PM-Tax

Wednesday 26 October 2016

News and Views from the Pinsent Masons Tax team In this Issue

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Comment • Will Brexit affect the continued tax crackdown? by Jason Collins • Christmas is coming... a few thoughts on the approaching year end for corporates by Heather Self • Proposed new penalty for participants in VAT fraud by Stuart Walsh • Our response to the consultation on penalties for enablers of tax avoidance by Catherine Robins • Update on the new criminal offence of failure to prevent the facilitation of tax evasion by Jason Collins Articles • What happens when a provision in a tax deed depends on the outcome of a case? by Jeremy Webster

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• What can we expect in the Autumn Statement? by Catherine Robins Cases Lomas and Others v HMRC [2016] EWHC 2492 (Ch) HMRC v BMW(UK) Holdings Ltd and others [2016] UKUT 434 (TCC) Paya Limited and Tim Willcox Limited v HMRC [2016] UKFTT 0660 (TC) Six Continents Ltd and Another v HMRC [2016] EWHC 2426 (Ch) Events

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PM-Tax | Comment

Will Brexit affect the continued tax ‘crackdown’? by Jason Collins This comment was published in Plucking the Goose: A Century of Taxation from the Great War to the Digital Age, which was published to celebrate Tolley’s centenary year.

It goes without saying that the concept of ‘tax avoidance’ has, generally speaking, become socially unacceptable over the last few years. There has been a conscious effort by the UK Government and other governments to tackle what is seen as the worst of it. But it is very hard to pin this general concept down in legislation. It is even harder to find consensus of what actually constitutes ‘avoidance’. What is considered to be acceptable planning by one large body of people may be denounced by another body of people as wholly unacceptable. Sometimes it seems that, for this latter group of people, the line is drawn to catch anything done by a reasonably wealthy individual or reasonably-sized multinational, especially if the activity involves taking expert tax advice (since such an option is simply not available to ‘the rest of us’). That latter group of people will draw cold comfort from the fact the UK now has a (to-date, unused) General Anti-Abuse Rule which defeats planning ab initio if a reasonable body of such esteemed advisers would consider the planning to be unreasonable.

However, if a post-Brexit UK risks losing international business because it is no longer part of the single market, clearly there is a need to compensate. For instance, in the immediate aftermath of the referendum result, George Osborne suggested a post-Brexit bargain basement rate of corporation tax. But the attractiveness of a tax regime is not just about the headline rate of tax, it is also the ease of doing business. Many large corporates have noticed a hardening of HMRC’s attitude towards them in the last 12 months. HMRC has spent the last ten years building cooperative relationships and it would be a shame to throw that all away in the pursuit of increased yields, especially when they may have reached the stage of diminishing returns from that work.

HMRC is under pressure to increase the yield from enquiries and investigations and has chalked up numerous wins in the courts against mass-marketed avoidance by wealthy individuals and multinationals. The trouble now is that much of that well has run dry. Having harvested the easier wins, HMRC is turning the screw on positions which until a couple of years ago would have been seen as ‘vanilla’. Large corporates in particular are feeling the brunt of this crackdown.

Jason Collins is head of our Litigation, Regulatory and Tax team. He is one of the leading tax practitioners in the UK. Jason specialises in representing corporate and individual clients who are the subject of a tax audit – and resolves complex disputes with HMRC in all aspects of direct tax and VAT, as well as tax treaty and State aid disputes involving other jurisdictions. Where necessary, he handles litigation before the Tax Courts and all the way through to the Court of Justice with a particular expertise in class actions and Group Litigation Orders.

For so long as the public finances continue to need repairing, we are unlikely to see any let up in this push. Whatever form the Brexit arrangements take, measures against tax avoidance are popular revenue raisers, and have a broad appeal to the electorate. If anything we can expect to see an ever increasing drive in this direction. The EU is keen to be seen to take the lead on a number of initiatives to tackle avoidance – although the reality of the matter is that the OECD plays a far more prominent role, such as with BEPS and the Common Reporting Standard. Brexit will not lead to the UK seeing itself as having a diminished role in the OECD. Far from it - the UK will continue to want to be at the forefront of developing a fair global tax system (or more precisely the interaction between those systems).

E: [email protected] T: +44 (0)20 7054 2727 For further details of the book, which is being published in aid of the Chartered Institute of Taxation’s Bridge the Gap initiative, click here.

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PM-Tax | Wednesday 26 October 2016 2

PM-Tax | Comment

Christmas is coming… a few thoughts on the approaching year end for corporates by Heather Self

Heather Self considers what groups with a December year end need to be thinking about. If your group has a December year end, you will already be thinking about the year end provision work. As always, you will take account of business transactions during the year and developments in tax legislation - so you will be well aware of the impact on deferred tax of the rate change and new legislation on the patent box and withholding tax on royalties. And of course, you will already have prepared your country by country reporting template and drafted the tax strategy.

example, even where there is no question of a “scheme” having been used. Another specific issue is the need to make a s198 election for the fixtures element of any acquisition on or after 1 April 2014: the time limit to agree an election with the vendor, or to refer the issue to the Tribunal, is two years. And then there is the year before, and the year before that….it is routine to update the tax provision for the group’s current view of the likely outcome. However, is this done on a robust basis, or is it just a case of updating last year’s schedule and handing it to the auditors? Again, could any decided cases have an impact on the position? Or, if you are relying on a Counsel’s opinion which was given some years ago, is it still valid? A particular issue affecting the longer term is the risk of a State Aid challenge - as the Apple decision has shown, this could affect the position going back as far as 10 years ago.

But meanwhile, the ghost of Christmas past appears. What about last year? And the year before that, and perhaps the one before that? The aim of this note is to highlight some key points to consider, from the perspective of what we are seeing as an increasingly aggressive approach by HMRC to disputes and to potential penalties. For last year, it will shortly be time to file the tax computation. What issues could give rise to a dispute with HMRC? What view have you taken, and can you demonstrate that your view is reasonable if HMRC later challenge it? If the treatment of an item is uncertain, and you have not already discussed it in real time, what disclosure should you make to protect yourself against a future discovery assessment? Capturing, and documenting, the thought processes at this stage may pay dividends later. Diverted profits tax is a specific example – the deadline for making a notification for last year has now passed, but have you documented your reasons for deciding that you had no obligation to notify?

Managing tax risk has always been a major part of any tax director’s role. But in our view, that risk is increasing, particularly in relation to the need to actively manage any open risks affecting prior years. Happy Christmas, everyone! Heather Self is a Partner with over 30 years of experience in tax. She has been Group Tax Director at Scottish Power, where she advised on numerous corporate transactions, including the $5bn disposal of the regulated US energy business. She also worked at HMRC on complex disputes with FTSE 100 companies, and was a specialist adviser to the utilities sector, where she was involved in policy issues on energy generation and renewables.

For 2014, remember that there is a time limit of 12 months to amend a corporation tax computation, and this limit is strictly applied by HMRC. Has anything changed since the computation was filed? In particular, have there been any decided cases in the last 12 months which have an impact on the filing position? An area for particular focus is any financing structures: we are seeing HMRC taking a very wide view of unallowable purpose issues, for

E: [email protected] T: +44 (0)161 662 8066

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PM-Tax | Wednesday 26 October 2016 3

PM-Tax | Comment

Proposed new penalty for participants in VAT fraud by Stuart Walsh

Stuart Walsh comments on a new penalty proposed by HMRC which could catch businesses and company officers that “should have known” about the presence of fraud somewhere in the supply chain, as well as those who actually knew about the fraud. A large part of the ‘VAT gap’ – ie the difference between the tax HMRC actually collects and what it should collect, is caused by organised VAT fraud such as missing trader intra community (MTIC) fraud. Such frauds are increasingly complex, but, in essence, involve a fraudster in the UK: (i) purchasing goods from within the EU, so that UK VAT is not chargeable on the purchase; (ii) making an onward supply of those goods in the UK, which is subject to UK VAT; then (iii) absconding with the UK VAT.

Penalty proposals The current penalty regime requires HMRC to decide, when issuing the penalty, whether the business’s non-compliance is ‘deliberate’ or ‘careless’. A ’deliberate’ penalty (of up to 100% of the input VAT denied) would be appropriate if the business had actual knowledge; whilst a ‘careless’ penalty (up to 30% of the input VAT denied) would be appropriate if the business ‘should have known’ of the connection with fraud.

The government has issued a consultation document setting out proposals for new penalties for businesses which have input tax recovery denied as a result of MTIC fraud. Penalties could also attach to company officers and directors.

To avoid potentially prejudicing their case against the business by having to assess the penalty on either a careless or deliberate basis, HMRC currently waits until the VAT case in respect of the disallowance of input tax and any litigation is finalised. However, this can result in a second round of litigation, this time against the penalty.

MTIC fraud MTIC fraud was initially most commonly associated with small, high value electronic goods, such as mobile phones. Such was the scale of the fraud, legislation was introduced to make those participants in the supply chain who “knew” or “had reasonable grounds to suspect” that VAT would go unpaid in the supply chain jointly and severally liable for that VAT. Following subsequent developments in case law, principally the CJEU case of Kittel, HMRC were lawfully permitted to deny input tax recovery to all participants in a supply chain who “knew or should have known” that their transactions were connected with VAT fraud. Depending upon the number of participants in the supply chain, the value of input tax denied could quickly exceed the value of the VAT that had not been remitted to HMRC by the ultimate fraudster. Following Kittel, HMRC rarely imposed “joint and several” liability, favouring instead to deny participants input tax recovery.

It is proposed that the new penalty would apply where a business knew, or should have known, that their transactions were connected with VAT fraud. However, controversially HMRC intends to do away with the distinction between ‘knew’ and ‘should have known’. The penalty would be assessed at the same time as the disallowance of the input tax recovery so that an appeal against the penalty could be dealt with at the same time as the substantive issue. HMRC has proposed two broad design options for the new penalty, although it has asked for views about other options as part of the consultation exercise. Option A is a fixed rate, 30% penalty which would apply in all cases where the business either knew or should have known that fraud was involved. This proposal departs from the usual principle for tax penalties that the more culpable the behaviour the greater the penalty. This does not seem reasonable as there is a significant distinction between a business which knowingly participates in fraud and one whose due diligence procedures are not as effective as they should be.

Despite the increased weaponry at HMRC’s disposal, it did not serve to deter the fraudsters from seeking to exploit new markets for ill-gotten gains, with the fraud spreading to the financial services and energy sectors, most notably affecting the precious metal, carbon credit and wholesale gas and electricity markets, and also the alcohol sector. Unfortunately, the truth of the matter is that few industries are safe from the risk of MTIC fraud and the consequences for legitimate businesses that become unwittingly involved in a supply chain affected by MTIC fraud can be serious, with input tax denial compounded with a behaviour based penalty calculated as a percentage of the input VAT denied.

Option B would involve a 25% penalty where the Kittel principle is applied. However, this penalty would increase to 50% if the underlying decision was appealed and the tribunal later ruled that there was actual knowledge of the fraud. CONTENTS

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PM-Tax | Wednesday 26 October 2016 4

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PM-Tax | Comment

Proposed new penalty for participants in VAT fraud (continued) HMRC is not proposing any penalty reductions in exchange for disclosure of information, although it is seeking views on whether to include this in the design. Not reducing a penalty where an employer has co-operated and made a disclosure to HMRC will not encourage those who discover irregularities to come forward, which cannot be in HMRC’s interests. The consultation also seeks views on whether to ‘name and shame’ those who participate in VAT fraud. Penalties for company officers In each case, the new penalty would apply to both the company itself, and to company officers such as directors and company secretaries. Penalties could be issued against individuals whether they knew or ought to have known that the transactions were connected with VAT fraud. Currently, individuals can only be penalised where there is evidence of deliberate behaviour. This proposal is particularly worrying. Logically, there is likely to be little sympathy for directors incurring personal liability in circumstances where they allow their company to enter into transactions in full knowledge that they are participating in a VAT fraud, given that it essentially demonstrates dishonest behaviour. However, the proposal would mean extending the same level of personal liability to company officers who ‘should have known’ that their company’s transactions were connected to fraud - conduct akin to careless behaviour. Personal liability in these circumstances appears excessive, and it is very difficult to rationally justify a ‘one size fits all’ approach to two very different types of behaviour. All businesses are therefore well advised to revisit their existing controls and procedures, including supplier and customer due diligence procedures, to ensure that they are suitably robust such that the business is best placed to avoid becoming inadvertently involved in a supply chain affected by fraud, and potentially seeing it, or the company officers, being characterised as a party that “should have known”, with the resulting consequences. The consultation closes on 11 November 2016. Stuart Walsh is a Partner and head of our Tax Disputes Team. He has extensive experience of working with large FTSE 100 clients in resolving disputes with HMRC across all indirect and direct taxes. He has particular experience in defending legitimate businesses caught up unwittingly in MTIC fraud. Stuart has represented clients at all stages of the appeal process from the First-tier Tribunal (Tax) through to the Supreme Court, before the Administrative Court and the CJEU. E: [email protected] T: +44 (0)20 7054 2797 CONTENTS

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PM-Tax | Wednesday 26 October 2016 5

PM-Tax | Comment

Our response to the consultation on penalties for enablers of tax avoidance by Catherine Robins

The government’s consultation on penalties for enablers of tax avoidance and further sanctions for users of tax avoidance schemes closed recently. Our response to the consultation highlighted the fact that the proposals are so wide ranging that they could catch routine tax advice and make it difficult for taxpayers to obtain professional advice. The consultation document covered three main areas:

We do not consider that the penalty regime should be triggered where a follower notice is issued, unless the original case which gave rise to the follower notice had been decided at the time the services of the enabler are provided.

• Penalties for ‘enablers’ of tax avoidance - this proposed penalties calculated by reference to the tax avoided for a wide class of businesses involved in the ‘supply chain’ for tax avoidance that is ‘defeated’.

Penalties for ‘enablers’ of tax avoidance

Extending the definition to arrangements which have been the subject of a targeted avoidance-related rule or unallowable purpose test makes it unnecessarily wide. There are a vast number of such tests in legislation and most new pieces of legislation now contain such a test. Arrangements which fall foul of an unallowable purpose test are not necessarily artificial schemes designed to avoid tax. For example, in most financing transactions advisers would need to consider the unallowable purpose test in section 441 CTA 2009. The decision as to whether or not there is an unallowable purpose can often be finely balanced and it is unreasonable for a penalty to be imposed on the adviser in this situation if their analysis does not accord with that of HMRC and the courts.

We support the government’s attempts to prevent tax evasion and to clampdown on the minority of tax advisers who promote aggressive avoidance schemes. However, the proposals in the consultation document go a long way beyond these objectives and we think they need to be significantly amended to prevent them being a disproportionate response to the perceived risk.

In order for the penalties to apply, a tax avoidance arrangement has to have been ‘defeated’. The proposal is that there will be a defeat where there is a final determination of a tribunal or court that the arrangements do not achieve their purported tax advantage, or, in the absence of such a decision there is agreement between the taxpayer and HMRC that the arrangements do not work.

The main problem with the proposals is that the proposed definitions of ‘tax avoidance’ and ‘enablers’ are much too wide.

We think that the proposals could discourage taxpayers from settling with HMRC if agreeing that the scheme is ineffective is a trigger for potential penalties for advisers. This potentially creates a conflict of interest between advisers and their clients, with advisers perhaps wanting the taxpayer to fight on so that a potential penalty for the adviser is not triggered.

• Penalties for those who use tax avoidance that is defeated – this included proposals to limit when those who have used ‘defeated’ tax avoidance can rely on a defence of having taken reasonable care in completing their tax return so that their behaviour will be treated as careless and not deliberate. Treating conduct as deliberate would increase penalties for scheme users. • Further ways to discourage avoidance – this included proposals for more ‘real time’ interventions by HMRC to contact users of schemes “at each stage of an arrangement’s lifecycle”, in the hope of persuading them not to use a scheme or, if they have, to settle.

The definition of tax avoidance arrangement includes ‘any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable)’. An arrangement will constitute tax avoidance if: • it has been counteracted by the general anti-abuse rule (GAAR);

The government says that it wants ‘enablers’ to be wider that just those who design, promote and market avoidance and to include “anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements and without whom the arrangements as designed could not be implemented”.

• it is notifiable under the disclosure of tax avoidance scheme (DOTAS) rules; • a follower notice has been issued in respect of it; or • it has been the subject of a targeted avoidance-related rule or ‘unallowable purpose test’ in a specific piece of legislation.

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PM-Tax | Wednesday 26 October 2016 6

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PM-Tax | Comment

Our response to the consultation on penalties for enablers of tax avoidance (continued) Penalties for those who use tax avoidance that is defeated

Disturbingly the government proposes basing the definition on the one used in the new penalty provisions for those who enable offshore evasion.

In addition to imposing penalties on those involved, however tenuously, in a tax avoidance scheme, the government also wants to further penalise the scheme users. It is concerned that taxpayers can reduce their exposure to penalties by claiming that they have taken reasonable care with their return when they have relied on generic advice provided as part of the scheme.

Whilst such a wide list of enablers may be appropriate when what is being enabled is evasion, which could constitute a criminal offence and involves dishonesty and potentially concealment, it is not appropriate when tax avoidance is involved. For example setting up companies, trusts and other vehicles that are used to hide beneficial ownership, is quite different to setting up companies, trusts and other vehicles for lawful purposes, but where the arrangements happen to fall foul of an anti avoidance provision.

The government proposes setting out in the legislation what does not constitute the taking of reasonable care, or, possibly, placing the requirement to prove reasonable care onto the taxpayer. On the government’s proposed list of types of advice which would not be considered to amount to taking reasonable care are generic advice, advice addressed to a third party and advice commissioned or funded by a party with a direct financial interest in selling the scheme or not provided by a disinterested party.

As currently drafted the enabler penalties could catch professional firms giving mainstream tax advice on normal commercial transactions. We think that if these measures are to be introduced they should be limited to mass promoted schemes and to the ‘enablers’ who play an active part in devising such schemes.

We are concerned about the prospect of moving the burden of proof that ‘reasonable care’ was taken, on to the taxpayer. The balance of power is already heavily weighted towards HMRC. The burden on taxpayers to ensure they are tax-compliant is considerable in terms of time and cost and many individuals employ advisers to help them. This is in part because they do not have a deep understanding of tax and partly because their resources are too stretched to cope without assistance. Thus, if a taxpayer has taken advice from a reputable professional with no obvious reason to doubt its credibility, HMRC should recognise that, for many taxpayers with no tax training, that does constitute ‘reasonable care’.

We are concerned that if the proposals are implemented in their current form they could result in taxpayers being unable to get tax advice in relation to commercial transactions because advisers will not be willing to advise if there is potential to engage a TAAR given the possibility of becoming liable to a penalty. This would mean that businesses and individuals would be unable to obtain certainty in relation to the potential tax consequences of their transactions. It is also not clear whether the proposed new rules could apply retrospectively. It seems that the intention is that the new rules will apply to schemes defeated after a set date, even if they were implemented some years ago. We do not think that arrangements put in place several years ago, based on the law at that time, should bring the designers of the planning and its users into the scope of the proposed sanctions.

Although the consultation has only recently closed, we may get an update on what the government proposes to do in the Autumn Statement on 23 November. However, given this measure was mentioned specifically in Theresa May’s speech at the Conservative Party conference, it is unlikely that it will be dropped. We hope, however, that it will watered down, so that it is a workable and proportionate response to the government’s concerns over the continued use of tax avoidance schemes.

The government is considering basing the penalty for the enabler on the amount of tax under-declared by the user of the arrangements. We think that a tax based penalty is inappropriate in this situation where the enabler may have had a very small part in the arrangements and may therefore have received only a small fee for their involvement.

Catherine Robins is a Partner in our tax team. Although originally a corporate tax specialist, Catherine now provides technical assistance to clients and members of our contentious tax and non-contentious tax teams in all areas of tax. She is the editor of PM-Tax. E: [email protected] T: +44 (0)121 625 3054

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PM-Tax | Wednesday 26 October 2016 7

PM-Tax | Comment

Update on the new criminal offence of failure to prevent the facilitation of tax evasion by Jason Collins

Plans to criminalise companies that fail to prevent the facilitation of tax evasion by their employees and representatives have moved one step closer, following the publication of legislation. The new corporate criminal offence of failure to prevent the facilitation of tax evasion will apply to non-UK based, as well as UK based, corporations which fail to prevent their representatives from criminally facilitating the evasion of UK tax. It will also catch corporations incorporated, or with a place of business in the UK, which fail to prevent their representatives from criminally facilitating the evasion of overseas tax.

Companies and partnerships organised, or with a place of business in the UK, could be caught by the offence if their employees or representatives are facilitating the evasion of non-UK tax. This will include those jurisdictions where compliance with tax codes is less rigidly followed than in the UK. HMRC has indicated that the government is most likely to pursue a prosecution where the tax evasion involves a developing country – especially in Africa.

The measures are set out in the recently published Criminal Finances Bill. The new offence is expected to come into force some time in 2017, before the first automatic exchanges of information under the common reporting standard (CRS) take place in September 2017. HMRC has also published a response to its previous consultation and has updated its draft guidance on the new offence.

Businesses need to be making a start on conducting an initial risk assessment and developing the policies and procedures that are appropriate for their particular business and risk profile. At Pinsent Masons, we have brought our tax, bribery and compliance technology specialists together to develop a suite of ‘out of the box’ tools to help to meet the ‘reasonable prevention procedures’ standard. These solutions have been developed to keep the cost of compliance down, minimise the burden on a business’s compliance function and significantly reduce the risk of exposure to a facilitation crime. If an issue arises, adoption of our solutions means that a business should be in a good place to demonstrate a reasonable prevention defence. Our solutions can be deployed across any business and can be tailored to meet existing processes. Please contact us for further information.

The criminal offence will apply to companies and partnerships, but there will be a defence if organisations are able to show that they had in place procedures to prevent the facilitation of tax evasion “that it was reasonable in all the circumstances” to expect them to have in place or if it was not reasonable in all the circumstances to expect them to have any prevention procedures in place. The offence will particularly affect banks and trust companies. However, it will extend to all sectors including infrastructure and energy businesses operating in developing countries, particularly those that rely heavily on external consultants; high tax sectors such as alcohol and tobacco and businesses that handle large amounts of cash.

Jason Collins is head of our Litigation, Regulatory and Tax team. He is one of the leading tax practitioners in the UK. Jason specialises in representing corporate and individual clients who are the subject of a tax audit. Where necessary, he handles litigation before the Tax Courts and all the way through to the Court of Justice - with a particular expertise in class actions and Group Litigation Orders.

It is important that all businesses carry out an initial risk assessment and supplement this with regular ongoing assessments, external audits and implementing robust policies, to ensure they are doing everything reasonably possible to prevent criminal activity. This could prove a significant burden to some companies, but will be vital to their defence if investigated. Organisations will be liable for the actions of all persons who are “acting in the capacity of a person associated” with them, but not those that act entirely independently. This will cover employees, but also third parties providing services to a client of the organisation if the organisation has an element of control over the provision of those services.

E: [email protected] T: +44 (0)20 7054 2727 See our webinar and seminar to prepare you for the ‘failure to prevent’ offence.

The proposals very deliberately target the most senior executives in a business. Although the offence is committed by the company, no board member wishes for their CV to include presiding over a company which obtained a criminal record.

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PM-Tax | Wednesday 26 October 2016 8

PM-Tax | Articles

What happens when a provision in a tax deed depends on the outcome of a case? by Jeremy Webster This article was published in Tax Journal on 30 September 2016.

Q We are buying a target that potentially has a big tax liability in it. Whether or not the liability comes home to roost depends on the outcome of an ongoing case. Are standard tax deed provisions sufficient to deal with this, or do I need to add in something extra? A It depends on what the state of the case is, and what the credit status of the seller is.

The London Clubs case The case of London Clubs Management Ltd v HMRC [2016] UKUT 259 (TCC) (reported in Tax Journal, 17 June 2016) gives a useful example of an ongoing case for which escrow provisions might work in practice. The issue in that case is whether free chips given to certain customers as a promotional tool (non-negotiable chips) constitute money or money’s worth. This is a critical question because if the chips do represent money or money’s worth, then gaming duty applies.

The tax deed is generally there to cater for unexpected liabilities. If there is a known liability that would normally be factored into the price, especially in a completion accounts deal. However, where the liability is truly contingent, the seller may be unwilling to accept that approach as it could lose out. If the seller is a good credit risk, for example a FTSE 100 company with plenty of assets and a reputation to preserve, it may be enough for the buyer to rely on standard tax deed provisions. In that case, if the liability does crystallise the usual process is followed, i.e. the buyer demands payment and the seller’s conduct rights kick in, pursuant to which it may dispute HMRC’s assessment in the courts, subject to keeping the buyer indemnified against its costs. The trouble with this is that typically the conduct indemnity only requires payment of the buyer’s (reasonable) costs on an ongoing basis, with the underlying tax liability left unpaid and interest and penalties potentially increasing as the dispute progresses, unless the tax is of a type that has to be paid upfront before it can be disputed. Many buyers would understandably be nervous about this as tax disputes can take years to work their way through the courts, so you may need to make sure your tax deed requires payment on account to HMRC before a tax claim can be disputed by the seller.

Customers use the non-negotiable chips to place bets: if they lose, the chips are lost; if they win, they keep the non-negotiable chips. The non-negotiable chips can only ever be used to place bets and cannot be cashed or exchanged for goods or services. If the target in a transaction is a casino which has been giving out nonnegotiable chips and not paying gaming duty, there could be a significant potential tax exposure in the target. Casinos have generally not treated non-negotiable chips as subject to gaming duty, so this is a big issue in the industry. Someone selling a company operating a casino will be reluctant to agree a price chip for something which they may see as a non-issue (on the grounds that none of their competitors applied gaming duty). However, if the parties cannot agree a price reduction to reflect the risk of historic gaming duty liabilities (or insure the risk), a well advised buyer would want alternative protection, such as deferred consideration held in escrow to fund the liability if and when it crystallises. Escrows can be very useful but need drafting carefully to cater for all imaginable scenarios. Starting with the triggers for release from escrow, should the trigger be specific to the outcome of the London Clubs case, for example? Or should an assessment by HMRC against the target before that case is decided trigger release?

If the seller is not such a good credit risk, for example a special purpose vehicle in a tax haven, the seller would be ill advised to rely on the standard tax deed provisions. The use of an escrow is one possible solution, but how should the escrow account mechanism work? Having a longstop date is a sensible first step to give some certainty to the arrangement, but what if that long-stop date arrives whilst the dispute is working its way through the court system – which party gets the money? What should the triggers be for release from the escrow generally?

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PM-Tax | Articles

What happens when a provision in a tax deed depends on the outcome of a case? (continued) In London Clubs, the First Tier Tribunal found for HMRC (that non-negotiable chips are subject to gaming duty) but this decision was reversed by the Upper Tribunal. HMRC is currently seeking leave to appeal to the Court of Appeal, so what happens if the target gets an assessment from HMRC on non-negotiable chips at that point (i.e. before the matter is finally determined)? The buyer will want to use escrow monies to pay the tax claimed, while the seller would want to dispute the assessment to try to get ‘its’ money back. If the assessment is less than the escrow amount, should any of the escrow be released to the seller at the time of assessment? Or should this be done only once the London Clubs case is finally determined? Building a ‘war chest’ Whatever is decided in terms of triggers, costs could be significant with potentially years’ worth of litigation. A buyer would be well advised to insist on a ‘war chest’ concept. This requires that enough cash is left in escrow and that the seller has to top up the escrow as and when required, so that it always contains funds to pay for the ongoing costs of the dispute with HMRC. If the war chest is empty, then the seller loses its conduct rights and the case is closed. This concept is especially important where the escrow can be used to satisfy other claims under the SPA, as it could easily be exhausted whilst litigation is ongoing. The war chest provides a last line of defence to prevent the buyer accumulating costs which it may not be able to recover from the seller. In short, specific drafting is required where there is a tax liability dependent on a current case. An escrow account is one solution, but it needs careful thought to make sure it works as the parties intend. Jeremy Webster is a Senior Associate specialising in corporate and business tax. He has extensive experience of advising on a range of corporate tax issues, including mergers and acquisitions, corporate structuring, capital market transactions, funds (including property, debt and private equity) company reorganisations and real estate transactions. He also advises entrepreneurs, investors and business owners on tax issues generally (including exit arrangements and employment taxes). E: [email protected] T: +44 (0)20 7418 7107

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PM-Tax | Wednesday 26 October 2016 10

PM-Tax | Articles

What can we expect in the Autumn Statement? by Catherine Robins

Much has happened since March’s Budget - the UK has voted to leave the EU and we have a new Prime Minister, Chancellor of the Exchequer and Financial Secretary to the Treasury in post. This year’s Autumn Statement on 23 November is likely therefore to be particularly interesting. Corporates will be wondering whether the new Chancellor will be as keen for the UK to be a trailblazer in relation to introducing the OECD’s recommendations to restrict tax relief for interest payments. This is one of the recommendations from the OECD as part of its base erosion and profit shifting (BEPS) project designed to reduce tax avoidance by multinationals. The UK government’s current proposal is that the measures will apply from April 2017.

Hammond’s speech to the Conservative party conference of cutting the rate further. In the wake of the Brexit referendum decision, his predecessor had announced a proposal to cut the rate to 15%. We think this further cut in the rate unlikely at this point in time – not least because it is not something that business is calling for. Although there is press speculation that the threat of a drastic rate cut could be used as a bargaining chip in the Brexit negotiations.

In the light of the uncertainties over Brexit and the fact that the OECD has not yet made final recommendations in relation to the group ratio rule or how the rules should apply to banks and insurance companies, we think it would be better to postpone the introduction of the fixed ratio rule until 2018. However, we think it most likely that the Chancellor will stick to the current timetable, but we could see some minor changes to the public benefit exemption and perhaps limited concessions to exclude some situations where the proposals are causing problems but where is no significant BEPS risk. One such area could be asset backed finance where the assets are in the UK and the debt is from third parties.

Philip Hammond’s speech to the conservative party conference was unusual for a speech by a chancellor in recent years because it contained no mention of clamping down on tax avoidance or tax evasion. However, in her speech Theresa May emphasised the expectation that people would pay their “fair share of tax”. She also signalled an intention to be tough on those who do not pay tax they are expected to. “If you’re a tax-dodger, we’re coming after you. If you’re an accountant, a financial adviser or a middleman who helps people to avoid what they owe to society, we’re coming after you too”, she said. This suggests more of the blurring of the line between tax evasion and avoidance that we have seen in recent years.

Another significant concern for large corporates is the proposal that from April 2017, companies with profits in excess of £5 million will only be able to offset 50% of their profits using losses carried forward from a previous accounting period. We hope that given the economic uncertainty that has followed the UK’s referendum vote to leave the EU, the chancellor will postpone the introduction of these new rules. The Finance Act 2016 reduces even further the carry forward losses that can be used by banks so that only 25% of profits can be offset. Banks will be hoping that the Chancellor will not introduce any new ‘bank bashing’ measures.

The reference in the prime minister’s speech to financial advisers and middlemen appears to be a reference to the proposals set out in a recent consultation to impose penalties on ‘enablers’ of avoidance. The intention behind the proposals appears to be to clamp down on those who devise and actively market aggressive avoidance schemes. Unfortunately, as currently drawn, the proposals are so wide that they are unworkable and could impede businesses and individuals seeking to obtain advice on the tax consequences of commercial transactions. We hope that the chancellor will announce a more workable regime targeted at those who take a significant part in devising and marketing mass marketed avoidance schemes, rather than at those who provide more routine advice on commercial transactions. See my comment piece for further details.

Insurance companies will be hoping that the Chancellor will take on board their concern that the loss restrictions could mean that they have to increase their regulatory capital, as the immediate tax relief available for losses arising from a stress event is taken into account when calculating capital requirements so a restriction in loss relief could lead to an increased capital requirement.

Philip Hammond has announced that he has dropped George Osborne’s target of clearing the financial deficit by 2020, but that “the task of fiscal consolidation must continue”, but “in a pragmatic way that reflects the new circumstances we face”.

The corporation tax rate is already set to fall to 19% in April 2017 and 17% in April 2020. However, there was no mention in Philip

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PM-Tax | Articles

What can we expect in the Autumn Statement? (continued) He signalled spending on infrastructure, with a focus on “modest, rapidly deliverable investments” in road and rail and increased spending on new homes, possibly with a focus on smaller house builders. We could perhaps see some form of infrastructure fund or maybe specific asset-backed government bonds. There could also be funds for tax incentives. Perhaps an increase in the annual investment allowance to stimulate spending by businesses. VAT is one of the few taxes that will be significantly affected by Brexit as it is an EU tax. It is probably too soon for any announcements on what a post-Brexit system of VAT may look like. However, a temporary reduction in the rate of VAT could be used as a measure to stimulate spending – or at least in the case of some goods to offset for consumers the price increases likely as a result in the fall in the value of sterling. Although this would not help in the case of most staple food items which are not subject to VAT. On the personal tax front, the most significant potential issue is further tinkering with the tax relief system for pension contributions. Some businesses are also calling for a delay in the introduction of the apprenticeship levy. This is due to apply from April 2017 and is intended to contribute to closing the skills gap, but there are many detailed implications that businesses need to get to grips with. We might also get an indication of the current administration’s approach to tax policy making. For example will we return to effectively just one Budget a year, with the Autumn Statement dealing purely with economic policy and spending (as the IFS and CIOT have called for)? Will we see a commitment to more consultation over proposed changes to the tax system? We already know that “legislation day” will be 5 December, when draft legislation for the Finance Bill 2017 will be published so it seems as if, at least in the short term, the government will continue with George Osborne’s tradition of publishing draft finance bill clauses in December. We can only hope that on 23 November we won’t be presented with a raft of new proposals and that we can have a period of relative calm while the government and businesses work out what the tax landscape will look like post-Brexit. Catherine Robins is a Partner in our tax team. Although originally a corporate tax specialist, Catherine now provides technical assistance to clients and members of our contentious tax and non-contentious tax teams in all areas of tax. She is the editor of PM-Tax. E: [email protected] T: +44 (0)121 625 3054

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PM-Tax PM-Tax | Comment | Cases

Cases Lomas and Others v HMRC [2016] EWHC 2492 (Ch) Statutory interest payable on an insolvency is not yearly interest so can be paid gross. This case arose out of the administration of Lehman Brothers. Around £5 billion was due to be paid as statutory interest to creditors. The joint administrators argued that statutory interest is not ‘yearly interest’ for the purposes of section 874 Income Tax Act 2007 and so could be paid gross. HMRC said it was yearly interest which would mean the administrators would be required to deduct tax from it. The administrators applied to the High Court for direction on whether the interest constituted yearly interest.

statutorily imposed on the creditors for the equitable distribution of surplus. He said there was no loan; no investment; no judgment; no period of accrual; no right unless and until a surplus was established; no quality or capability of recurrence; there was only a moratorium and a scheme of distribution mandated by the statute and the rules. He said that case law established that the fact that money remains outstanding for more than a year and bears interest is not sufficient for the interest to be yearly interest. He said that something akin to a loan or investment ‘at interest’ must also be demonstrated or be capable of being inferred from the evidence.

HMRC had initially taken the view that statutory interest was not yearly interest and this had been set out in paragraph 7433 of its Insolvency Manual. It was only when the administrators asked HMRC to reconfirm the position, as they were about to pay the interest, that the matter was referred to HMRC’s CTIS Financial Products Team, which said that statutory interest payments should be subject to deduction and that 7433 of the Insolvency Manual had been misconstrued, and applied only to payments of statutory interest to HMRC.

Hildyard J was critical of HMRC’s change of view, saying: “it does seem to me, as I made clear in the course of the hearing, that I should remind HMRC how unsatisfactory it is that they should issue inconsistent or confusing statements in this way, and fail to involve a relevant specialist team and/or make proper internal checks when giving formal confirmations of their position which they must expect to be relied on. It is not only that it is inherently unsatisfactory and regrettable when government departments give materially inconsistent formal statements or guidance. It is also that, in a case such as this, debt is traded; and a change in the stance of HMRC may confound the commercial assumptions and expectations of the traders and the market. It is of real importance, both in terms of good governance and a fair market, that HMRC should make every effort to ensure that this sort of thing does not happen again.”

HMRC argued that the interest would be ‘yearly interest’ if it was calculated by reference to a period of a year or more. In the alternative it argued that it would be yearly interest if at the time the administration commenced it was not likely that the debts would be repaid within a year. Mr Justice Hildyard decided that statutory interest was not yearly interest. He said that the statutory right to interest arises only if and when a surplus is established and does not accrue over the period between the commencement of the administration and the payment of dividend or dividends on the proved debts.

Comment It is not surprising that HMRC decided to look more closely at the tax treatment of the interest in this case, given that around £1.2 billion of tax was at stake. However the judge was very critical of HMRC’s conduct.

He said that although it was common ground that statutory interest was ‘interest’ for the purposes of tax legislation, it was interest of a very different nature from that payable on contractual debts, judgment debts or other analogous debts. The judge said that the right to payment out of a surplus of statutory interest pursuant to Rule 2.88(7) is in the nature of an arrangement

Read the decision

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PM-Tax | Cases

Cases (continued) HMRC v BMW(UK) Holdings Ltd and others [2016] UKUT 434 (TCC) The right to claim repayments of overpaid VAT remains with the representative member of the VAT group that the company that actually made the supply was a member of at that time the supply was made. This case concerned how the grouping provisions in section 43 VATA 1994 operate when a company moves into or out of a VAT group, and which company has the right to make a claim under section 80 VATA for the repayment of VAT. Appeals from two FTT decisions, which reached different conclusions were heard together.

The FTT held that in period 1 only Chartered Trust was entitled to claim and in period 2 only Standard Chartered was entitled to claim. The losing companies appealed.

In the case of BMW and Rover Group, VAT had been overdeclared by Rover companies while they had been members of a VAT group. The companies left the VAT group and subsequently BMW became the representative member of that VAT group. Rover executed an assignment to MGR of any claim they might have to the repayment of the overdeclared VAT. Later BMW claimed repayment of the overdeclared VAT as representative member of the VAT group, and MGR claimed repayment for itself and as assignee of Rover.

• lay with the representative member for the time being of the VAT group of which the group company that actually made the supply (the ‘real world supplier’ or ‘RWS’) had been a member at the time of the supply;

Three possibilities were argued before the UT by the various parties. These were that the right to claim:

• lay with the representative member of that group until the RWS left it, when it reverted to the RWS;or • lay with the representative member while the VAT group was extant but on the coming to an end of the VAT group devolved on the company which had borne the economic burden of the wrongly charged VAT.

The FTT held that when a company which, apart from the effects of the VAT grouping provisions, would be treated as having made the supply to which the claim relates, left the VAT group, it became thereafter the person entitled to make the claim. It therefore decided that MGR was the person entitled to make the claim. BMW and HMRC appealed.

Lloyds and MGR also argued that these were issues on which it would not be possible for the UT to reach a conclusion with confidence and that they should refer a question to the CJEU. In the UT, Mr Justice Warren and Judge Charles Hellier decided that the right to claim remained with the representative member of the VAT group of which the RWS was a member at the time the supply was made. They said: “We conclude therefore that a construction of section 43 and section 80 under which the only person entitled to receive payment in the section 80 claim is the representative member for the time being is not only a permissible construction but is one which is required by the words and purpose of section 43.” The UT therefore disagreed with the FTT in BMW and Rover and agreed with the FTT in Lloyds and Standard Chartered. They declined to refer the issue to the CJEU.

In the case of Lloyds and Standard Chartered, Chartered Trust had supplied goods and services and overdeclared VAT in two periods. In period 1 it was the representative member of a VAT group which was dissolved at the end of the period. In period 2 it was a member of the Standard Chartered VAT group. At the end of period 2 Chartered Trust left the Standard Chartered VAT group and joined the Lloyds VAT group. Chartered Trust claimed repayment of VAT in respect of both periods; Standard Chartered also claimed in respect of both periods. Its claim in relation to period 1 arose because in that period it was the holding company of Chartered Trust and was on the basis that it had borne the burden of the overpaid VAT.

Comment It is welcome that we now have some clarity on the question of which company can claim repayments of overpaid VAT where companies have moved in and out of VAT groups. The decision is consistent with that given earlier this year by the Inner House of the Court of Session in Taylor Clark. The judges did recognise that there may be some situations where the representative member would not be able to recover the VAT, such as where it had been irrevocably dissolved. Although this issue did not arise on these appeals, the judges said that if it arose it might be necessary to provide some other method by which the members could be treated as having the rights that would be ascribed to the representative member. Read the decision

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Cases (continued) Paya Limited and Tim Willcox Limited v HMRC [2016] UKFTT 0660 (TC) FTT does not have the jurisdiction to allow a person who is not a party to the proceedings to submit evidence of its own motion. Two personal service companies (PSCs) of BBC presenters were assessed to income tax and NICs under the IR35 provisions.

explicitly giving the FTT that jurisdiction. She said that, although Rule 2(2)(b) requires the FTT to avoid unnecessary formality and seek flexibility in the proceedings, it does not allow the FTT to step outside the rules altogether and although Rule 5(1) gives the FTT power to regulate its own procedure, that power is not unlimited and the FTT cannot act in a way which is inconsistent with its jurisdiction, which is adversarial in nature. She also said that the FTT has no power to issue a costs order against a non-party, and has no sanctions at all against a person in the position of the BBC - which is consistent with the FTT having no jurisdiction to allow a non-party to intervene in the proceedings.

The BBC made an application to submit witness evidence other than as a party to the proceedings. The substantive issue in the dispute with HMRC was whether IR35 applied to the engagements between the PSCs and the BBC and so both HMRC and the PSCs anticipated calling witnesses who were current or former employees of the BBC. The BBC asked the FTT to direct that evidence from BBC witnesses be prepared and submitted to the FTT by the BBC’s legal team and not by the parties. This would mean that the BBC would retain control over the evidence given by BBC witnesses, who might include individuals called by neither party. Both HMRC and the PSCs objected to the BBC’s application.

Comment This is an interesting procedural issue. It makes sense in a case like this for the taxpayers and HMRC to have control over the evidence presented to the tribunal.

FTT Judge Anne Redston decided that the FTT did not have the jurisdiction to allow a person who was not a party to the proceedings to submit evidence to the FTT of its own motion. She said this was because the FTT Tribunal rules contain no provision

Read the decision

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Cases (continued) Six Continents Ltd and Another v HMRC [2016] EWHC 2426 (Ch) In calculating repayments of tax in respect of dividends from EU subsidiaries, notional tax should be treated as having been paid in respect of dividends from revaluations and liquidations but not dividends paid from share premium account. Six Continents received dividends from a Netherlands subsidiary (SCIH) between 1993 and 1997. These were chargeable to corporation tax under Schedule D Case V. Six Continents is enrolled in the CFC and dividend GLO and is claiming recovery of the corporation tax paid on the dividends. It has already been established, in the the second reference to the CJEU of the FII group litigation, that the Case V charge on dividends paid to a UK holding company by a subsidiary resident in another Member State is contrary to EU law.

In relation to dividends paid from share premium account, Henderson J said that the UK system of taxing returns of share capital does not involve discrimination against non-UK resident companies. He said that it is not the case that the UK taxes returns of capital made by UK-resident companies more advantageously than it taxes similar returns of capital made by non-resident companies. The position is, rather, that returns of capital by a non-UK resident company are outside the scope of UK tax altogether.

In this case the High Court had to decide the extent to which Six Continents should receive a notional credit for Dutch tax paid in respect of dividends paid from revaluations and dividends from liquidation proceeds. It also had to decide whether EU law required any tax credit to be notionally given in respect of dividends paid from the share premium account.

When returns of capital are paid up the corporate chain by way of distribution, a comparison may then be made between the UK tax treatment of such distributions by resident and non-resident companies. However, at this stage, the difference of treatment is justified because there are no taxable profits which underlie the relevant parts of the dividends paid by SCIH to Six Continents. Accordingly, the judge said that there are no profits in respect of which EU law requires a tax credit at the Dutch nominal rate to be given to Six Continents.

After hearing expert evidence about Dutch tax law, Mr Justice Henderson, decided that credit should be given for dividends paid from revaluations and dividends from liquidation proceeds, since these were within the scope of Dutch tax, although they were exempt from Dutch tax because of a domestic exemption.

The judge awarded compound interest on the repayments, subject to HMRC’s appeal to the Supreme Court in Littlewoods. Comment This is a decision in relation to the technicalities of calculating the amount of tax that should be repaid. It followed a refusal back in October 2015 by Henderson J to give summary judgment on the issue, without hearing expert evidence on Dutch tax law. Read the decision

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PM-Tax | Events

Events

Failure to prevent the facilitation of tax evasion – webinar As part of a series of free webinars, Pinsent Masons will be running a webinar on the proposed new offence of failing to prevent the facilitation of tax evasion. Jason Collins and Tori Magill from the Pinsent Masons tax team will discuss how in-house compliance, legal and tax teams should prepare for the new proposed failure to prevent the facilitation of tax evasion offence. Under this offence, organisations will be liable for the acts of their staff and other associated persons who knowingly facilitate tax evasion, including for tax liabilities in another country. Companies will have a defence if they implement and operate procedures to try to prevent facilitation. At this webinar, Jason and Tori will talk you through how the offence will operate and what “reasonable procedures” you can implement to ensure compliance. Date: Thursday 3 November Time: 1pm - 2pm You attend the webinar online with a PC and a telephone and are able to ask questions of the presenters. The webinar is free, but due to WebEx capacity restrictions, spaces may be limited and are allocated on a first come first served basis. Register here.

Failure to prevent the facilitation of tax evasion seminar – preparing your business for the new regime The partners of Pinsent Masons invite you to a seminar to discuss how businesses can comply with the new corporate offence of failing to prevent tax evasion. With effect from September 2017, it will be a criminal offence for a business to fail to prevent any person associated with it from facilitating tax evasion. The new legislation, which will apply to all businesses, will make senior management responsible for introducing measures to prevent the facilitation of tax evasion. The implementation of the new legislation will impose a heavy administrative burden on businesses which will be required to introduce preventative measures, such as new processes, risk assessments and internal audits to ensure compliance with the new laws. As such, compliance, legal and tax teams and also Board members will need to understand how the offence will operate and how “reasonable procedures” can be implemented. Our panel of speakers will outline how we can help you comply with the new legislation - including introducing our new suite of tools which we have developed to help clients reduce their risk of exposure to the facilitation crime. More information about this can be found here. Pinsent Masons speakers at the seminar will include: • Jason Collins, Partner, Head of Tax Enforcement • Anne-Marie Ottaway, Partner, former prosecutor at the Serious Fraud Office • Tori Magill, Director, former HMRC criminal investigations team leader Date: Thursday 17 November 2016 Time: 5.15pm Registration; 5.30pm Seminar; 6.45pm Drinks reception Venue: Pinsent Masons, 30 Crown Place, London EC2A 4ES If you would like to attend please contact Sarah Arato. CONTENTS

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PM-Tax | Events

Events (continued) Tax Risk Conference - our keynote annual conference for Tax Directors and those who manage tax risk This year’s half-day conference will cover: • How to survive an appearance before a select committee with your reputation intact • The HMRC view: what are the priorities for large businesses? • Managing tax enquiries against the backdrop of increasing tax litigation • The new offence of failure to prevent tax evasion: how to avoid committing the offence • Brexit and tax debate: will the UK really regain sovereignty over tax? • A round-up of BEPS, the latest on Avoidance and the Autumn Statement 2016. This is the conference for tax directors and those who manage tax risk in large organisations. Speakers include: • Dame Margaret Hodge MP, former Chair of the Public Accounts Committee • Jo Wakeman, Large Business Director at HMRC • Experts from the Pinsent Masons Tax team. Additional speakers to be announced shortly. Date: Wednesday 30 November 2016 Time: 1.15pm Registration and Lunch; 2.00pm Conference; 6.30pm Drinks and Networking Venue: Pinsent Masons, 30 Crown Place, London EC2A 4ES (directions) Places are strictly limited - early booking is advisable. If you would like to attend please contact Sarah Arrato.

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PM-Tax | People

People

Pinsent Masons roundtable discussion on the diverted profits tax (10 October 2016) The diverted profits tax is very much in the news again. Jim Harra was quoted in the Financial Times as saying that about 100 MNEs were in HMRC’s sights. Meanwhile, reports are emerging that preliminary notices are being issued to a number of taxpayers, including notices that are seeking to use section 80 FA 2015 (transactions or entities lacking economic substance) to re-characterise the effect of transactions in cases where assets were transferred out of the UK a number of years ago and where the transactions were agreed by HMRC to be correctly priced from a transfer pricing perspective. While this may have come as a surprise to some, it won’t have come as a surprise to those who attended Pinsent Masons’ lively roundtable discussion on the diverted profits tax on 10 October 2016. As Andrew Scott explained at the event, one of the key objectives of the diverted profits tax was to fill a gap in HMRC’s armoury where a transaction was correctly priced but could not (or could not without undue difficulty) be re-characterised under OECD transfer pricing guidelines. In a case where there is an effective tax mismatch involving transactions or entities lacking economic substance, the key ‘relevant alternative provision’ in the legislation now allows HMRC to ask what the relevant parties would have done if tax on income had not been a consideration. Very often it will be said by HMRC that the answer to that question will be ‘nothing’. And that is an outcome that is expressly recognised by the legislation as a particular type of provision. There was a stimulating debate on the intended target of the legislation. In seeking to answer that question Heather Self went through some practical case studies, from cases involving captive

insurance companies to cases where assets previously held in the UK were sold to an offshore entity with arrangements for continuing access for other UK entities to those assets. Heather emphasised how it was important to identify what the ‘material provision’ was in any given case as this determined how the other detailed rules worked. Throughout the discussion there was an emphasis on the importance of evidence to satisfy the heavily fact-dependent rules. Jason Collins stressed that evidence would be critical and that companies needed to be thinking sooner rather than later about how they would present their case to HMRC. In particular, they should not wait until HMRC actually issues a notice. The issue of a preliminary notice is the first but critical stage in the charging process. There are only limited circumstances in which HMRC needs to consider representations when the notice is issued. Consequently, the issue of a preliminary notice means that a taxpayer is very likely to receive a charging notice, requiring them to pay HMRC’s estimate of the DPT due within 30 days of issue. Once the DPT has been paid, HMRC has a further 12 months to make changes to the amount of DPT charged, after which the position is final unless the taxpayer appeals. In other words, once the gun is fired, time will be tight. And, as Jason explained, if the ‘relevant alternative provision’ is engaged, the taxpayer will need to demonstrate by reference to evidence what it would have done absent tax. It would not be surprising if there were no contemporaneous records recording other alternative courses, and, in any event, it is people not documents who appear as witnesses in tribunal proceedings. It is no easy matter to locate the relevant decision-makers in relation to events that happened several years ago and ask them hypothetical questions. But that is what the legislation requires. So, the advice was clear: prepare now by undertaking a full fact-finding exercise to a ‘litigation standard’.

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