The Legal 500

The VAT tribunal has upheld HMRC's assessment that the sale of a restaurant business was not a transfer of a going concern (TOGC) because the buyer did not carry on the same kind of business as the seller after the transfer.

The House of Lords has upheld the claims for refund of tax made by two taxpayers – Mr Fleming (F) and Condé Nast Publications (C).

Draft legislation, that affects the income tax and CGT treatment of UK-resident, nondomiciled individuals was issued on 18 January 2008. The legislation was subject to a consultation process until the end of February and follows on from the announcement in the 2007 PBR.

In July 2007, The House of Lords determined in the case of Jones v Garnett (HM Inspector of Taxes) (the Arctic Systems case), that profits of a company owned by a husband and wife, which were paid equally to them by way of dividend, would be taxed on each of them. HMRC had attempted to tax the dividends solely on Mr Jones, as he was undertaking most of the work that generated the profits.

In the 2007 pre-budget report (PBR), the government announced significant changes to the UK capital gains tax (CGT) regime. Individuals, trustees and personal representatives will be subject to the new rules. Companies liable to corporation tax are not affected by the new proposals. The draft legislation, published on 24 January 2008, will implement a number of changes, including:

HMRC has published Business Brief 41/2007 on the substantial shareholding exemption.

HMRC has published further guidance on the new managed service companies legislation.

The Court of Appeal has held that a Swiss company with a UK branch was liable to pay UK VAT on consultancy services supplied to the UK branch.

The Court of Appeal has provided further guidance about how ‘residual' VAT is to be recovered (HM Revenue & Customs v Mayflower Theatre Trust Ltd).

According to new HM Revenue & Customs (HMRC) guidance, although certain managed service company (MSC) providers consider themselves outside of the new tax legislation for MSCs, they may in fact be caught by the new rules. The guidance states that whether or not a provider is caught depends on the precise relationship between the MSC provider and the client company. The full guidance is available at www.hmrc.gov.uk/employment-status/current.htm and a summary of the new rules is set out below.

There have been interesting developments regarding the VAT treatment of services provided to investment funds. Advocate General Kokott recently delivered her Opinion in JPMorgan Fleming Claverhouse Investment Trust Plc and the Association of the Investment Trust Companies v Commissioners of HM Revenue & Customs, which challenges the scope of the UK's VAT exemption for investment funds.

The Court of Appeal has issued guidance to the Special Commissioners in relation to Marks and Spencer Plc's claim for cross-border group relief.

There were several headline-grabbing announcements in the 2007 budget, including the main rate of corporation tax falling from 30% to 28% and the basic rate of income tax falling from 22% to 20%, both with effect from 1 April 2008. However, the overall impact of these announcements is expected to be largely neutral due to offsetting tax increases elsewhere in the budget. The main announcements are considered below.

As examined in the February 2007 corporate tax briefing (IHL147, p66), a new s75A of the Finance Act 2003 has been inserted by the Stamp Duty Land Tax (Variation of the Finance Act 2003) Regulations 2006, which came into effect on 6 December 2006. HMRC has recently published interim guidance on this section to assist taxpayers and their advisers. This is available at: www.hmrc.gov.uk/so/sdlt_regs06_intguidance.htm.

In the recent case of SCA Packaging Ltd v HM Customs & Excise the High Court held that payments made to redundant employees in lieu of unexpired notice were emoluments from employment which were taxable.

In the recent case of Total Network SL v Commissioners of Customs & Excise, HMRC tried an alternative method of recovery in relation to VAT carousel fraud - conspiracy to cheat the public revenue by unlawful means.

In Tumble Tots (UK) Ltd v Commissioners for Her Majesty's Revenue and Customs it was held that a franchisor of a well-known activity programme that supplied a number of benefits in consideration of payment of a registration fee made a single supply for VAT purposes, namely the supply of membership.

The ECJ has ruled that the UK legislation that taxes the receipt of dividends from UK resident and non-UK resident companies differently is in breach of EC law.

The European Court of Justice has ruled that the EC Treaty precludes any national legislation that imposes a greater liability to tax on non-resident parent companies that receive dividends from resident subsidiaries than to resident parent companies that receive dividends from such subsidiaries. This is so even if a Double Tax Treaty authorises the tax and provides for set-off of the tax in the state of the non-resident parent company.

The High Court has held that capital gains tax (CGT) roll-over relief is not available where an individual, resident in the UK, takes loan notes in exchange for their shares in a company with the intention of ceasing to be a UK resident before the loan notes are redeemed.

The Chancellor delivered his pre-Budget report on 6 December 2006. This edition of the corporate tax briefing examines some of the important announcements.

The government plans to amend the VAT legislation so that the ';reverse charge' rules apply to the trade in mobile telephones, computer chips and certain other goods.

The High Court has held that the assignment of receivables, in the context of a securitisation, did not constitute a supply for VAT purposes.

The House of Lords has held that a taxpayer is entitled to recover taxes paid under a mistake of law, and that the time limit on when such payments can be recovered should begin on the date that the mistake was discovered and not the date that the tax was paid.

The case of Indofood International Finance Ltd v JP Morgan Chase Bank NA London Branch has caused considerable uncertainty in relation to many cross-border funding structures.

Previously, we considered the Advocate General's Opinion in Cadbury Schweppes Plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue. The European Court of Justice (ECJ) has now passed down its judgment, which broadly supports the Opinion.

HMRC has issued Business Brief 14/06, containing detail of its proposals to introduce a ‘reverse charge' procedure for trade in certain goods, such as mobile telephones, computer chips and certain other goods. Since an EU derogation is required, the changes are not expected to come into force before 1 December 2006.

Advocate General Juliane Kokott of the ECJ has issued an Opinion that the awarding of the new 3G licences to operators was not a taxable supply for VAT purposes. If the ECJ follows her Opinion, it would appear to preclude the operators from recovering any sums in respect of VAT.

In Wood and another v Holden (Inspector of Taxes) the Court of Appeal provided further guidance on when a company is resident in the UK for capital gains tax purposes.

Jones v Garnett (Inspector of Taxes) concerned arrangements between the taxpayer (J) and his wife, and whether these constituted a ‘settlement’ for the purposes of s660 of the Income and Corporation Taxes Act 1988 (ICTA 1988).

In Optigen Ltd and others v Commissioners of Customs & Excise, the European Court of Justice (ECJ) ruled that traders who are unwitting parties to ‘carousel fraud’ may nevertheless recover the VAT they have paid. HMRC has responded by stating that it will seek a derogation from the VAT ‘Sixth Directive’ to amend the current legislation.

The Advocate General of the European Court of Justice (ECJ), Poiares Maduro, has delivered his opinion in the ongoing Marks & Spencer case in response to questions referred by the High Court. In simple terms, the questions ask whether the UK rules conflict with EU law by disallowing tax losses that Marks & Spencer has made in subsidiaries in France and Belgium from being deducted from UK profits of a Marks & Spencer company in the UK.

In IHL 132 (July 2005) the corporate tax briefing examined the Kretztechnik case and HMRC

As referred in IHL 134 (October 2005), the Construction Industry Scheme will be replaced by an entirely new computerised system. However, the date for implementation has been pushed back to April 2007, to give the industry additional time to prepare for the new regime.

See www.hmrc.gov.uk/new-cis/cis350.pdf.

Jonathan Legg, solicitor, Lawrence Graham
E-mail: jonathan.legg@lawgram.com

Following the merger of the Inland Revenue and HM Customs & Excise, it is proposed that the separate fraud procedures used by the two departments (ie the Hansard procedure for the Inland Revenue or the civil evasion procedure for HM Customs & Excise) will be replaced by a new ‘civil investigations of fraud’ procedure (NB the civil evasion procedure will be retained for suspected evasion at ports and airports).

The recent case of Demibourne Ltd v Revenue and Customs Commissioners has shown that an employer is still liable to account for income and national insurance contributions, even if the employee has self-assessed the tax.

In Bookit Ltd v Revenue and Customs, the High Court has ruled that services provided by the taxpayer that allowed customers to book cinema tickets were exempt for VAT purposes.

HMRC has admitted that the Stamp Duty Land Tax legislation did not allow it to charge interest on the late payment of the tax. HMRC has stated that it will repay interest to parties that have incorrectly accounted for interest by 31 January 2006. The error has been amended going forward, so interest may be validly charged from 26 September 2005. Details can be found at the following link:

www.hmrc.gov.uk/so/sdlt-rates.htm.

The House of Lords in College of Estate Management v Commissioners of Customs and Excise has restored the earlier tribunal decision by holding that the taxpayer made a single exempt supply of services in the provision of its ‘distance learning’ courses.

The government stated in the pre-Budget report of 2004 that it wished to remove the distortion in the current tax system between the tax treatment of different forms of finance. This included aligning the tax treatment of leased plant and machinery with other forms of finance. A technical note has now been issued, setting out the commencement/transitional provisions and providing details of the new regime:

http://www.hmrc.gov.uk/leasing/index.htm

The Construction Industry Scheme (CIS) sets out how payments to subcontractors for construction work can be made. Under the existing rules, a contractor must make a tax deduction from payments made to subcontractors holding a CIS4 registration card. If the subcontractor holds a tax certificate (CIS5 or CIS6), then the payment can be made gross. If they have neither a registration card nor a tax certificate then the payment cannot be made at all.

The European Court has ruled in favour of the taxpayer in relation to the amount of VAT that can be deducted when assets are acquired for both business and non-business use. HMRC has responded to this case in Business Brief 15/05.

The High Court has ruled that 'virtual assignments' can qualify as the 'leasing or letting of immovable property' for the purposes of the Sixth Directive. HMRC has published its response to Abbey National Plc v Commissioners of Customs & Excise in Business Brief 16/05, and has been given leave to appeal to the Court of Appeal.

Wood and another v HM Inspector of Taxes involved a complex scheme designed to avoid the capital gains tax arising on the sale of a trading group by the taxpayer. As Park J commented:

'… the success or failure of the scheme does not turn on sophisticated points of statutory construction… it turns on one of the basic concepts of UK tax law, the concept of "residence" of a company.'

In IHL123 we reported on the High Court decision of Lindsay J in Debenhams Retail Plc v Commissioners of Customs and Excise. The Court of Appeal has now allowed HMRC's appeal.

From 1 August, Stamp Duty Land Tax (SDLT) has been brought within the tax avoidance disclosure rules. Set out below is a brief overview of the new regime. It should be noted that, if an arrangement has to be disclosed, this does not necessarily mean that the scheme does not 'work' for tax purposes.

The Finance (No3) Bill was published on 26 May 2005. As referred to in IHL131 (June 2005), this Bill includes the provisions that were taken out of the Finance Act 2005 (which was passed in truncated form due to the general election at the beginning of May 2005). Certain provisions have also been amended in light of various representations. These include provisions relating to:

The European Court of Justice (ECJ) has ruled that an issue of shares is not a supply for VAT purposes. This ruling conflicts with HMRC's historical position and means that taxpayers who make taxable supplies for VAT purposes should be able to recover VAT on costs associated with share issues. HMRC has responded to this case in Business Brief 12/05.

The High Court has opined on the operation of the three-year cap for repayments of overpaid VAT and the concession that HMRC has issued regarding the cap. In R (BT Plc) v HMRC, BT was unsuccessful in obtaining a judicial review of HMRC's decision not to apply the concession in this case.

HMRC has confirmed its change of policy in relation to the VAT treatment of inducement payments on the grant of a lease. In most cases, a tenant will not be making a supply for VAT purposes if it simply agrees to be bound by the normal covenants in a lease and receives payment from the landlord for doing so.

The Commissioners of Revenue and Customs Act 2005 received Royal Assent on 7 April 2005. This Act forms the basis of the new combined department, HM Revenue and Customs, and the separate prosecutions office, the Revenue and Customs Prosecutions Office. The departments were launched on 18 April 2005.

The Income Tax (Trading and Other Income) Act 2005 received Royal Assent on 24 March and came into effect on 6 April 2005.

The Advocate General of the ECJ has issued an opinion in response to questions referred by the High Court and the VAT and Duties Tribunal. If the opinion is followed by the ECJ, the case will have a significant impact on the VAT regime and tax planning.

This Corporate Tax Briefing examines the main proposals announced in Budget 2005 which were not covered by last month's briefing.

In Kretztechnik AG v Finanzamt Linz the Advocate-General has issued an opinion in favour of the taxpayer in relation to the recovery of VAT on fees paid for a stock exchange listing. This case will be beneficial to many companies engaged in corporate finance activity if the European Court of Justice (ECJ) follows the Advocate General's analysis.

On 16 March 2005 Gordon Brown delivered his ninth Budget. This article focuses on the main issues affecting property in the UK. Next month the 'Corporate tax briefing' will examine other corporate tax issues.

As referred to in IHL124 (p42), the Savings Tax Directive (designed to counter cross-border tax evasion by collecting and exchanging information about foreign-resident individuals receiving savings income outside their resident state) is due to come into force on 1 July 2005.

To encourage employers to set up 'payroll giving' schemes, the Home Office has launched a grants programme for firms with fewer than 500 staff. Additionally, the first £10 given by each employee will be matched.

The 'IR35 legislation' is designed (as per the Revenue website) to:

'… remove opportunities for the avoidance of tax and Class 1 National Insurance Contributions (NICs) by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker.'

In Telewest Communications and another v Commissioners of Customs and Excise the Court of Appeal ruled in favour of the taxpayer regarding the VAT structuring of its broadcasting services and the provision of its listings magazine.

The Pre-Budget Report was made on 2 December 2004. This briefing summarises some of the more significant announcements. Links to the relevant sections of the Inland Revenue and HM Customs and Excise websites are set out below.

The House of Lords has given judgment on two important cases, clarifying the scope of the anti-avoidance principles set out in the Ramsay line of cases. The first is Barclays Mercantile Business Finance Ltd v Mawson (HM Inspector of Taxes).

The Special Commissioners have ruled that the proceeds of a share buy-back could not be treated as a capital receipt due to the purpose of the transaction.