UK: UK Tax Round Up - January 2019

UK DEVELOPMENTS

Amendments to the Finance Bill – entrepreneurs' relief and intangibles

Three significant changes have been made to the Finance Bill published last October which will be included in the Finance Act 2019 (expected to receive Royal Assent in early February).

Entrepreneurs' relief

We reported some key announcements arising out of the UK's 2018 Autumn Budget back in October, including amendments to the conditions for claiming entrepreneurs' relief (ER) on the sale of shares (see here). As discussed there, those changes introduced a new 5% economic rights test. The new test is based on the group relief rules and was widely criticised for its complexity and difficulty to satisfy.

On 8 January 2019, a proposed amendment to the draft legislation implementing the changes to ER was agreed in the House of Commons. The amendment, which was proposed by the Government following lobbying, introduces an additional and alternative 5% economic test for an individual to qualify for ER on the sale of shares. In addition to the new 5% distributions and assets on a winding up test announced in the Finance Bill, an individual may also benefit from ER if, throughout the requisite holding period (24 months from 6 April), he or she is entitled, by virtue of holding ordinary shares, to 5% of the proceeds from a disposal of the whole of the company's ordinary share capital for its market value.

This alternative economic test may be simpler for individuals to satisfy, particularly in transactions where the target company is funded using non-commercial loans or other sorts of preferred capital instrument. It will, however, still be considerably more difficult for individuals to qualify for ER on share sales than it was before 29 October and careful consideration will need to be given to capital structures where there is a desire for ER to be available.

As a reminder, it is important when assessing the availability of ER to understand what is and what is not ordinary share capital. In August, the Chartered Institute of Taxation, with HMRC's agreement, published a list of examples of share terms with HMRC's preliminary view on whether they are or are not "ordinary share capital". As can be seen, seemingly minor differences could have significant consequences if they mean that what is intended to be ordinary share capital is not or vice versa.

Intangibles

Also approved on 8 January 2019 were two new provisions in the Finance Bill relating to the intangibles regime.

The first relates to degrouping charges. Similar to the capital gains regime, transfers of intangible assets within a corporate group benefit from tax neutral treatment. However, to avoid abuse, a degrouping charge will apply if the company leaves the corporate group still holding the asset within six years of the transfer. In the capital gains regime, these degrouping charges are switched off in relation to assets held by a company being sold where the sale of the company qualifies for the substantial shareholding exemption (the UK's participation exemption). Under the changes to the Finance Bill, degrouping charges for intangibles will be more closely aligned with the capital gains regime, so that degrouping charges relating to previously transferred intangibles will also be switched off where the degrouping transaction is the sale of shares in a company owning the intangibles that qualifies for the substantial shareholdings exemption.

In addition, legislation has been introduced that partially reverses the restriction on tax deductibility for acquisitions of goodwill that was introduced in 2015. Relief for acquisitions of goodwill will be given at a fixed rate of 6.5% of cost per year, but will be capped at six times the value of other IP assets (including patents, registered designs, copyright and design rights and plant breeders' rights) acquired alongside the goodwill. This will mean that no relief is available if the relevant transfer does not include any of these other assets. Relief will not be permitted in related party acquisitions. The new rule will apply to acquisitions from 1 April.

Each of these amendments have been welcomed and are positive for UK investment.

HMRC launches profit diversion tax compliance facility

HMRC has launched a profit diversion compliance facility intended to assist multinational enterprises (MNEs) to regularise their transfer pricing (TP) affairs, particularly where their TP policies and arrangements might not comply with OECD guidelines.

The key features of the compliance facility include:

  • MNEs must submit a six-part report with prescriptive requirements, including a declaration of full and accurate disclosure by the senior responsible officer and proposals as to (and payment of) the amount of tax, interest and penalties payable as a result of the non-compliant TP arrangements.
  • HMRC promises an accelerated process (with a stated aim of responding to the proposal within three months of submission) and that no diverted profits tax (DPT) notice will be issued for periods covered by the proposal. The disclosure does not, however, provide immunity from a criminal investigation, although HMRC states that it is highly unlikely to start a criminal investigation if taxpayers have made full and accurate disclosure. There is no offer of reduced penalties for taxpayers using the facility but disclosure will be treated as "unprompted". There are further penalty benefits for disclosures before 31 December 2019.

HMRC states that it intends to issue letters to those MNEs that it considers demonstrate features associated with profit diversion and that it is planning a programme of investigations of MNEs. The introduction of the facility might be taken to indicate that this is an area that HMRC intends to prioritise and that MNEs adopting aggressive TP policies might be advised to consider them further in the light of this development.

VAT: Question whether investment fund management services can be apportioned between standard rated supplies and exempt supplies referred to ECJ

In our September 2017 UK Tax Round Up we discussed the First Tier Tribunal (FTT) decision in Blackrock v HMRC, in which it was decided that the supply of investment management services via a computer program to both "special investment funds" (SIFs) and non-SIFs attracted VAT at the standard rate on the entire management fee as a single composite supply (notwithstanding that investment management services supplied to SIFs are VAT exempt) on the basis that the funds in question were predominantly non-SIFs.

In December, the Upper Tribunal (UT) confirmed the FTT's view that 'fintec' management services can, in principle, benefit from the SIF management exemption, but declined to comment on, whether in this circumstance an apportionment of the single management supply between the recipient SIFs and non-SIFs was possible. That question has been referred to the ECJ.

As we discussed in our February 2018 UK Tax Round Up in the context of Stadion Amsterdam, it is only in very limited circumstances and where there is clear legislative authority for doing so that a single supply can be subject to treatment as two distinct supplies for VAT purposes. So even if the ECJ find in Blackrock's favour, fund managers will be well advised to distinguish supplies made to SIFs and to non-SIFs to the maximum extent possible. The extent to which that is possible for a fund manager using fintec to manage multiple funds through a single computer platform would then have to be considered on a case by case basis.

We will update readers following the ECJ's ruling.

VAT: Provision of management services for contingent payment is not an economic activity

In W Resources v HMRC, the FTT has found that a parent company which provided management services to newly acquired subsidiaries, with payment for those services contingent on the subsidiaries generating income, was unable to reclaim its input VAT on services that it received.

As a general matter, the parent company's ability to reclaim the input VAT associated with the management services was dependent on it having made supplies for consideration to the subsidiaries in the course of carrying on an economic activity.

The test in this regard is two-fold. First, is the taxpayer making supplies for consideration? Second, is the taxpayer making those supplies with a view to making a profit?

The FTT found the first requirement to be satisfied notwithstanding the contingent payment terms. It considered the second requirement to be more problematic. There was no guarantee that the contingency would be satisfied in the future so it could not be said that the parent's purpose in providing the services was to generate income on a continuing basis (in contrast to making a profit). Further, the assessment of this condition needed to be made at the time that the parent company incurred its input VAT costs. On the basis of the UT's decision in the Norsemen case, the FTT decided that the contingency meant that the parent company did not satisfy the second requirement of having an intention to generate income.

The FTT noted, however, that it was far from certain that its finding was correct, since a body of ECJ case law seemed to imply that if a holding company provided management services to its subsidiaries for consideration then it was by definition carrying out an economic activity. Ultimately, the FTT felt bound to follow the UT's decision in Norsemen on the point.

The case is the next instalment in a long line of decisions regarding recovery of input VAT by parent/deal companies following acquisitions, and there are likely more to come as HMRC focuses on this issue.

However, the key points for clients remain the same. Early establishment of the relevant companies and clear onward supplies with a view to generating income – with no contingencies – are crucial.

VAT: UT allows Tesco input VAT recovery from Clubcard scheme

In HMRC v Tesco the UT agreed with the FTT and held that Tesco was entitled to input VAT recovery in respect of the VAT it paid to third parties who accepted reward tokens as payment towards the purchase of their goods or services under Tesco's well-known Clubcard scheme.

The essential facts behind the scheme are that Tesco's customers can earn Clubcard points which they can then use to buy discounted goods and services from Tesco's "deal partners". Tesco pays the deal partners a fee (with VAT) for their involvement in the scheme and agreement to accept the Clubcard points in payment for their goods and services.

HMRC had argued that Tesco's payment to the deal partners was a third party payment in respect of the customers' purchases from the deal partners. If that was correct, Tesco would have had no basis of recovering its input VAT. In the alternative, HMRC they argued that only a small proportion of the fee paid by Tesco should be attributed to the deal partners agreeing to participate in the scheme and the rest of it should be treated as third party consideration, so reducing Tesco's input VAT recovery.

Tesco argued that the entire fee paid to the deal partners was for the deal partners' participation in the scheme and agreement to accept the Clubcard points as (part) payment. On that basis, Tesco was entitled to recovery of its input VAT as it was directly linked to Tesco's VATable grocery business.

The FTT had decided that the VAT was deductible as input tax since the deal partner was making a supply of redemption services to Tesco.

The UT has agreed with the FTT and dismissed HMRC's appeal on the basis that, applying the House of Lords' decision in Redrow, the transaction must be looked at from Tesco's perspective and whether it received a benefit, linked to its VATable business, as a result of its payment to the deal partners. Looking at the terms of the arrangements, the UT agreed with the FTT that Tesco was receiving a benefit from the deal partners of facilitating the operation of its Clubcard scheme, which was operated for the furtherance of Tesco's business.

The UT considered in detail the judgements of LMUK/Baxi that related to the Nectar and Baxi loyalty schemes. Both of these cases highlight the requirement to consider the economic reality of the particular arrangements in order to determine whether VAT is or is not recoverable. Although there were reward schemes where it may be appropriate to apportion the input VAT between consideration for services (deductible) and third party consideration (not deductible), the Clubcard scheme was not one of them. Neither the contracts nor the economic reality of the arrangements suggested that only part of the sums paid by Tesco was consideration for services supplied to Tesco and, as such, Tesco was entitled to input tax recovery for all of the VAT paid on the fees paid to its deal partners.

INTERNATIONAL DEVELOPMENTS

ECJ rule that contractual termination payments are consideration for VAT supply purposes and not compensation

The ECJ has held in Meo v Autoridade that an amount payable by the customer on default under a service contract was consideration for VAT purposes and not compensation for breach of contract.

The ECJ concluded that if the default payment was the same as the amount that would have been paid had the contract continued (as was the case here), the sum paid was consideration for the right to benefit from the supplier's performance of the contract even if the customer did not access the services (whether by choice or because of the customer's default).

Following this principle, the ECJ drew contrast with prior cases highlighting, on the one hand, the case where a deposit for a hotel room was compensation for the customer's failure to take up the room and, on the other hand, the case where the full price of an air ticket paid by a customer who failed to take their seat was consideration for a supply.

This decision is interesting in light of HMRC's recent announcement, summarised in our December 2018 Round Up, that from 1 March 2019 payments and deposits for goods and services that customers do not take up will be treated as payments for the supply of goods or services and not as compensation, regardless of the amount payable, and might mean that HMRC has to reconsider this position.

IPT: Relevant jurisdiction under W&I insurance contracts

We are increasingly seeing purchasers and vendors seeking insurance for breaches of representations, warranties and indemnities and tax indemnities given as part of M&A deal documentation (so-called W&I insurance).

The taxation of W&I insurance and payments is an evolving area too, and in this regard the ECJ has recently confirmed in A Ltd v Veronsaajien Oikeudenvalvontayksikkö that insurance premium tax (IPT) chargeable in respect of W&I insurance is levied where the insurance policyholder is established and not where the target company is established.

The relevant European legislation provides that the right to tax insurance contracts lies with the jurisdiction in which "the risk is situated". For building, vehicle and travel insurance this is based on the country of physical presence or registration. The Finnish courts that first heard this case felt unable to form a view on where the risk of W&I insurance fell since it could be where the target was established or where the policyholder was established. When referred, the ECJ noted that the general principle of insurance taxation is that it is levied where the contractual risk lies and it was determined that, as the W&I insurance is taken out in respect of the risk allocation as between purchaser and seller it should be the jurisdiction of whichever of those parties is the W&I insurance policyholder that is the IPT taxing jurisdiction, and not that of the target company.

This case acts as a reminder that IPT costs should be factored into assessments by purchasers and sellers of transaction costs. Rates of IPT varies across EU member states (it varies between nil at 24% across the EU and is 20% for W&I policies in the UK), so where IPT is levied is an important consideration.

UK Tax Round Up - January 2019

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions