasion

by Phil Berwick

2

Pinsent Masons

HMRC’s attempt in Charlton to use TMA 1970 s 29 to correct its

own error seems to be arguably in breach of its own litigation strategy and is contrary to assurances given in 2004 when DOTAS was introduced.

The decision of the Upper Tribunal in Charlton FTC/73/2011 was clear cut and changes little as to how the ‘discovery’ rules apply. Briefly summarised the taxpayers fully disclosed their tax scheme including, crucially, a scheme reference number (SRN). Despite this HMRC (fully aware of the scheme) overlooked the need to open an enquiry.

To be fair to HMRC, the scheme failed so HMRC may have felt justified in pursuing a case that they were unlikely to win. However, if this was a ‘nothing to lose’ attempt to save the day then it is difficult to see how

that decision was in line with the litigation strategy. More importantly in arguing their case, HMRC undervalued the critical importance of the SRN in the effective operation of the DOTAS regime and the key role of the SRN as a means of preventing such mistakes being made in the first place.

In the wake of the 2004 Budget HMRC officials discussed various aspects of DOTAS with the accounting firms, the CIOT and others. The possibility of a ‘Charlton’ type situation was of general concern and the interaction between the SRN and s 29 was discussed on a number of occasions. To minimise the risk the DOTAS obligation placed on a taxpayer was simplified requiring in most cases only the disclosure of the SRN provided by HMRC to the promoter and in turn to the taxpayer. No narrative comment was required

and the use of ‘white space’ comments (seemingly in some cases from ‘outer space’) was discouraged. It is clear that some advisers have continued to use the white space possibly to ‘avoid penalties’ but the regulatory impact assessment and early versions of the guidance made clear that the taxpayer’s obligation was to disclose only the SRN.

This simplification was deliberate. It made clear to the user that they had used in HMRC’s view a ‘tax avoidance scheme’; it sent a message that ‘an HMRC investigation was certain’ (sic) and that there was a significant change of law risk (with possible retrospection.) Internally the SRN provided local inspectors with everything they needed to spot DOTAS schemes. This was important since at the time most tax returns were examined by Revenue staff with

PM-Tax | Issue 19 Wednesday 27 February 2013

2

In the wake of the 2004

Budget HMRC officials discussed various aspects of DOTAS with the accounting firms, the CIOT and others. The possibility of a ‘Charlton’ type situation was of general concern and the interaction between the SRN and s 29 was discussed on a number of occasions.

“

Our Comment

Ray McCann is a Partner (non-lawyer) leading our private wealth tax practice and also advises corporate clients on a range of advisory and HMRC related issues, especially in relation to tax planning disputes.

Until 2006, Ray was a senior HMRC Inspector where he held a number of high profile investigation and policy roles including, work on cross border tax avoidance issues with tax authorities in the US, Australia and Canada. In 2004, Ray was responsible for the introduction of the “DOTAS” rules.

Email: [email protected]: +44 (0) 207 054 2715

DOTAS and discovery Ray McCann considers the recent Charlton decision

First published in the Tax Journal on 15 February 2013

Pinsent Masons

little experience of sophisticated tax avoidance schemes so detection was patchy. For all practical purposes, especially as to whether to open an enquiry, knowledge of the scheme was not required, as the SRN was intended to say it all.

In my view Charlton would have been decided differently had it not been a DOTAS scheme or had the SRN been omitted. In that case the taxpayer would have been exposed to both discovery and penalties and the ‘white space’ comments would not have helped. Here the taxpayers will ‘get away with it on a technicality’. HMRC has been increasingly determined to enforce a very strict rule of law no matter how unfair the end result so it must accept on this occasion that the law on discovery, intended to ensure ‘fair dealings’ is against it. And whatever else can be said of DOTAS, it made clear that providing the taxpayer correctly disclosed the SRN, any failure to open an enquiry within the time allowed rests entirely with HMRC!

For further commentary on Charlton, see ‘The Upper Tribunal’s decision in Charlton’ (Aileen Barry), Tax Journal, dated 25 January 2013, p 11..

> continued from previous page


3

Recent Articles

DOTAS and discovery (continued)

Pinsent Masons

The UK and the Isle of Man governments have struck a deal creating an automatic information

exchange procedure as well as a disclosure facility for UK taxpayers.

The automatic exchange agreement very much mirrors the UK-US agreement which implements the Foreign Account Tax Compliance Act (known as “FATCA”). Under the agreement, a wide range of financial information on UK taxpayers with accounts in the Isle of Man will be automatically reported to HMRC every year.

The new Isle of Man disclosure facility is similar to the Liechtenstein Disclosure Facility (“LDF”) in that it encourages taxpayers to come forward rather than wait and face higher penalties if found out. However, the new facility is much less attractive than the LDF.

Most importantly, it does not offer immunity from criminal prosecution. Given HMRC’s new appetite for prosecution, this is a major drawback.

Secondly, a wider range of taxpayers (than under the LDF) are excluded from its application; in particular, those who have been “under investigation” (both criminal and civil) by HMRC.

Taxpayers who have been involved with another disclosure facility are also excluded as well as those subject to the UK/Swiss agreement.

The new facility only applies to UK tax resident individuals who have or have had a bank account in the Isle of Man between 6th April 1999 and 31st December 2013. So there is effectively no way in after 31st December of this year even though the facility will run to September 2016.

Under the facility, tax must be paid at the time of the application, unless HMRC agrees otherwise. This exposes taxpayers to a greater risk of discovery by HMRC, as it means that all the relevant computations must be carried out in advance of the application being submitted.

Finally the penalties payable under the facility are substantial; 10% to 40%.

UK taxpayers with undisclosed “relevant property” (including bank accounts, annuity contracts and trusts) in the Isle of Man should act now as the new information exchange agreement means that HMRC should be able to find them out – although the precise timetable of the agreement is not known yet.

In many cases, the LDF will still offer the best method of disclosing tax liabilities..


4

Our Comment

Phil Berwick is a Partner (non-lawyer) and a former inspector of taxes.

Phil left the Inland Revenue in 1995. Since then he has been principally involved in investigations instigated by HMRC’s Specialist Investigations and Civil Investigation of Fraud teams. He deals with complex investigations and those involving fraud (Codes of Practice 8 and 9).

Email: [email protected]: +44 (0) 20 7054 2548

The UK and Isle of Man will cooperateto combat tax evasion By Phil Berwick

Pinsent Masons

Draft legislation to enact changes to UK HMRC tax-advantaged share plans was published in

December 2012. The proposed changes will implement some of the recommendations for simplification made by the Office of Tax Simplification (“OTS”) following its review of tax-advantaged plans in 2012. In this article, we consider what the changes will mean in practice for companies operating tax-advantaged share plans, and suggest what those companies can be doing now in order to prepare for the changes.

BackgroundIn June 2012, the OTS completed its review of the four types of tax-advantaged share plan – the Company Share Option Plan (“CSOP”), Save As You Earn (“SAYE”), Share Incentive Plan (“SIP”) and Enterprise Management Incentives (“EMI”). Following consultation, HMRC is now taking forward a number of the recommendations made by the OTS in its final report. Draft legislation for those of the proposed changes which

are due to take effect in 2013 has now been published, and some changes in HMRC published guidance have also been made.

One of the big changes following the OTS review will be the move to a “self-certification” process for CSOP, SAYE and SIP, in place of the current formal approval system. HMRC has confirmed that it will be taking this forward, with a view to implementing the new self-certification regime in 2014 – watch this space…

Simplifications proposed to take effect in 2013Draft legislation, which will form part of Finance Bill 2013, has now been published and the consultation closed on 6 February. In this update, we consider the legislation for the 2013 changes as it is currently drafted, but as there may be some amendments made prior to enactment, companies should continue to monitor development this area.

The Finance Bill will be enacted later in 2013 (likely to be some time in July), and most

of the changes referred to below will take place at that point, on “Royal Assent” to the Finance Bill. However, the removal of the reinvestment limit for dividends on SIP shares (see further below) will take effect from 6 April this year - the beginning of the new tax year.

What should companies be doing now?Companies need to be aware of how the proposed changes may impact their share plans, and to ensure they keep up-to-date with any developments in the draft legislation. In particular, companies should:

• Look at their plan rules, and examine how these may be treated as “modified” by the new legislation – some of the changes take effect “automatically”;

• Consider whether changes to the rules would be appropriate – in most cases, it would be “best practice” and would avoid confusion if rules are amended to reflect the deemed modifications of the new legislation. In some cases,


5

Suzannah Crookes is a Senior Associate who advises companies on the implementation and continuing operation of employee share and incentive plans, including adopting new plans (including HMRC approved plans), managing grants and maturities under existing plans, covering international aspects where appropriate, and other technical tax and legal matters.

Email: [email protected]: +44 (0)113 294 5233

Changes to UK HMRC tax-advantaged employee share plans – the practical implications By Suzannah Crookes

Recent Articles

Pinsent Masons

companies may wish to make other changes in light of the new legislation;

• Consider whether equivalent changes would be appropriate to “unapproved” plans which companies are operating alongside a tax-advantaged plan for consistency;

• Will any changes to the rules require HMRC approval? It is expected that changes to reflect automatic modifications made by the new legislation would not require HMRC approval or consent, but this would need to be confirmed on a case-by-case basis, in particular if the changes made go wider than simply reflecting automatic modifications.

• Confirm how any changes may be adopted by the company. For the most part, changes which are appropriate to reflect the new legislation may be adopted by a resolution of the board (or, where appropriate, the remuneration committee). However, listed companies making additional changes which are wider than merely reflecting the legislation, will need to look at whether shareholder approval would be required and if so,

when it would be appropriate to go to shareholders on these changes. Private companies will need to confirm if any relevant approvals or consents are required to such changes.

• Talk to their plan administrators and any other relevant service providers to ensure that systems take account of appropriate changes;

• Review employee documentation and communications. Employee booklets and FAQs, in particular, are likely to require some degree of updating. As well as for new awards, some of the changes will impact on existing awardholders, so suitable communication (whether in paper or electronic format) will be required and should be planned and budgeted for.

The changes in detailThe rest of this update looks in more detail at the main changes proposed in the draft legislation and how these will impact on the way in which companies operate their share plans.

One change will take effect for the new tax year:

SIP: Dividends – with effect from 6 April 2013, the present cap of £1,500 per employee per year on dividend reinvestment will be removed, as will the requirement that reinvestment must take place within three years. Companies will not need to amend their rules to achieve this change (although they may consider doing so), but employee booklets and other communications will require updating. In addition, companies and/or their share plans administrators will no longer have to maintain systems for paying cash dividends in excess of the reinvestment limit. This will be a welcome change for companies and participants in SIPs in particular where significant holdings have been built up, or where higher levels of dividends are paid.

The remainder of the changes will take effect from Royal Assent to the Finance Bill (so summer 2013):

Retirement – if CSOP or SAYE options are exercised, or shares are withdrawn from a SIP, early by reason of retirement, currently the provisions allowing for tax benefits under the plans to be available are linked to a “specified age” which is different in each of the plans, so causing complexity and inconsistencies. HMRC has accepted the OTS recommendation for simplification, by removing the

concept of a “specified age” in each plan. This change mirrors the impact of the removal of the statutory default retirement age, and will be automatically read into the plan rules within effect from Royal Assent. HMRC guidance explains that going forward, companies will be required to operate the provisions for tax-favoured early exercise by reference to their own definition of retirement, which should be given its “normal and natural meaning”. It is unclear whether specific provisions allowing early exercise on retirement should continue to be included in the plan rules, but simply omitting the references to a “specified age”. Some companies may already be familiar with having to address the question of whether someone has in fact retired for the purposes of being treated as a good leaver for an “unapproved” share plan. However, HMRC has indicated that it will publish guidance setting out the circumstances in which retirement can be presumed, and confirming that it will not be possible to retire for the purposes of a tax-advantaged plan but not for “other purposes”.

Good leaver circumstances – currently, CSOP, SAYE and SIP contain different provisions as to when an individual will be treated as a good leaver, for the purposes of being entitled


Changes to UK HMRC tax-advantaged employee share plans – the practical implications (continued)

Our Comment


6

Pinsent Masons

to favourable tax treatment under those plans. In addition to the changes proposed in relation to retirement, HMRC has also accepted the OTS recommendation that these provisions be aligned in the three types of plan, and the proposal is that the good leaver circumstances which currently apply to SIP will in future apply also for CSOP and SAYE. The current SIP good leaver circumstances are injury, disability, redundancy, retirement, TUPE transfer and sale of the employer company out of the group. The changes in tax treatment will be automatic where the plan rules permit exercise of options in such circumstances. This welcome simplification will assist both in operating plans (in particular where companies are operating more than one type of tax-advantaged plan), and also in relation to process on corporate transactions and related due diligence.

Cash Takeovers – Currently, the tax advantages of CSOP, SIP and SAYE are not available to participants in the event of a cash takeover of the company prior to the normal time at which tax-favoured treatment can be obtained. Going forward, this will change under the proposed legislation, so that the tax-advantages of the three types of plan will be protected in the case of early

exercise/withdrawal for CSOP/SAYE/SIP on the occurrence of a cash takeover. The legislation refers to a cash takeover pursuant a general offer – it is not clear what the position would be in respect of a scheme of arrangement where there is no general offer. Care will also be needed as the tax protection may not be available where the consideration for the takeover is a mixture of cash and other assets (such as shares (where a roll-over of options may be available in the right circumstances) or loan notes). Also, there may be no tax protection for awards made at a time when “arrangements” for a takeover are in existence - it is not clear now this may impact regular contributions under a SIP or SAYE plan in the run-up to a takeover. Where a takeover transaction is in contemplation, companies should look at share plans due diligence at an early stage, to ensure that they take account of the correct position under the revised legislation. In particular for transactions at or around the time of Royal Assent, companies will need to be in a position to operate tax on the correct basis, depending upon whether or not the changes have been implemented, and to communicate with participants accordingly.

Material Interests – all of the four types of tax-advantaged plan contain rules so that individuals who already

have a “material interest” in the issuing company are not able to participate in the plans. The proposed changes in legislation will align the definition of a “material interest” across the two discretionary plans, by amending the 25% which currently applies for CSOP to 30%, which is the relevant threshold for EMI, and removing the test altogether for the two all-employee plans SAYE and SIP. This change will take place automatically for companies with effect from Royal Assent and will be of particular benefit to some close companies which have previously been restricted in their ability to offer tax-advantaged share incentives to key individuals.

Restrictions on Shares – if shares carry restrictions, current rules provide that SAYE and CSOP options can only be granted where these are “permitted restrictions”, which are quite narrow in scope. Similar provisions apply in relation to SIP shares, although the detail of the “permitted restrictions” is different. However, EMI options can be granted over restricted shares, provided that the option agreement contains details of the restrictions. The current position means that some private companies in particular are not able to offer CSOP/SAYE/SIP and, where the company does not qualify for EMI, this can mean that there is no possibility of offering tax-

advantaged incentives. The proposed amendments will mean that, as from Royal Assent, all tax-advantaged plans will be able to use restricted shares. As is currently the case for EMI options, in assessing relevant financial limits under the plans, the restricted shares will be valued as if unrestricted. Also as currently for EMI, it will be necessary to provide details of the restrictions. This will enable many more unlisted companies to qualify, but may not help companies which have more than one class of share or if are private-equity owned, because of other conditions in the legislation. A consequential effect seems to be that in future, SIP shares may be subject to forfeiture provisions even in good leaver circumstances (which is not currently permitted by the legislation) – we await the final form of the legislation to confirm whether this is in fact the intention.

SIP: accumulation periods – some companies offering the partnership shares under a SIP may operate an “accumulation period” (whereby a participant’s monthly deductions are accumulated over a period of say 3 months and the shares purchased at the end of that period, rather than on a monthly basis). Currently companies are exposed to share price movements over an accumulation period, as the



Our Comment


7

Pinsent Masons

legislation requires that the participant acquires partnership shares at the lower of the price at the beginning of the period or the price at the end. In some cases, companies have chosen not to operate accumulation periods because of this exposure. The proposed changes will mean that, for new partnership share agreements entered into after Royal Assent, companies will have more flexibility on the approach in these circumstances, which will potentially give them the ability to budget with more certainty in relation to acquisition of partnership shares. The company will have to choose, and state in the partnership share agreement whether the partnership shares will be acquired at the price at the beginning of the accumulation period, or the price at the end, or alternatively, to continue the current arrangement. Some companies may want to reconsider whether an accumulation period on this basis would be more attractive.

EMI: disqualifying events – where there is a “disqualifying event” for EMI purposes, participants will lose any tax benefits in relation to growth in value of the shares after the date of the disqualifying event, except where options are exercised within a specified

period following the event. That period is to be extended from 40 to 90 days. This will make it easier for participants to take advantage of this “window” for tax-favoured exercise in relevant circumstances.

EMI: entrepreneur’s relief – as part of a separate package of measures, welcome changes will significantly increase the circumstances in which individuals will qualify for entrepreneur’s relief on the sale of shares acquired on exercise of an EMI option.

Changes made or to be made other than by legislationAs well as the changes to be made by amendments to the legislation, some changes are being made by way of revised HMRC guidance.

Electronic communications – where information is required to be provided to participants, HMRC has confirmed that this can be provided in electronic format, provided that it is appropriate to do so, taking into account whether participants will have access to a PC/intranet portal etc. This clarifies and confirms the approach which companies have increasingly been taking in relation to the administration of share plans.

EMI: incorporation by reference – where documents are incorporated by reference into an EMI option contract, HMRC has confirmed that these do not need to be appended to the contract, provided that the contract contains a statement of where they can be accessed.

SAYE: monthly contributions – the circumstances in which SAYE contributions can be made otherwise than from salary are extended to include cases in which an employee is on sabbatical leave or secondment. This welcome change reflects recent trends in more flexible working practices.

Finally, it is proposed that the 7-year SAYE savings contract will be abolished and this change will take effect by means of an amendment to the SAYE prospectus. Although take-up of 7-year contracts has been small in recent years, some companies will be affected by this change and should communicate accordingly with participants..



Our Comment


8

Pinsent Masons

HMRC v Abdul Noor [2013] UKUT 071The FTT does not have jurisdiction to adjudicate a claim for a refund of input tax based on legitimate expectation.

Mr Noor had incurred VAT input tax on the development of a small commercial property. On telephoning HMRC’s National Advice Service, he had been told to keep all invoices as he could claim VAT under the option to tax within three years. When Mr Noor eventually registered for VAT, he was told by HMRC that he was not entitled to a refund of input tax as the services had been supplied to Mr Noor more than six months before his effective date of registration.

The FTT had allowed Mr Noor’s appeal from HMRC’s decision.

Disagreeing with Sales J’s reasoning in Oxfam, the UT found that the FTT had no jurisdiction to give effect to any legitimate expectation which Mr Noor may be able to establish in relation to any credit for input tax. The amount of input tax which may be credited to Mr Noor was determined by statute and so the taxpayer’s right to a public law remedy did not affect “what is input tax”.

The FTT noted however that where the VAT legislation gives HMRC discretionary powers, the FTT can adjudicate whether the discretion has been exercised reasonably.

HMRC’s appeal was allowed..

Our perspective on recent cases


9

Procedure

Pinsent Masons

The partners of the Vaccine Research LTD v HMRC [2013] UKFTT 073A partnership set up for research and development purposes can only claim loss relief in respect of research and development capital allowances to the extent that the expense was incurred to finance research and development activities.

A complex scheme had been devised to provide investors in a research partnership with substantial tax refunds which they could set off against other income. Investors had contributed £114 million to the partnership, funded as to £86 million by loan and as to £28 million from other sources. The £86 million contributed by the investors were then paid across to a company (Numology) which then re-invested those funds in the partnership. The partnership sub-contracted its research activity to Numology which itself sub-contracted the research to another company (PepTell) for a sum of £14 million. The partners also received guaranteed licensing fees which enabled them to meet their obligations under the loans taken out to invest in the partnership. There was an expectation that royalties would become payable once PepTell had developed the vaccine.

HMRC contended that the partnership’s claim to expenditure on research and development was limited to the £14 million effectively used by PepTell to develop a vaccine.

The FTT accepted that the scheme was not a sham -

as valid legal documents had been created but noted that “the commerciality of the investment to an investor (…) did not depend in practical terms to any extent on the possible returns from those royalties”.

The tribunal found that only the £14 million paid to PepTell was paid under a genuine commercial agreement for research and development.

The Tribunal concluded that only £14 million was incurred on research and development and that the activities of the partnership pertaining to the £14million investment were trading activities carried out with a view to profit.

The appeal was allowed in part.

HMRC v George Anson [2013] EWCA civ 63A partner in a Delaware LLC is not entitled to the profits of the LLC as they arise (regardless of any automatic allocation under the LLC agreement) and so the tax payable by the partner on his share of the LLC’s profits in the US cannot be set against the partner’s liability to tax in the UK under double tax treaty relief.

Mr Anson, a UK resident non-domiciled individual, was a participant in a Delaware limited liability company (LLC) and was subject to US federal and state tax on the profits of the LLC as they arose (on the basis that the LLC had not elected to be treated as a corporation, and was thus treated as transparent



10

Substance

Pinsent Masons

for US tax purposes). Mr Anson sought double tax treaty relief under the UK/US Double Tax Convention. The availability of the relief depended on whether Mr Anson was taxable on the same income on both sides of the Atlantic.

HMRC have longed considered Delaware Limited Liability Companies as opaque for UK tax purposes. This is made clear in their guidance (see paragraph 180000 of their International Manual) which is based on the Memec case. In Memec, the court had stated that the right approach when deciding whether a foreign entity should be taxed as a company (opaque) or as partnership (transparent) was to compare its characteristics to those of an English or Scottish partnership.

The decision of the FTT in this case had muddled the water. Although the FTT had not commented on whether the relevant Delaware LLC was opaque or transparent, it had held that its members were entitled to its profits as they arose and that therefore Mr Anson was entitled to double taxation relief on the profits he had received from the LLC.

The Upper Tribunal, reversing the FTT’s decision, had stressed that a crucial factor was the fact that the taxpayer did not have any proprietary interest in the assets of the LLC. The profits of the LLC belonged to the LLC and the position was not changed by a contractual obligation to distribute them to the members. Treaty relief was therefore not available.

The Court of Appeal upheld the decision of the UT concluding that Mr Anson was not entitled to a share of the profits of the LLC as they arose. A clear indication was the fact that deductions could be made from profits before they were allocated to the partners. Mr Anson merely had a contractual entitlement to receive LLC profits under the LLC agreement - which provided for automatic allocation. It followed that the source of Mr Anson’s income must be a different source of income from that of the entity itself and so double tax treaty relief was not available.

The Court of Appeal rejected Mr Anson’s claim to treaty relief.

Tui Travel PLC and Others v HMRC [2013] UKFTT 75Self-funded discounts offered by an agent on services sold on behalf of a supplier do not reduce the commission payable by the supplier to the agent nor the amount of output tax payable on the commission.

Tui Travel is a corporate group specialising in leisure travel including travel agency with well-known brands such as Thompson and First Choice.

Tour operators assemble package holidays which are sold through the Tui Travel’s agencies. The travel agencies offer customers self-funded discounts and forward the full price of the holidays to the tour operators, who pay Tui Travel a commission calculated by reference to the full price of the holidays.

Tui Travel appealed against HMRC’s denial of their claim for a refund of output tax which they claimed had been overpaid on commissions received from tour operators. Tui Travel argued that output tax should have been calculated by reference to the discounted amount of the commissions.The FTT noted that the tour operator was the principal in the sale of holidays to customers. Tui Travel did not enter into a contractual relationship with the customer with regard to the supply of the holiday and did not have the power to grant the customer a price discount. The discount funded by Tui Travel was effectively third party consideration.

Tui Travel was therefore in a separate chain of supply of introductory services and there was total fiscal neutrality in the two chains of supply; the subjective amount received by Tui Travel in respect of its supplies to the tour operator was the full amount of commission paid, and the tax received by HMRC for the supply by the tour operator to the customers did not exceed the amount paid by the customers.

The appeal was dismissed.

Hubbard v HMRC [2013] UKFTT 78 (TC)Invoicing arrangements which suggest that a supplier is acting as a principal can be ignored, for VAT purposes, in circumstances where they are not a true reflection of the nature of the transactions.

Mr Hubbard was carrying on business as a sole trader providing steam cleaning services, whilst also driving lorries part time.



11

Substance

Pinsent Masons

When a haulier called Mr Hubbard asking for a driver, he would either do the work himself, or contact another driver. Where another driver was engaged, Mr Hubbard would issue an invoice to the haulage company for the full amount, and then be invoiced by the driver, less a commission of £1.50 to £2.00 per hour. It would then be for the driver to contact the company to make the practical arrangements for the job.

The FTT noted that Mr Hubbard took the “line of least resistance” when complying with HMRC’s direction to fill in the VAT return on the basis that the gross amount received from customers was the amount of his taxable outputs. Although, in relation to customers who had seized trading, any declared VAT would not be recoverable and so Mr Hubbard omitted those invoices from his return.

The FTT accepted HMRC’s point that Mr Hubbard’s invoicing arrangements might prima facie suggest that he was supplying the drivers’ services but found that those arrangements had been put in place for convenience “in circumstances, where as matter of law, the drivers were supplying their services to the haulage company customers directly.” In this respect, the fact that any effective control over the drivers was exercised by the haulage companies was of crucial importance.

The FTT concluded that Mr Hubbard had been acting as an agent and that therefore VAT should have been paid by reference to the commissions he received for his introductory services only.

Antiques Within LTD v HMRC [2013] UKFTT 89The supply of a stall in an antiques market and the supply of “sales services” when the stallholder is not present are not ancillary or incidental to each other, they are therefore distinct services for VAT purposes.

Antiques Within was set as an antiques centre renting out about 70% of its floor space to other antiques dealers; “stallholders” who paid between £50 and £100 a week depending on the size of the floor space they occupied. There was no written contract.

Stallholders were absent from the site half of the time (sourcing, collecting and delivering goods). Antiques Within therefore offered a “sales facility” so that items displayed on the stalls could be sold in the absence of the stallholder. All items were labelled and Antiques Within had no power to negotiate the price set out on the label. If a sale was agreed, Antiques Within would simply remit the price to the stallholder on his return to the premises.

HMRC contended that Antiques Within were making a single standard supply of sales services (the supply of floor space being ancillary) whereas Antiques Within argued that the main supply was the exempt supply of land (the supply of sales services being ancillary).

The FTT noted that the position should be examined from the standpoint of the stallholder, having regard to the essential features of the arrangement and the economic reality. The fact that the stallholders paid one price was relevant but not determinative and the

key question was whether one service was a means of better enjoying the other.

The FTT found that the two supplies by Antiques Within could not be seen as ancillary or incidental to each other as the relationship between the two supplies was evenly balanced. Both the provision of floor space and the provision of sales services were essential to the stallholders.

The appeal was allowed in part on the basis that Antiques Within was making both exempt supplies of land and standard rated supplies of sales services.

Birmingham Hippodrome Theatre Trust LTD v HMRC [2013] UKUT 057When the wrong amounts of output tax have been paid by the taxpayer and the wrong amounts of input tax have been repaid by HMRC as a result of the same mistake, section 81(3A) VATA 1994 allows a set-off of liabilities regardless of limitation periods.

Between 1990 and 2004, the Theatre had accounted for output tax on supplies which should have been treated as exempt but between 2000 and 2001 had received a repayment of input tax, which, because its outputs should have been treated as exempt, should not have been made. In 2006, the Theatre made a claim for the repayment of its overpaid output tax for those VAT periods in which its claim was not barred by time limits. Those VAT periods fell between 1990 and 1996 but HMRC were, by that stage, out of time to claim repayment of the input tax wrongly repaid.



12

Substance

Pinsent Masons

The repayments therefore exceeded the overpaid output tax.

HMRC denied the claim, the taxpayer appealed and lost in front of the FTT. The FTT held that (i) there was “not a generally applicable principle that taxpayer claims that happened to produce an advantageous result for the taxpayer constitute “abusive practices” which would permit the claim to be denied; but that (ii) s. 81(3A) did entitle HMRC to offset the input tax erroneously repaid for 2000 and 2001 against the claim in respect of 1990 to 1996 so as to reduce the amount payable to the Theatre to nil.”

The theatre appealed the FTT’s decision.

The case turned on the interpretation of Section 81(3A) VATA 94 which governs set-offs in cases of mistaken payments (and repayments) of VAT.

The UT stressed that the purpose of the Sixth Directive is that “each taxable person shall be liable to pay the correct net amount of tax when delivering his return”. Mechanisms for refunds and reimbursements must therefore be in place to cater for overpayments, underpayments etc. The curtailment of the purpose of the Directive by the imposition of time-limits is permissible as long as it does not violate the purpose of the Directive. If HMRC were allowed to pick and choose between out of time periods (so that it could choose periods in which amounts were due to HMRC), the purpose of the Directive would be violated. Thus Section 81(3A) provides that all otherwise time-

barred claims, whether of HMRC or the taxpayer, are taken into account for the purpose of the set-off.

The UT therefore drew five conclusions:

• HMRC are not entitled to pick and choose between out of time periods in order to achieve the best result for the Treasury;

• The set-off is limited to amounts connected to the same mistake;

• No time limitation is required;

• Although the mistake was caused by both the failure of the UK to implement the Sixth Directive and HMRC’s erroneous practice, there was effectively one mistake; and

• Section 81(3A) VATA 94 did not require a transitional period.

The theatre’s appeal was dismissed..



13

Substance

Budget 2013 Digested

Following our hugely successful Autumn Statement Breakfast Seminar with the Financial Times Vanessa Houlder, Pinsent Masons is delighted to invite you to a breakfast seminar to digest the budget statement on the morning of March 21st 2013.

We will confirm details of our panel of experts nearer the date.

We do hope you will join us for expert analysis of all announcements made by the Chancellor.

Date: Thursday 21 March 2013 Time: Breakfast served from 8am; Seminar commences at 8.30; Seminar ends 10am Venue: Pinsent Masons LLP, 30 Crown Place, London, EC2A 4ES

Forthcoming Seminar

Pinsent MasonsEvents

The Pinsent Masons Tax team will be hosting the seminar detailed below. To find out more or book a place, please contact Alistair McVan on 020 70542735 or [email protected]


14

mailto:alistair.mcvan%40mcgrigors.com?subject=

Pinsent Masons

Tell us what you think We welcome comments on the newsletter, and suggestions for future content.

Please send any comments or suggestions to [email protected]

You can also use this email address if you have any queries.

Pinsent Masons People

Combining the experience, resources and international reachof McGrigors and Pinsent Masons

Pinsent Masons LLP, a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons

LLP and affiliated entities that practise under the name ‘Pinsent Masons’ or a name that incorporates those words. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those affiliated entities as the context requires. © Pinsent Masons LLP 2013.

For a full list of our locations around the globe please visit our websites

www.pinsentmasons.com | www.Out-Law.com

We are delighted to announce our plans to establish a presence in

Turkey focusing on the infrastructure sector.

We are keen to grow the operation to 20 lawyers over the next 3 years.

The office will have a clear focus on the infrastructure sector in Turkey, Eastern Europe, Central Asia, the Gulf and Africa, serving in particular the International Contractor market. With 31 of the “Top 225 International Contractors List” based in Turkey, it is second only to China in the number of construction companies it has active in international markets.

Pinsent Masons’ imminent launch in Turkey represents the latest step in a period of

rapid international expansion at the firm. In the past 12 months it has opened offices in Paris and Munich and doubled the size of its team in Shanghai. Last May’s merger with McGrigors also saw the firm gain a presence in Qatar and The Falkland Islands. The Istanbul office will bring the firm’s total number of offices to 18, the majority of those being outside the UK.

Chris Mullen, Senior Partner at Pinsent Masons, says:

“Over the past 12 months we have made considerable progress in expanding our network. We have a clear focus on investment into those global sectors where we see significant client demand and the greatest potential for growth, so opening in Istanbul and targeting the infrastructure

sector is a natural next step. The feedback from the market is that our sector focus and expertise in key geographies adds up to a compelling proposition.”

Eloise Walker, Partner, Head of International Tax and Infrastructure at Pinsent Masons, says:

“We are delighted to be opening our doors in Turkey at a time when there is a need in the region for high quality, international advice on complex issues in the infrastructure sector. Eastern Europe and Central Asia are significant areas for many of our clients and we look forward to being able to offer them an extensive international tax service for such a significant market.”.

Pinsent Masons to launch Turkish presence


15

People

mailto:cathya.djanogly%40pinsentmasons.com?subject=

mailto:cathya.djanogly%40pinsentmasons.com?subject=

In This Issue - Pinsent Masons · PDF file · 2013-03-02In This Issue Editor:...

Documents

Transcript of In This Issue - Pinsent Masons · PDF file · 2013-03-02In This Issue Editor:...