PM-Tax | Our Comment

PM-Tax

Wednesday 21 May 2014

News and Views from the Pinsent Masons Tax team In this Issue Our Comment • Starbucks: are the latest moves just a storm in a coffee cup? by Heather Self • Impact of proposals for CGT charge on non-residents owning UK property on fund structures by John Christian

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• VAT treatment of finance agreements by Darren Mellor-Clark Recent Articles • Finance Bill 2014: Follower notices and accelerated payments by Jason Collins • VAT changes to affect existing and ongoing student accommodation projects by Jon Robinson Our perspective on recent cases Procedure • Mr Ian Shiner & Mr David Sheinman v Revenue & Customs [2014] UKFTT 372 (TC)

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• General Healthcare Group Ltd v HMRC [2014] UKFTT 353 (TC) • The Queen (Jorge Manuel De Silva and Bernard Alec Dokelman) v HMRC [2014] UKUT 0170 (TCC) Substance • Hawksbridge LLP v HMRC [2014] UKFTT 416 (TC) • UK v Council of the European Union (C-209/13) • Dazmonda Limited T/A Sugar & Spice v HMRC [2014] UKFTT 337 (TC) • UKFTT 350 (TCC) People

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@PM_Tax © Pinsent Masons LLP 2014

PM-Tax | Our Comment

Starbucks: are the latest moves just a storm in a coffee cup? by Heather Self This comment appeared on www.accountancylive.com on 8 May 2014

In tax terms, there will be little change as Starbucks relocates its HQ to the UK – so what’s all the fuss about, asks Heather Self. In late 2012, Starbucks appeared before the Public Accounts Committee (PAC) to explain why they had paid very little tax in 14 years of doing business in the UK. The PAC was not impressed, and even David Cameron famously said that businesses which think they can avoid paying their “fair share” of tax need to “wake up and smell the coffee”. In an apparent attempt to win back favour, Starbucks offered to pay “a significant amount of tax during 2013 and 2014, regardless of whether the company is profitable.” However, the move appeared to backfire, with both HMRC and tax experts pointing out that UK corporation tax is not a voluntary tax, and that there is no mechanism for a company to make a payment in excess of that required by law.

Once the EMEA HQ moves to the UK, royalties previously paid to the Netherlands will stay within the UK – and so UK taxable profits will go up. Royalty income from other European countries will also flow into the UK and will be taxable here. It is important to note that, although the UK gives a tax exemption for most dividend income, this does not apply to royalty income – foreign source royalties are within the UK tax net (despite some media comments on the Starbucks story saying that they would be exempt). However, as the tax bill goes up in the UK, it will go down in the Netherlands – and with a UK tax rate of 21% (reducing to 20% in 2015) compared to a 25% rate in the Netherlands, it seems unlikely that the overall tax bill of the group will go up – there will simply be a shift from the Netherlands to the UK. The UK will, however, tax the royalty income at the standard rate of corporation tax – it is not clear whether the same was true in the Netherlands, since Starbucks confirmed to the PAC that it had a “low tax ruling” there, but declined to disclose full details on the grounds of confidentiality. Starbucks said that the overall effective tax rate paid on royalties was an average of 16%, and also confirmed that it did not use “island offshore tax havens.”

In April 2014, Starbucks announced that it would move its EMEA headquarters to the UK. However, it became apparent that this would only result in the move of a “modest number of senior executives” to London, and that over 200 people would continue to be employed in the Amsterdam hub. So why did Starbucks announce this move – and how much did it have to do with tax? Starbucks pointed out that over half of its European stores are located in the UK – so from a business point of view, it makes sense for senior leaders to oversee the UK market from London, rather than Amsterdam.

Using past losses Another interesting question is whether Starbucks will be able to use past losses in the UK against additional profits generated by the move of the EMEA HQ. Although losses can be used against future profits of the same trade, they cannot be used against royalty income. So there could well be trading losses carried forward, but tax payable on the royalty income.

However, in a statement, Starbucks also said: “This move will mean we pay more tax in the UK”, and Starbucks later clarified that royalties from other European operations would now be paid to the UK, and tax would be paid on them.

However, any current year losses can be offset against other income in the same year, including royalty income. So how did Starbucks generate its ‘voluntary’ tax payment in 2013 and 2014? If this was achieved by disclaiming capital allowances, additional allowances can be claimed in future years – possibly giving a current year offset.

The Netherlands currently charges a royalty of 6% to the UK and other countries, which covers the use of the Starbucks name and services such as product development and marketing. Starbucks is adamant that this is calculated in accordance with the arm’s length principle, although it also confirmed that the UK tax deduction has been reduced to 4.7% after negotiation with HMRC. The PAC was deeply sceptical about the royalty, but seemed to miss the point that ‘brand development’ is a key part of maintaining many intangible assets – and independent surveys have attributed huge values to corporate brands.

Looking more broadly at the UK tax system, there has been a clear policy objective of creating a competitive corporate tax system. The tax rate is 21%, and dividend income is exempt. The controlled foreign company (CFC) rules now target income which has been CONTENTS

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PM-Tax | Wednesday 21 May 2014 2

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PM-Tax | Our Comment

Starbucks: are the latest moves just a storm in a coffee cup? (continued) ‘artificially diverted’ from the UK, but no longer seek to tax UKheadquartered multinationals on their global profits. All of this has moved the UK significantly up the rankings for groups choosing where to put their European holding companies. Contrast this with the US system, which has a headline rate of 35% and full taxation of dividends (with a credit for foreign taxes suffered). The US CFC system is also extremely complex, but in practice many US multinationals have used complex structures to hold intellectual property (IP) offshore in low-tax jurisdictions (the so-called ‘Double Irish’ or ‘Dutch Sandwich’ structures). This has led to many US groups building up very substantial amounts of cash outside the US, and not wanting to take the money back into the US since to do so would trigger huge US tax costs. Just as the UK saw companies moving to Ireland or Switzerland a few years ago, so now the US is starting to see major groups seeking to ‘invert’ and put a new European holding company on top of the US group – in order to escape the complexities and costs of the US tax system. However, none of this is particularly relevant to Starbucks, which remains a firmly US-headquartered group and which has said that it has not used offshore tax havens. The move of its EMEA HQ to the UK is not a major tax-driven move, but a business-driven change where a small number of senior executives will become based in London rather than Amsterdam. The substance of the group’s activities, and particularly its coffee-buying in Switzerland and roasting in the Netherlands, does not seem to be changing at all. Hence, in tax terms, there is likely to be a modest shift in the group’s tax burden from the Netherlands to the UK – but probably with very little additional tax being paid overall. One is left wondering why Starbucks highlighted this as a major development – perhaps, as with their ‘voluntary’ tax payment, they were hoping that it would go down well with politicians? Instead, on closer examination, this seems to be a storm in a teacup. Heather Self is a Partner (non-lawyer) with almost 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. Heather has been shortlisted for Taxation’s 2014 tax writer of the year. E: [email protected] T: +44 (0)161 662 8066

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PM-Tax | Wednesday 21 May 2014 3

PM-Tax | Our Comment

Impact of proposals for CGT charge on non-residents owning UK property on fund structures by John Christian

The proposed extension of capital gains tax (CGT) to gains made on the disposal of UK residential property by non-residents goes wider than expected and could impact on fund structures for investing in UK property. Background The Chancellor of the Exchequer announced his intention to bring gains made by non-UK residents selling UK residential properties within the scope of CGT as part of the 2013 Autumn Statement. UK resident individuals are currently subject to CGT on gains made on residential property, providing that property is not their principal private residence or, if they own more than one property, the one nominated as their main residence. CGT is payable at 18% for basic rate taxpayers and 28% for higher rate taxpayers.

The new charge will apply from April 2015 but only in respect of gains arising from that date. It is intended to target properties “used or suitable for use as a dwelling”, including property that is in the process of being constructed or adapted for such use. Property used to generate income from letting or used as an investment will also be subject to the tax. The government has made it clear that they see genuine business activity as within the scope of the CGT charge, so the exemptions applying to ATED and SDLT for property rental businesses will not be available.

In April 2013, the government introduced a CGT charge on residential properties held through companies and other “nonnatural persons”, payable at 28% in respect of gains accruing on the disposal of interests in high value residential property that is subject to the new annual tax on enveloped dwellings (ATED). The annual ATED charge was also introduced in April 2013, and is currently payable in respect of residential property valued over £2 million held by a company or other non-natural person. However, dwellings purchased as part of a genuine property rental business, held for charitable purposes or run as a commercial business are exempt from this charge. At the 2014 Budget, the government announced that the threshold for ATED is to be reduced from £2m to £500,000 in stages.

Disposal of UK residential property owned by non-UK residents through vehicles such as companies, trusts, partnerships and certain types of funds would also be caught by the charge. The government will announce the rate of tax for companies and funds at a later date. Tax for non-UK resident individuals would be charged in line with existing UK CGT rates, and the annual exempt amount would also be available. Whether the individual is subject to the lower or higher rate of tax would depend on their total taxable income and gains for that particular year but only UK source income and gains will be relevant in determining the relevant tax band. Taxpayers would also be entitled to relief on their main private residence in certain circumstances, bearing in mind that a UK residence is unlikely to be the main residence of a non-resident.

CGT does however not arise on residential property held by non-UK residents not within the “non-natural” persons rules, and does not arise on commercial property held by non-residents.

The consultation document says that the government does not intend to tax most forms of residential property that is primarily for communal use, such as boarding schools and nursing homes, under the new regime. However, in a surprise move, it is proposed that residential accommodation for students will not be excluded, unless it is a hall of residence attached to an institution. In addition, disposals of multiple dwellings in a single transaction would not be excluded from the CGT charge, despite beneficial treatment under the SDLT regime.

The proposals A consultation document published at the end of March sets out the proposed scope and likely design of the new CGT regime. The government says that the change will bring the UK into line with many other countries, which already charge CGT based on the location of the residential property rather than the location of the seller.

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PM-Tax | Our Comment

Impact of proposals for CGT charge (continued) Investment Funds In most cases, funds are not directly subject to UK tax on gains made from disposals of residential property; instead investors are taxed as if they had invested in the underlying assets directly. However, the government says that since UK residents are subject to CGT on the gains they make when disposing of shares held in these funds, there is an argument that, “for fairness”, non-resident individuals investing through funds should be subject to CGT. The government does not intend to tax non-residents on disposals of shares or units in a fund, but intends to introduce a charge at fund level, in some circumstances.

the UK and overseas and is starting to develop as a new real estate asset class. Investment structures which bear tax at fund level will significantly affect returns and may make the investment nonviable. Some residential funds have followed the model for commercial assets using overseas unit trusts or companies so that tax is not suffered at the fund level. As evidenced by the many representations made since the introduction of the REIT regime, the REIT rules do not work efficiently for residential REITs. Those looking to launch residential funds face the difficult choice of non-resident structures with uncertainty as to whether the GDO condition will be satisfied for their fund, and the onshore option of a REIT with the increased compliance and operating costs of a listed or traded vehicle and less than perfect UK REIT rules.

The government accepts that it would be extremely difficult to monitor and to target disposals of units of investment in residential property within a fund that holds multiple investments. However, it is concerned that if it excluded from charge all investment into UK residential property through funds, this would be exploited and fund structures would be used by small groups of connected people to avoid the new rules.

Withholding tax As it may be difficult to collect CGT from non-residents, the government is proposing to implement a form of withholding tax that will operate alongside the option to self-report on the tax due. It appears that the government is proposing that solicitors and accountants acting for a non-resident on the sale of UK property should be responsible for identifying the seller as non-resident and collecting the withholding tax, perhaps in a similar way to the SDLT process with agents transferring monies due within 30 days.

It therefore proposes a charge at fund level for funds that do not satisfy a genuine diversity of ownership (GDO) test. The test will build on the approach set out in the UK authorised funds legislation, and the offshore funds rules. No detail is available yet of how the charge on funds that do not meet the GDO test will be implemented. However, the government says that it may also consider a further second-stage test to ensure that where the vast majority of a fund’s portfolio is not in residential property it is not affected by the charge.

The consultation closes on 21 June 2014 and anyone who may be adversely affected by the rules is advised to respond. We will have to wait to see the final form of the proposals, but those structuring investments involving residential property need to take account of the possible changes now, as they are likely to affect gains made after the April 2015 by those in existing structures, and not just non-residents making investments after that date.

Pension funds will be excluded from the scope of the charge. UK REITs must be diversely owned and have specific requirements to make and distribute income from investments, therefore nonresidents investing in UK residential property through UK REITs will not be affected by the new CGT regime. Property owned by foreign real estate investment trusts (REITs) will also not be taxable, to the extent that the foreign REIT is equivalent to a UK REIT.

John Christian is a partner and head of our Corporate Tax Team. He specialises in corporate and business tax with a particular focus on real estate investment, development and financing.

Unless the government modifies its proposals, those looking to raise funds for investment into UK residential letting will therefore need to structure their funds as a REIT or a diversely held fund to avoid a CGT charge at the fund level. The private rental sector (PRS) in the UK is attracting considerable investor interest from

E: [email protected] T: +44 (0)113 294 5296

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PM-Tax | Wednesday 21 May 2014 5

PM-Tax | Our Comment

VAT treatment of finance agreements by Darren Mellor-Clark

In the case of Mercedes-Benz Financial Services UK Ltd, the Upper Tribunal has ruled that certain types of hire purchase agreements do not constitute supplies of goods at the outset of the contract. Businesses should consider the judgment’s application to their own finance product range and determine whether retrospective claims are appropriate. Background Hire purchase (HP) agreements have caused a number of issues for VAT practitioners and businesses over the years. The question as to what is being supplied and its associated liability has proved to be a perennial conundrum.

The key features of the Agility product are as follows: • The arrangement is described as a hire purchase contract. • At the beginning of the agreement a deposit is paid and a term for the arrangement is agreed. • The monthly payments under Agility are lower than under a vanilla HP contract. This is because the lessor is only financing part of the outstanding balance of the vehicle.

From a commercial and general legal perspective, HP agreements are governed by the Consumer Credit Act 1974. Essentially, they consist of a bailment, or hire of the goods, in return for periodic payments. The title to the goods will pass to the hirer on completion of payment and the exercising of an option or some other act.

• At the end of the agreement the lessor may either exercise an option to buy the vehicle, hand it back to Mercedes Benz (subject to terms and conditions) with nothing else owing or exercise the option to purchase and use the vehicle in part exchange for a new vehicle. • If the lessor exercises the option to purchase then he must pay a substantial amount known as the Guaranteed Future Value. This amount is, effectively, the outstanding balance on the vehicle and it is much higher than the purchase fee payable under the vanilla HP agreement.

From a VAT perspective, an HP agreement consists of the supply of the goods themselves, along with a separate supply of credit – provided that credit is separately disclosed and charged for. Additionally, VAT Act 1994, Schedule 4, para 4(1)(2) states that there is a supply of the goods if the agreement expressly contemplates the passing of title to the goods at some point in the future, but not later than when the goods are fully paid for.

• The lessor need not make the decision to purchase or hand back until the end of the contract. The question facing the Upper Tribunal was simple: does the Agility product fall within the provisions of VAT Act Schedule 4 and thus fall to be treated as a supply of goods with the result that the full output tax is due at the inception of the contract?

The practical impact of this has been that under HP agreements the output tax is due on the full value of the goods at the inception of the contract. Whereas under a plain lease agreement the output tax arises on each payment made, i.e. the tax burden is spread throughout the life of the lease as opposed to falling due in one amount at the beginning. Clearly the VAT treatment of HP contracts creates an unwelcome cost burden on this type of transaction.

The Tribunal’s decision The Upper Tribunal reversed the finding at the First Tier and held that the Agility product does not fall within the provisions of VAT Act 1994, Schedule 4, para 4(1)(2). In deciding the matter the Tribunal analysed the provisions of the Principal VAT Directive, Article 14(2)(b) from which the UK provisions are derived. Article 14(2)(b) holds that there is a supply of goods for VAT purposes if “in the normal course of events ownership is to pass at the latest upon payment of the final instalment…”.

Mercedes-Benz Financial Services (MBFS) – Agility product MBFS offers a suite of products to assist its customers finance their Mercedes vehicle. It offers traditional leasing and HP products in addition to a product known as Agility. It is the latter offering which was the subject of MBFS’ appeal to the Tribunal.

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PM-Tax | Our Comment

VAT treatment of finance agreements (continued) The Tribunal considered that the “in the normal course of events” test must be judged objectively by reference to the economic purpose of the contract, meaning examining the parties’ respective interests which performance of the contract satisfies.

Practical implications Businesses offering HP contracts with a similar choice as to whether or not to take title may wish to review their current arrangements and consider whether retrospective claims for overpaid output tax are appropriate.

Its conclusion was that “in the normal course of events” was satisfied where transfer of title at the end of the contract was the normal outcome rather than simply a possible outcome. The following points are of note in the Tribunal’s reasoning:

The decision also highlights the importance of considering a wide range of evidence when defining economic purpose. In particular contracts, marketing material and the fundamental economics should be considered.

• The fact that transfer of title was only one option provided for, which the lessor may or may not exercise, meant that transfer of title could not be said to occur in the normal course of events.

With our extensive practices in tax and consumer credit issues, Pinsent Masons is well placed to assist businesses in this area.

• The First Tier Tribunal noted that relatively equal numbers of lessors exercised their rights of early termination granted by the Consumer Credit Act in both the Agility and vanilla HP products. However, the relative levels of termination could not be used to determine the normal course of events. To do so would erode certainty and introduce subjective factors into an objective determination.

Darren Mellor-Clark is head of our indirect tax advisory practice and advises clients with regard to key business issues especially within the financial services, commodities and telecoms sectors. In particular he has advised extensively on the indirect tax implications arising from regulatory and commercial change within the financial services sector, for example: Recovery and Resolution Planning; Independent Commission on Banking; UCITS IV; and the Retail Distribution Review.

• Early termination rights in themselves did not provide an answer to the question. Termination is not a means of performing the contract, but rather avoiding performance. “In the normal course of events” assumes that the contract will be performed. • The interests of the customer are satisfied in that he acquires use of a vehicle, for which he may pay over a period of time. The vanilla HP and the Agility product both offer this facility. However, the Agility product also allows the lessor to avoid a commitment to acquire the vehicle at the end of the period, thus offering total freedom for the customer.

E: [email protected] T: +44 (0)20 7054 2743

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PM-Tax | Wednesday 21 May 2014 7

PM-Tax | Recent Our Comment Articles

Finance Bill 2014: Follower notices and accelerated payments by Jason Collins This article was first published in Tax Journal on 9 May 2014.

Controversial measures to tackle mass marketed avoidance are going through Parliament. They seek to remove cash flow and perceived procrastination advantages under the current regime for resolving tax disputes. The measures give HMRC the ability to issue ‘follower notices’, where it believes that there is a final ‘judicial ruling which is relevant to the chosen arrangements’; and ‘accelerated payment notices’, requiring the taxpayers to make upfront payments of the disputed tax, pending the outcome of an enquiry or tax appeal. A payment notice may be issued: following a follower notice; if the ‘chosen tax arrangements’ are ‘DOTAS arrangements’; or if a GAAR counteraction notice is or has been given. Taxpayers who expect to be affected by these measures need to consider their options, including any grounds for challenge. Rarely do government proposals generate so much adverse comment and intense lobbying from the tax and legal professions. The Finance Bill proposals require ‘accelerated payment’ of the tax in dispute in avoidance cases. They will also impose a penalty if a taxpayer litigates and loses a case after receiving a ‘follower notice’ in which HMRC opines the issue has already been determined by other litigation. This has been described as ‘unconstitutional’ and as having the effect of making HMRC ‘judge and jury’.

HMRC may issue a notice where “HMRC is of the opinion that there is a judicial ruling which is relevant to the chosen arrangements”. The ruling must itself relate to tax avoidance. A ruling is ‘relevant’ if the ‘principles’ laid down or the ‘reasoning given’ in the ruling would, if applied to the arrangements, deny the asserted advantage (or part of it). The government has added the reference to ‘reasoning’ in response to feedback, accepting that the reference to principles alone left the ambit of the measure too wide. However, it is not easy to see that the change helps much. If the government intends to prevent users of ostensibly similar schemes from dragging their feet, the legislation ought to stipulate that the facts of the case in hand should be similar to those in the relevant ruling. The consultation response assures us that notices will only be issued following approval at senior level and will be scrutinised by staff who have not been working on the case. Given the impact of a notice, this does not represent much of a safeguard.

The proposals will apply where there is an open enquiry or tax appeal in relation to ‘tax arrangements’ – namely, where it is reasonable to conclude that obtaining a ‘tax advantage’ was the main purpose or one of the main purposes of the ‘arrangements’. Given the breadth of this definition, the changes may affect the activity of large corporates; however, they are designed principally to help break the logjam of unresolved avoidance cases involving high net worth individuals. HMRC has calculated that 43,000 of 65,000 such cases are potentially affected. HMRC has been lobbied by many to abandon the retrospective aspects of these proposals; and it has openly admitted that it expects to be heavily challenged in litigation, including by way of judicial review, and has set resources aside for the fight.

The relevant ruling must be ‘final’. ‘Final’ means that the ruling was given in litigation which is no longer capable of appeal, which has not been appealed or where an appeal has been abandoned. Controversially, a decision of the First-tier Tribunal can be ‘final’ in these circumstances, despite the fact that it is not a court of precedent so its decisions are not binding on others. HMRC’s justification is that promoters might ‘game’ the system by arranging for one scheme user to go to the tribunal and, if they lose, be ‘bailed out’ financially by the rest of the users, with another user rising to bring their own appeal without any of them drawing a follower notice in the meantime – and presumably repeating ad infinitum.

Follower notices The first weapon in the proposed arsenal is a ‘follower notice’. (At one stage, HMRC had labelled these ‘failure notices’ but has sensibly returned to less emotive language.) HMRC believes that even when it wins a piece of litigation, other users of that scheme or of similar schemes claim their cases are ‘different’. This ties up a lot of HMRC resources in chasing down individual cases. The follower notice is designed to tackle this behaviour by threatening a large penalty if the taxpayer does not promptly fold.

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Finance Bill 2014: Follower notices and accelerated payments (continued) A notice requires the taxpayer to undertake ‘corrective action’, by amending a return or claim or, in the case of an appeal, settling that dispute. The taxpayer can make representations to object to the notice. The taxpayer is liable to a penalty if he does not take the necessary ‘corrective action’ within 90 days of the notice; or, if representations have been made within the 90 days, within 30 days of HMRC confirming the notice in response (if later than the original 90 days). Presumably, taxpayers will therefore be in no hurry to make early representations. The penalty is 50% of the ‘denied tax advantage’. This can be reduced for cooperation but not to less than 10%.

Accelerated payment notices The second weapon in HMRC’s proposed arsenal is an ‘accelerated payment’ notice. This requires the taxpayer to pay the tax in dispute to HMRC pending the outcome of an enquiry or tax appeal. Its application to tax enquiries is the most significant feature of the measure because presently HMRC has no power to require payment without working up an individual case to litigation. Even then, in direct tax cases HMRC in practice postpones payment until it gets a tribunal decision in its favour. A payment notice may be issued off the back of a follower notice. It may, however, also be issued on a freestanding basis, if the ‘chosen tax arrangements’ are ‘DOTAS arrangements’ or a GAAR counteraction notice is or has been given (involving supporting opinions from at least two panel members). The notice will specify HMRC’s estimate of the tax due. The taxpayer can make written representations to HMRC that the requisite conditions have not been met, or objecting to the amount of tax payment required.

Challenge The consultation response accepts that a taxpayer has the right not to take the corrective action and to proceed with their own tax appeal. However, there is no statutory right of appeal against the giving of a notice. A taxpayer who disagrees that the ruling is relevant may therefore only be left with the option of bringing a judicial review of HMRC’s decision to issue the notice, despite the taxpayer’s representations against doing so. A successful judicial review would require HMRC to withdraw the follower notice.

The taxpayer must make the accelerated payment within 90 days of receipt of the notice or, if written representations are made and the notice is confirmed by HMRC, 30 days from receipt of the confirmation (if this is longer than the original 90 days). A late payment penalty of 5% of the disputed tax is payable if the payment is not made by the deadline and a further 5% at five and 11 months of the deadline.

If a judicial review is unsuccessful or not brought at all, a taxpayer would need to bring the tax appeal with the threat of a penalty hanging over the case like the sword of Damocles. HMRC says: “The intention is that the penalty will apply where the dispute is resolved on the same basis as the ‘relevant judgment’ cited in the ‘follower notice’.” It also says: “The taxpayer’s appeal against the penalty can include the contention that HMRC should not have issued the ‘follower notice’ in the first place because the judicial decision cited was not ‘relevant’.”

The accelerated payment constitutes a payment ‘on account of tax’. This means that the sum in question presumably can be enforced as a debt against the taxpayer – including through insolvency action and action to enforce debts via overseas courts where mutual assistance treaties apply. HMRC says it will consider requests for its normal ‘time to pay’ discretionary relief.

The first point to note is about timing. A penalty assessment can be raised during the course of the substantive tax appeal, and indeed HMRC must issue one if the follower notice was given during the course of an enquiry. Payment of the penalty is, however, suspended for the duration of the penalty appeal – so it will be possible to avoid paying the penalty during the substantive tax appeal provided the penalty appeal can be stood over behind it.

Challenge Routes to challenge payment notices are, as with follower notices, limited. There is no right of appeal about the validity of the notice. However, the retrospective nature of the measure may be open to a judicial review challenge on human rights grounds, because the payment notice fundamentally changes the procedural basis on which a pre-existing legal dispute is played out. It would be difficult to argue that a payment notice based on a follower notice is illegal without also persuading a court that the follower notice itself is invalid. If a court did not overturn HMRC’s decision that it is reasonable to conclude that the tax appeal was determined by the ‘relevant ruling’, it would be difficult to see that a court could say a payment on account of that tax should not be made.

Second, it is not clear how to square HMRC’s statements of principle with the draft legislation. A taxpayer is liable to a penalty for not undertaking the corrective action required by a notice (which is not withdrawn) within the specified time. There is no right of appeal against the validity of the notice itself. As the draft legislation stands, it would appear that if the taxpayer is successful in the tax appeal, he would need to invite HMRC to withdraw the notice, thus disengaging the operation of the penalty provision (and closing down any penalty appeal which is in force).

But the merits are stronger where the payment notice is issued only because the arrangements were in DOTAS. Self-evidently, HMRC cannot say it has already essentially ‘won’ the tax appeal, because otherwise it would have issued a follower notice.

In practice, it is hoped that where it can, HMRC will refrain from issuing a penalty unless and until it wins the tax appeal. The nature of the penalty is to act as a deterrent against taxpayers maintaining frivolous or unwinnable positions. The mere threat of it hanging over a litigant’s head should be enough to meet this aim.

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Finance Bill 2014: Follower notices and accelerated payments (continued) It may also be possible to challenge a DOTAS based payment notice on the basis that the arrangements were not, in fact, ‘notifiable’. This potentially provides an escape route for historic arrangements where, out of an abundance of caution and good citizenship, the promoter notified HMRC even though strictly speaking it did not need to do so.

In any event, affected taxpayers also ought to be taking steps to ‘prepare for the worst’ by raising funds to meet expected payment notices, given there is potentially little leeway on ‘time to pay’. Such planning should be undertaken on a ‘bad luck’ assumption of being one of the first to get a notice in HMRC’s two year window for getting up to speed.

Special rules for partnerships Special rules apply to situations where the dispute is about the partnership’s tax return and claims, but where the asserted tax advantage will accrue to the partners. Follower notices are issued to the representative partner. The penalties for non-compliance are lower, with a maximum penalty of 20% for partnerships (as against 50% for others); and a minimum penalty of 4% for partnerships (as against 10% for others). Individual partners are liable for a share of any penalty based on their participation in the profits and losses of the partnership. There is no right of appeal against HMRC’s determination of such share.

Impact on large corporates Whilst aimed at schemes mass marketed to high net worth individuals, it is worth noting that the measures could also apply to large corporates. The risk of a payment notice may not be of the greatest concern because, although no corporate would welcome having to generate cash to meet a payment notice, the company will have already taken a view for its financial statements on where the cash is likely to sit at the end of the dispute.

Accelerated payment notices are replaced with ‘partner payment notices’, which are issued to the individual partners. The conditions for issuing these are essentially the same, with a modification to reflect the fact that follower notices are given not to the partner but to the partnership. Each partner can make representations about their payment notice, and deadlines for compliance and late payment penalties are the same.

Tax avoidance in the future Follower notices and accelerated payment will provide a hefty deterrent against engaging in future schemes. Already, we are seeing signs of changes in behaviour – perhaps most strikingly, one of the most prominent promoters has announced it is pulling out of film schemes – and others may follow suit. However, some promoters are ‘adapting’, by moving their charges away from upfront mandatory amounts towards back-end fees based on a successful outcome, and marketing ideas which are expressed to fall outside DOTAS (and, of course, the GAAR). But it is already very clear that these proposals will dim the appetite for aggressive avoidance in the future. In terms of existing avoidance disputes, it is disappointing that the government will not offer a carrot with this stick, which would lead to a far quicker settlement of the existing 65,000 cases, and in particular the 22,000 cases which are not caught by these measures. The fear is that, in the short term at least, HMRC has added an extra layer of ground for dispute.

The main concern will therefore be the risk of a follower notice penalty, if HMRC takes against the efficacy of the planning.

Pre-existing schemes Users of existing schemes need to take steps now to analyse how they will be caught by these provisions. HMRC has two years from royal assent in July to issue follower notices in respect of existing ‘relevant rulings’ (i.e. those given before the legislation is passed). It also has two years to issue payment notices, whether based on a follower notice or the scheme falling within DOTAS. HMRC can issue payment notices based on more than one ground, if relevant. HMRC has promised to give advance warning of the proposals becoming law in July of the DOTAS schemes upon which it intends to issue payment notices. It also intends to issue warning letters in selected cases. What we do not yet know is whether HMRC will give any advance warning about where it might use follower notices. Clearly, early pointers would be helpful given the added threat of a stiff penalty if the user decides to litigate. We are promised HMRC guidance some time in May, so might have better clarity then.

Jason Collins is head of our Tax Group. Jason is one of the leading tax practitioners in the UK. He specialises in handling any form of complex dispute with HM Revenue & Customs in all aspects of direct tax and VAT, resolving the dispute through structured negotiation and formal mediation. Where necessary, he also handles litigation before the Tax Tribunal and all the way through to the European Court – with a particular expertise in class actions and Group Litigation Orders.

Taxpayers that expect to be affected by these measures should consider their challenge options. From a timing perspective, the cautious approach would be to wait to bring judicial review proceedings until after a notice has been issued, and to apply for injunctive relief against the enforcement of the notice. An alternative view is that a challenge could be brought as soon as the measures become law, if it is clear that the taxpayer will certainly be affected – for example, because the taxpayer’s scheme is on the published list of schemes HMRC pre-identifies it will be pursuing – and injunctive relief could be sought to stop HMRC from issuing a notice at all.

E: [email protected] T: +44 (0)20 7054 2727

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PM-Tax | Wednesday 21 May 2014 10

PM-Tax | Recent Our Comment Articles

VAT changes to affect existing and ongoing student accommodation projects by Jon Robinson

Over the last few months, HMRC has made several VAT announcements that will have a significant effect on student accommodation projects. Central to these announcements is the withdrawal, with effect from 1 April 2015, of the ‘vacation use concession’ for higher education institutions (HEIs), creating a more level playing field for private accommodation providers. The first freehold sale or grant of a long lease over new student accommodation is generally eligible for zero-rating for VAT purposes. This treatment is crucial to the financial modelling of projects and means that the significant VAT costs incurred on the construction of the accommodation can be recovered, without a subsequent irrecoverable VAT charge being made to the landlord of the student tenancies.

and the works are expected to progress to completion without interruption.” However, HEIs will ultimately have to come to terms with the fact that the vacation use concession will no longer be available for new projects from April 2015. Restriction of definition of “student” for VAT purposes HMRC has recently narrowed its published interpretation of the term “student” for VAT purposes. The interpretation was previously wide enough to cover anybody engaged in a course of study or instruction, and was not just limited to those attending college, university or another HEI. The new HMRC guidance restricts this interpretation to individuals who have left school and are in further education “with a view to obtaining a generally-recognised academic or professional qualification or maintaining an existing professional qualification.”

The legislation requires that the accommodation be used “solely” (interpreted by HMRC as 95% or more) as residential accommodation for students. However, by concession, HMRC has historically allowed HEIs to disregard how the accommodation is used during holiday periods, meaning zero-rating can be achieved provided the building has at least 95% student occupation during term time. Private sector providers have never been allowed to rely on the vacation use concession. Following a review of HMRC’s discretion to make such concessions, the vacation use concession is to be withdrawn from 1 April 2015. From this date, any material (more than 5%) ‘non-student’ use of the accommodation (both in term time and holiday periods) could potentially create a huge irrecoverable VAT cost for projects.

Coupled with the withdrawal of the vacation use concession, this change may make it more difficult for HEIs to obtain zero-rating. From 1 April 2015 the accommodation must be used “solely” to house students (using the new restricted definition) in order to benefit from zero-rating. HMRC’s new guidance indicates that individuals undertaking summer school courses, for example, may not come within the definition of “student”.

A related concession, permitting dining halls and kitchens to be zero-rated if they are used “predominantly” (at least 50%) by the students living in the accommodation, is also to be withdrawn from 1 April 2015. Similar to the requirement for student accommodation, the dining hall and kitchen will have to be used “solely” by students to benefit from zero-rating.

Can student accommodation be “dwellings”? HEIs concerned over the above changes may be able to take some solace from further recent guidance issued by HMRC. Buildings designed as “dwellings” (or a number of dwellings) can qualify for VAT zero-rating regardless of the level of student use. Historically HMRC did not accept that student accommodation could meet the “dwelling” criteria. HMRC have now softened their stance, accepting that some student accommodation (principally studio or ‘cluster’ flats) may be accepted as dwellings, although accommodation consisting of individual bedrooms and ensuite rooms will not. HEIs and private sector providers alike looking at new projects will need to consider the possibility of achieving dwelling status at an early stage.

Transitional rules may be extremely valuable HMRC announced transitional or ‘grandfathering’ rules when the withdrawal of the vacation use concession was announced. After concerns were raised by HEIs over long-running ongoing projects, a further relaxation of these rules was announced in early April. HMRC will now accept reliance by HEIs on the vacation use concession on a purchase or lease of new student accommodation where “an agreement for lease (or purchase) has been signed with the vendor or landlord before 1 April 2015 and a meaningful start to the construction of the building has taken place by that date,

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PM-Tax | Recent Articles

VAT changes to affect existing and ongoing student accommodation projects (continued) Conclusion The impact of failure to obtain VAT zero-rating on student accommodation can be severe and can call into question the financial viability of an entire scheme. With the withdrawal of the vacation use concession from April 2015, HEIs must consider whether new accommodation could qualify as “dwellings” to sidestep the problem of vacation use, or whether non-student use can be restricted to less than 5% over the whole year. Private sector providers, who may have been hoping at best for a widening of the vacation use concession, will at least see the levelling of the playing field as welcome news. Jon Robinson is a Senior Associate in our tax team. He advises on a wide range of corporate tax matters including mergers and acquisitions, private equity transactions, corporate finance transactions, joint ventures and corporate restructurings. He also advises extensively on property taxation (with a particular focus on VAT and SDLT), employment taxation and employee share schemes. Jon has considerable experience of advising on student accommodation projects, particularly in relation to VAT structuring and the application of zero-rating to new developments. E: [email protected] T: +44 (0)113 368 6570

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PM-Tax | Wednesday 21 May 2014 12

PM-Tax |PM-Tax Our Comment | Cases

Procedure

Mr Ian Shiner & Mr David Sheinman v Revenue & Customs [2014] UKFTT 372 (TC) A taxpayer was not estopped from appealing against a closure notice on a point decided by the Court of Appeal in a judicial review on the basis of the doctrine of res judicata but the Court of Appeal decision created a precedent that was binding on the FTT so the appeal was struck out. The taxpayers entered into tax planning structures designed to ensure that income was exempt from tax by virtue of the provisions of the UK/Isle of Man double tax treaty. HMRC issued closure notices stating that by virtue of section 858 ITTOIA 2005 the claimed exemption was not available to the taxpayers. The relevant part of section 858 was amended by Finance Act 2008 which applied the amendments with retrospective effect.

In relation to ‘issue estoppel’ the fact that the parties in the judicial review proceedings were, strictly, the Crown and HMRC and the taxpayers were only claimants so that the parties to the judicial review proceedings and the tax appeal proceedings were different from one another, made the FTT reluctant to conclude that the taxpayers were barred from raising their EU law argument before the FTT only because of issue estoppel.

The taxpayers applied for judicial review arguing that EU law prevented the retrospective amendment and their claim came before the Court of Appeal (CA), sitting, unusually, as a court of first instance. The CA unanimously dismissed the application for judicial review and the Supreme Court refused permission for onward appeal.

HMRC also argued that the FTT is bound by the doctrine of precedent and the point argued was indistinguishable from that determined in the judicial review proceedings. The FTT agreed that in dismissing the taxpayers’ arguments on the EU law point the CA had made a decision on a point of law that was binding on the FTT. It dismissed the taxpayers’ arguments that the decision was not binding because it was contrary to ECJ caselaw or because the CA did not have sufficient evidence before it.

The taxpayers then appealed to the FTT against the closure notices and HMRC asked the FTT to strike out those appeals on the basis that the taxpayers were trying to relitigate the same issue before the FTT that had been decided in the judicial review case.

The FTT decided that the EU law ground of appeal should be struck out.

HMRC argued the issue was ‘res judicata’. Res judicata is a form of estoppel which gives effect to the policy of the law that the parties to a judicial decision should not afterwards be allowed to relitigate the same question, even though the decision may be wrong. If it is wrong, it must be challenged by way of appeal or not at all. These two types of res judicata are called ‘cause of action estoppel’ and ‘issue estoppel’.

Comment Whilst interesting that the FTT was not convinced that the doctrine of ‘res judicata’ would apply where the first case was a judicial review and the second was the taxpayer’s own case against HMRC, the doctrine of precedent meant that the taxpayer could not reopen the argument that had failed in the judicial review case. Read the decision

The FTT said that ‘cause of action estoppel’ did not arise because the cause of action in the judicial review proceedings was a claim for declaratory relief and the proceedings were to adjudicate challenges by citizens to the lawfulness of acts and omissions of HMRC. The FTT said that an appeal against income tax assessments is sufficiently different from judicial review proceedings so as to not be prevented by cause of action estoppel.

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PM-Tax | Wednesday 21 May 2014 13

PM-Tax | Cases

Procedure (continued) General Healthcare Group Ltd v HMRC [2014] UKFTT 353 (TC) Lead case decisions should be binding on related cases unless the binding effect would cause unavoidable injustice. General Healthcare Group Ltd (GHG), made an application under rule 18(4) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, contending that a lead case decision should not be binding on it. The lead case decision in question was Nuffield Health v HMRC (which concerned the proper VAT treatment for the supply and fitting of medical appliances). The FTT had dismissed the appeal and Nuffield Health was not appealing the decision.

The FTT highlighted that there was no provision in rule 18 for a party to a related case to appeal the decision in the lead case. There must first be a determination by the FTT in the related case. The FTT confirmed that in most cases the required determination of the related case would come from the Tribunal directions given under rule 18(5), which may simply follow the result of the lead case, but that would not always be so, particularly where the common or related issues comprised issues of law only.

The FTT in GHG’s application recognised that rule 18 was not without its “difficulties”, which stem primarily from the fact that the designation of cases as lead cases and related cases does not survive an appeal. However, the FTT considered that a direction under rule 18(4) should be made only in circumstances “where the binding effect on a party would create an injustice that cannot be avoided by any other procedural means which preserves the integrity of the lead case process”. A direction under that rule should not be made simply as a matter of course if the lead case appellant does not appeal and the related case appellant wants to be unbound from it.

The FTT dismissed GHG’s application under rule 18(4). As no directions had been given for the disposal or further steps in this case under rule 18(5) it directed that there should be a hearing to determine the appropriate resolution of GHG’s case under rule 18(5) in which it could put forward evidence as to why its appeal should be allowed, on its own facts, notwithstanding the binding effect of the determination of the lead case on the common or related issues of law. Any rights of appeal would flow from that decision.

The FTT confirmed that it was only the decision in the lead case in respect of the “common or related issues” that was binding and so it was crucial that the FTT and the parties ensure that those common or related issues were properly recorded in the lead case direction.

Comment This case clearly highlights that a direction under rule 18(4) to unbind a related case from a lead case is not to be given lightly. It is also helpful to confirm the circumstances in which a related case appellant can appeal the decision if the lead case appellant loses in the FTT and does not itself appeal the decision. Read the decision

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PM-Tax | Cases

Procedure (continued) The Queen (Jorge Manuel De Silva and Bernard Alec Dokelman) v HMRC [2014] UKUT 0170 (TCC) Carry back loss relief in partners’ tax returns subject to enquiry when partnership tax returns filed. The taxpayers were both members of a number of film partnerships. They made carry back claims in their tax returns to set off partnership losses expected to arise in specified years against their income for earlier years. HMRC enquired into the partnership tax returns and agreed a reduced level of losses claimed by the partnerships.

The UT also confirmed that Schedule 1B to the TMA (which governs claims for relief involving two or more years of assessment) confirmed that the focus in the case of a carry back claim such as here was on the later year – the year in which the partnership losses actually arose. The taxpayers also tried to rely on the judgment in the Supreme Court in Cotter but the UT did not think there was anything in that decision which led them to the conclusion that HMRC had acted unlawfully in this case.

HMRC wrote to the taxpayers informing them that their own tax returns were being amended to reflect their share of the agreed, reduced level of partnership losses. There was no right of appeal against the HMRC decisions and so judicial review was the appropriate way to challenge the decision.

The UT highlighted that in fact the position in Cotter was the converse of this position – HMRC successfully maintained that the taxpayer’s carry back claim was a “stand alone” claim and their enquiry was correctly made under Schedule 1A. The UT considered that Lord Hodge’s judgment, in which he directly addressed Schedule 1B, was consistent with the UT’s analysis in this case. Indeed the UT even went so far as to say that if the taxpayer in Cotter had made his own assessment of his tax liability by bringing his carry back claim for relief into account in his return then such information would fall within a “return” under s.9A and the appropriate means of challenge would be by way of enquiry under s.9A not by way of enquiry under Schedule 1A.

The taxpayers argued that their claims to carry back the partnership losses were not claims made in a personal tax return but were properly to be regarded as “stand alone” claims (ie claims that were not made in a return). As such any challenge by HMRC had to be made by way of an enquiry into their individual tax returns for earlier years (before the partnership losses actually arose) and within the time limits set out in Schedule 1A TMA. The taxpayers argued that HMRC had failed to operate these procedures and were now out of time to do so. The UT was not convinced by the taxpayers’ arguments and dismissed the claim for judicial review. It did not agree that the claim for relief was a “stand alone” claim, commenting that it was an “inchoate claim for relief which, as a matter of substance, will only be validated when the partnership losses are included in the partner’s individual return for the later period, reflecting the partnership statement for that period”.

Comment The taxpayers failed in this challenge and the UT decided that HMRC had followed the correct procedure when it disallowed the their claims to carry back loss relief. Read the decision

The UT confirmed that HMRC had proceeded “in an appropriate and lawful manner”. HMRC commenced an enquiry into the relevant partnerships returns when they were filed which automatically had the effect of amounting to an enquiry into the relevant individual returns of the taxpayers (s.12AC(3) TMA).

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PM-Tax |PM-Tax Our Comment | Cases

Substance

Hawksbridge LLP v HMRC [2014] UKFTT 416 (TC) Arrangements designed to crystallise tax losses from investment in intellectual property through an LLP, funded by substantial borrowings failed as the borrowed money was not used for the purposes of the LLP’s trade This case related to the appeals of five “Icebreaker” limited liability partnerships (LLPs) and a joint reference to the FTT of a number of questions by seven individuals who were members of the LLPs. The cases of the five LLPs were lead cases for a further 46 LLPs. The individuals were selected as a representative cross-section of the approximately one thousand members of the LLPs.

disregarded on Ramsay grounds because the borrowing arrangements were not designed to raise capital for the purposes of the LLPs’ business, but were in reality a device whose sole purpose was to increase the size of the apparent losses. Schemes similar to these had already been considered, and had been judged to fail by Vos J, sitting in the Upper Tribunal, in Icebreaker 1 LLP v Revenue and Customs Commissioners.

Each LLP entered into agreements for the acquisition and exploitation of intellectual property rights. Each LLP acquired rights for relatively modest sums, and for much larger payments agreed with an exploitation company that the company would exploit the rights on its behalf. The revenue from the exploitation was to be shared between the partnership and the exploitation company, which was required also to pay certain guaranteed sums to the partnership. In addition each partnership entered into agreements with the promoter of the arrangements by which, in return for substantial payments, the promoter rendered, or was to render, various services to the partnership. The members’ capital injections which financed the payments were derived in part from their own resources and in part (around 75%) from secured borrowings from a bank – with all members of the LLP borrowing the same percentage on the same terms from the same bank. The members would receive guaranteed returns from the LLP which were sufficient to enable them to service and repay their borrowings. The borrowed funds remained in a deposit account with the bank.

The FTT agreed with HMRC that none of the borrowed money was ever truly available for exploitation of the rights, and that the purpose of the borrowing, coupled with the notional gross payment to each production company, was to create the illusion that the expenditure incurred by the partnerships in the first year was much greater than it truly was, in order to inflate the intended tax benefit. The FTT also decided that investors would not have participated in the schemes in order to make profits and would not have invested but for the tax breaks. Judge Colin Bishopp said “We are, indeed, quite satisfied that no serious and even moderately sophisticated investor, or one with a competent adviser, genuinely seeking a profit, even one willing to engage in a high-risk venture, but unmindful of any possible tax advantage, would rationally have chosen an Icebreaker Partnership”. The FTT stressed that the guaranteed payments to the members, “which were wholly independent of any profit or loss of the trade, and not derived from revenues earned from trading activities, cannot be regarded as trading profits”.

The cases relate to whether the first-year expenditure by the LLPs gives rise to an accounting loss which the members of each LLP may use by way of sideways relief against their income tax or capital gains tax liabilities.

The FTT said that, despite some slight differences in structure, these schemes could not be distinguished in material ways from those in Icebreaker 1. It therefore decided that as the borrowed money was only ever available for use as the price of the guaranteed payments, and not for the exploitation of intellectual property rights, it could not be brought into the calculation of profit and loss.

HMRC argued that the LLPs and the arrangements into which they entered were tax avoidance schemes. It argued that the schemes did not work as the expenditure which gave rise to the supposed losses was not incurred wholly and exclusively for the purposes of the LLPs’ trade. HMRC also argued that if the schemes did succeed in generating a tax advantage, that fiscal effect should be

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PM-Tax | Cases

Substance (continued) The FTT said it was “not altogether persuaded that the Ramsay line of authority can have any application to these cases”. However, it said that if it had had to decide the point it would have decided in line with Tower MCashback that the borrowing served no useful purpose but the inflation of the supposed loss and in line with Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) the borrowings could have been disregarded and therefore would not generate the tax relief intended.

“Merely doing something which has some connection to the trading activity is not enough; there must at least be a realistic prospect that the activity will result in an enhancement to the trade.” It therefore decided that the members were non-active partners. The scheme therefore failed to achieve the designed tax advantages. Comment This decision has attracted a lot of media attention because of media reports that Gary Barlow and certain other members of pop group “Take That” were investors in the schemes in question. In tax terms, the decision is not surprising and essentially follows the other Icebreaker decision. It gives another indication that other schemes which rely on bank borrowing to increase the tax relief or which rely on active participation in a trade by the investors may also struggle in the Courts.

The issues in relation to the individuals were, in respect of each individual member whether his or her LLP’s trade was carried on on a commercial basis and with a view to profit and whether each partner was an active partner. The FTT said that none of the LLPs or their members could have had a reasonable expectation of realising profits of the trade, so as to satisfy the conditions in the legislation. Judge Colin Bishopp said “Aiming at, or hoping for, profit is not to be equated with having a reasonable expectation of it. To take an analogy: a 14-handicap golfer may set out on the first tee with the aim and hope of going round the course in par; but he could have no reasonable expectation of doing so.”

On a procedural note, the judge said that it had taken a long time for the judgment to be given because of the sheer number of documents involved. He said that “whilst at first sight, the gathering together of several similar cases so that they can be heard together seems to be an economical course, in practice it creates real difficulties and leads to delay. It would, we think, have been better not to link the appeals with the references, to identify fewer lead cases or to focus, in the references, on one tax year.”

On the active partner question, members were asked to undertake tasks to evaluate further potential investment opportunities and the FTT was satisfied that they had undertaken the activities they described with the serious purpose of advancing the commercial interests of their respective partnerships. However, the FTT said that there was no realistic prospect that the actions of the members could have advanced the trade of the LLPs. It said

Read the decision

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PM-Tax | Cases

Substance (continued) UK v Council of the European Union (C-209/13) The UK’s first challenge to the financial transaction tax has been dismissed as premature. This case concerned the early challenge brought by the UK seeking to annul European Council Decision 2013/52/EU authorising enhanced cooperation in the area of financial transaction tax. In summer 2012, it became apparent that it would not be possible to achieve unanimous support in the EU for the principle of a common system of financial transaction tax (FTT). However, 11 member states wished to proceed. In February 2013 the European Commission adopted a proposal for a Council Directive implementing the EU enhanced cooperation procedure in relation to FTT.

The UK also claimed that non-recoverable costs would be imposed on non-participating Member States arising from requests for assistance in the recovery of taxes under the mutual assistance and administrative co-operation directives. The Court said that the objective of the Council Decision that the UK was challenging was only to establish enhanced cooperation. The decision said nothing about expenditure linked to the use of the enhanced co operation procedure. The UK’s challenges related to the form of the tax itself which had not yet been settled. The UK’s application was dismissed.

The UK asked the CJEU to annul the decision arguing that FTT would create extraterritorial effects contrary to Article 327 TFEU because it was proposed that it would apply to transactions where one party is in a participating state, and the other is established in a non-participating Member State. The UK argued that persons and financial institutions in the UK, and other non-participating Member States, would be affected by FTT, and therefore the tax would adversely affect the competences and rights of those Member States.

The court said “it is obvious that the question of the possible effects of the future FTT on the administrative costs of the non-participating Member States cannot be examined for as long as the principles of taxation in respect of that tax have not been definitively established”. Comment Although this challenge failed on the basis that it was premature, the CJEU has effectively confirmed that the proper time to make challenges to FTT is when the tax has been finalised. Read the decision

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PM-Tax | Cases

Substance (continued) Dazmonda Limited T/A Sugar & Spice v HMRC [2014] UKFTT 337 (TC) A supply by a club to a dancer of the use of a ‘booth’ for ‘private dances’ did not constitute an exempt supply of land because the club also supplied to the dancer the full use of its facilities. Dazmonda (the club) ran a ‘gentleman’s club’ consisting of a dance floor and bar area and six booths for ‘private dances’. The dancers were not employed by the club but made money from tips and private dance fees and made payments to the club for the use of the club’s facilities. This appeal concerned whether the supply of private dance booths to the dancers was a supply of land and therefore exempt for VAT purposes.

The FTT said it was not possible to consider the supply of the booth as a principal supply and the rest of the supplies (such as use of the main dance floor) as ancillary to that supply as because, with the exception of things like heating and lighting, the other supplies did not further the enjoyment of the use of the booth, but instead only assisted the dancers’ business. There was therefore only one single supply from the club to the dancers which was properly characterised as the provision of services rather than a supply of land. The supply was therefore standard rated and not exempt and so the club’s appeal was dismissed.

The dancers were allocated booths by the management and they could book booths in advance. A dancer had the exclusive right to admit or exclude anyone from the booth, except the club reserved a right of entry in the case of illegality or emergency. The FTT found that the agreements between the club and dancers did confer an exclusive right of occupation of the booths. However it found that that all dancers were provided with full use of the club’s facilities and that the fee was not just for the use of the booths.

Comment This is another case in the long line of cases trying to argue that supplies are exempt because they relate to land. Other examples include ‘chair rental’ at a hairdresser’s or beauty salon, which have been treated as standard rated since the law was clarified in 2012.

The FTT considered that the supply of just the booth for the duration of a dance was capable of being a letting of land despite the uncertain period of the occupation (a dance could last from five minutes to several hours). However, given the factual finding that the club supplied not just the booth, but also full use of the club’s facilities, the FTT had to decide whether the supply was a separate supply of land or whether it was part of a composite supply.

Read the decision

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PM-Tax | Wednesday 21 May 2014 19

PM-TaxPM-Tax | Our Comment | People

People Share plans – GEO conference Miami

effective and innovative communications for the share purchase plan which extends to thousands of employees across Europe and Central America, whilst being tailored to each country’s individual needs. Hannah and her co-presenters described how they tackled some of the different legal and practical requirements for joining the plan in the different jurisdictions involved, including some of the more interesting country ‘quirks’ that arose during due diligence. They shared some of the trials and the tribulations faced when translating the employee communications (including an entirely new web-based portal) into each local language and dealing with local co-ordinator absences at critical times, as well as how they dealt with money handling, money transfers and different currencies involved in the share purchase element of the plan, which created some interesting challenges. On a more technical side, they discussed the challenge of balancing the sometimes competing interests and ideas of board members, shareholders, employees and the finance team, to reach an outcome that satisfied everyone and still achieved the core objectives for the plan.

Share Plans and Incentives Team partners, Lynette Jacobs and Matthew Findley, together with newly promoted Senior Associate, Hannah Needle (see further below), attended and presented at the Global Equity Organisation (GEO) 15th Annual International Conference held in Miami from 7 to 9 May. Pinsent Masons is a founder member of GEO and we were proud to have been selected to present two sessions at the Conference, the largest ever for GEO, attended by more than 400 delegates from over 20 countries. In line with the Conference’s theme, “Making Connections, Crossing Boundaries, Expanding Your World”, Hannah’s presentation on the first day of the Conference, alongside Tim Pearson and Anna Fletcher of our client, International Personal Finance plc (IPF) and Adrian Gibbs of Capita Asset Services, the plan administrator, was on the introduction of IPF’s new international all-employee share plan.

The second day of the Conference saw Lynette and Matthew, alongside our client, Luxfer Holdings PLC, present on the recent fundamental changes to the UK directors’ pay landscape, in force from 1 October 2013. “Executive Pay, Policy & Reporting – International Implications (and Pressure Points) of the New UK Regime” provided an overview of the new regime under which UK incorporated companies, including some, such as Luxfer, which are listed outside of the UK, are now required to seek binding shareholder approval for their directors’ pay policy and will only be able to pay directors in accordance with that policy once it is approved. The session shared practical examples of particular pressure points the regime is creating, including around arrangements for new hires, leavers and the use of discretion. It looked also at the international reach of the new regime – that is, its application to UK incorporated companies, such as Luxfer, listed on the NYSE, NASDAQ and elsewhere in the European Economic Area. Linda Seddon, of Luxfer, spoke about some of the issues arising in practice for a UK company with a sole listing on the NYSE and the specific considerations which have arisen when applying the new UK directors’ pay regime in a non-UK regulatory context. The presentation looked also at ‘say on pay’ developments in each of the US, the European Union, France and Switzerland (following the Minder Initiative), with a view to identifying the global direction of travel for directors’ pay, policy and reporting as well as how investors, the UK Government and the media have responded to the new regime over the 2014 AGM season.

Matthew Findley and Hannah Needle at the Pinsent Masons stand A case study, “Two for One – Successes and Challenges from the IPF “Have Your Share” Plan Roll Out” session, shared some of the pitfalls (and tips for next time), interesting anecdotes and a flavour of the journey travelled to take the share purchase plan, which uses contributions from net salary and under which participants are awarded a right to receive additional shares after a further three years if they meet certain conditions, from inception to launch in early 2014. The team shared its experience of how to create

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PM-Tax | People

Share plans – GEO conference Miami (continued) When not presenting, team members manned the Pinsent Masons stand, from which a photo of our own brand Royal Mail business card postbox was posted on the Conference website, with the caption, “Love Pinsents’ booth accessories”! The team also attended various of the other plan sessions, covering share plan design, accounting and tax, legal and regulatory compliance and programme communication and administration as well as the three keynote presentations and six facilitated networking events. A highlight of the busy Conference was the GEO Awards Dinner at which companies from around the globe were recognised for their excellence in plan effectiveness, use of technology, innovative and creative plan design, communication, financial education, use of video communications, creative solutions and use of share plans in a corporate action. The venue of the 2015 Annual Conference – London – from 15 to 17 April next year, was announced by the UK Chapter committee, which includes Pinsent Masons’ partner, Matthew Findley. Before then members of the team will be at GEO’s Pan European Regional Event in Paris on 14 November and may well present another webcast for the GEO community – Lynette and Matthew having recently presented two sessions, including in April on changes to UK tax favoured plans entitled “Major Changes to UK Tax approved Stock Plans – Are you ready?”. Our business card postbox

Promotions In addition Anju Dhinsa and John Hardman in our tax investigations team have been promoted to the position of Tax Manager (the equivalent of Associate for tax advisers who are not lawyers). Anju and John specialise in all aspects of HMRC enquiry work assisting clients through a range of complex investigations and disclosures. This includes guiding clients through HMRC investigations carried out under Code of Practice 8 and Code of Practice 9, by HMRC’s Specialist Investigations and Civil Investigation of Fraud teams. Anju and John have extensive experience in successfully taking client’s through HMRC’s disclosure facilities including the Liechtenstein Disclosure Facility.

We are very pleased to announce that Hannah Needle of our share plans and incentives team has been promoted to Senior Associate. Hannah advises companies on the implementation and continuing operation of all forms of employee share and incentive plans, including the design and establishment of new plans, managing grants and maturities under existing plans and analysis of technical tax and legal matters. She also advises on the impact of corporate transactions that may affect a company’s incentive arrangements. Hannah has particular expertise in co-ordinating international due diligence projects for companies wishing to extend their share and incentive plans overseas as well as assisting companies with the launch and maturity of new and existing international plans (including tax advantaged plans) and co-ordinating relevant overseas tax and securities laws filings in connection with such plans. Hannah works for a range of private and listed companies, both UK-based and international. Hannah Needle T: +44(0)113 225 5448 E: [email protected]

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Taxation awards

We are delighted that we have been shortlisted for VAT team of the year in the Taxation Awards 2014. In addition, Heather Self, a regular contributor to PM-Tax, has also been shortlisted for Tax writer of the year. The winners will be announced on the night of Thursday 22nd May at The London Hilton on Park Lane. For more details of the event see www.taxationawards.co.uk.

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This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate businesses for regulatory or other reasons. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. © Pinsent Masons LLP 2014. 6820

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