PM-Tax 28 January 2015

Wednesday 28 January 2015
News and Views from the Pinsent Masons Tax team
In this Issue
Our Comment
•Increase in yield from HMRC investigations into large companies by James Bullock
•Update on European Commission investigation into Amazon’s tax arrangements in Luxembourg by Heather Self
•SDLT: Project Blue case by John Christian
Recent Articles
•BEPS: unintended consequences of interest deductibility proposals by Heather Self
•Penalties in practice by Fiona Fernie
Our perspective on recent cases
Colaingrove v HMRC [2015] UKUT 0002 (TCC)
Morrison v HMRC [2014] ScotCS CSIH 113
HMRC v GMAC UK PLC [2015] UKUT 0004 (TCC)
Global Foods Ltd and others v HMRC [2014] UKFTT 1112 (TC)
© Pinsent Masons LLP 2015
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PM-Tax | Our Comment
Increase in yield from HMRC
investigations into large companies
by James Bullock
HMRC looks set to spend more on tax investigations after the department secured an additional £5.9
billion from large businesses last year.
Figures obtained by Pinsent Masons show that HMRC recovered an
additional £97 for every £1 spent on new staff for its large business
compliance service last year. Units responsible for investigating
individual high net worth taxpayers and small businesses also
reported significant increases in tax take.
The Treasury has been providing the funding for tax investigations
but it now needs to give political support to HMRC in dealing with
the backlog. However, a long wait for a tribunal case to be heard is
not as much of an issue for HMRC as it is for a taxpayer that has
already had to pay the tax that is in dispute.
Every £1 spent in 2013/14 (to 31 March 2014) by HMRC’s Large
Business Service (LBS), which deals with the UK’s largest and most
complex businesses, resulted in the recovery of an additional £97
that year; up from £87 for every £1 invested in 2012/13, according
to the figures. The local compliance unit, which handles smaller
businesses, and the high net worth unit, which is responsible for
the tax affairs of wealthy individuals, collected an additional £18
for every £1 spent in 2013/14, up from £16 in 2012/13, according
to the figures.
Amount collected from compliance investigations compared to
expenditure on compliance staff 2012/13- 2013/14
£ collected for every £ 1 spent
on staffing
The kind of returns that HMRC is getting on its increased
investments into tax investigations would be seen as mouthwatering by the average private sector business. Securing £5.9
billion in extra tax from investigations into large businesses for
expenditure on compliance staff of just £61 million means that the
chancellor is getting tremendous value from these teams. It also
suggests that additional funding for investigation will focus on
investigations into medium-sized and larger businesses.
Large business
18 16
18 16
High net worth
HMRC unit
James Bullock is Head of our Litigation and
Compliance Group. He is one of the UK’s
leading tax practitioners and has been
recognised as such in the leading legal
directories for many years. James has over
twenty years of experience advising in relation
to large and complex disputes with HMRC for
large corporates and high net worth individuals,
including in particular leading negotiations and
handling tax litigation at all levels from the Tax
Tribunal to the Supreme Court and Court of
Justice of the European Union.
However, although this increase in activity is good news for HMRC
and the government, it could also lead to increased uncertainty for
businesses and a backlog in unresolved tribunal disputes. This is not
such good news in terms of making UK plc a business-friendly
environment. In particular, it has led to an increased backlog in
disputes and appeals, which threatens to cause a real problem.
The number of tax disputes awaiting a tribunal hearing is now at a
record high of 27,246, according to HMRC figures. This figure
includes an increase in the number of high-value disputes waiting
to be heard by the Upper Tribunal. Over the last year, 267 new
cases were lodged with the Upper Tribunal; an increase of 32% on
the number of cases lodged the previous year and almost four
times as many as five years ago, when 70 new cases were lodged
with the Upper Tribunal.
E: [email protected]
T: +44 (0)20 7054 2726
To achieve a more reasonable time frame for tax cases, HMRC needs
to adopt a more pragmatic approach and start negotiating deals.
PM-Tax | Wednesday 28 January 2015
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PM-Tax | Our Comment
Update on European Commission investigation into
Amazon’s tax arrangements in Luxembourg
by Heather Self
Corporation tax arrangements agreed between Luxembourg and the online retailer Amazon in 2003
may have conferred a “selective tax advantage” on Amazon, the European Commission has said.
In October 2014 the European Commission announced that it was
conducting an in-depth investigation into the corporation tax
arrangements agreed between Luxembourg and Amazon in 2003,
which were set out in a tax ruling. A non-confidential version of its
letter to Luxembourg setting out its preliminary reasons for doing
so has now been published.
ministry has now confirmed in a statement on its website that it
has now submitted that information and is “fully cooperating with
the Commission in the investigation”.
The Commission said that the ruling had been granted only 11
working days after the letter requesting it, and noted that it had
been in force unchallenged for over 10 years.
The Commission’s early view is that the ruling granted Amazon
selective and ongoing tax advantages in a way that breached EU
rules against state aid. It has asked Luxembourg to provide further
information ahead of its final ruling.
“Even if the transfer pricing arrangement in the ruling request
could have been considered to comply with the arm’s length
principle when that request was made to the Luxembourgish tax
authorities, quod non, the appropriateness of the remuneration
over the years should have been called into question, given the
changes to the economic environment and required remuneration
levels,” the Commission said in its letter. It said that the 10 years
duration of the ruling was much longer than the length of tax
rulings currently concluded by member states.
If used to provide selective advantages to a specific company or
group of companies, tax rulings may involve state aid within the
meaning of EU rules. These rules are intended to prevent the
distortion of competition caused by national governments granting
advantages or incentives to particular companies. If the
Commission finds that state aid rules have been breached, any
company found to have benefited can be ordered to pay back
illegal reliefs granted over a period, usually up to 10 years.
One of the interesting things about the letter is that it refers to
evidence given to the UK’s Public Accounts Committee in 2012,
when Amazon was asked to defend its UK tax position. At that
hearing, Amazon said that all of its strategic functions were carried
out in Luxembourg, and the Commission is now saying that that
would suggest that profits in Luxembourg should be higher. This is
an indication of a developing trend for the Commission to ‘join the
dots’ by looking at information which has already been disclosed
to different fora.
The investigation considers a ruling granted in November 2003
concerning the royalty payable by Amazon’s EU operating
company, Amazon EU Sarl. The royalty is paid to a Luxembourg
partnership of which two Amazon US companies are members.
Because the partnership is transparent, this royalty income is not
subject to corporation tax in Luxembourg. The letter suggests that
in addition, the taxation of the partners in the US can be deferred
indefinitely as long as none of the profit is repatriated to the US.
Last year the Commission published its initial thoughts about
investigations it is carrying out into rulings granted to Apple in
Ireland, Starbucks in the Netherlands and Fiat Finance and Trade in
Luxembourg. The Commission looks to be on stronger ground with
its challenges to the Amazon and Apple rulings, than its challenge
to Starbucks, where it looked as if a full transfer pricing study had
been carried out.
The Commission’s letter has a confident flavour. It sets out a
number of concerns about the way that the royalty has been
calculated. In particular, the net effect is that the profit of the
operating company – taxable in Luxembourg – is a fairly
predictable number, rather than clearly reflecting the actual
functions and risks carried out by that entity. The Commission says
that this does not appear to comply with the ‘arm’s length’
principle, and hence is potentially state aid.
With the European Commission investigating two companies’
rulings in Luxembourg and the leak of the so-called “Lux leak”
documents suggesting that over 300 multinationals received
favourable tax rulings from Luxembourg, Luxembourg appears to
be a main focus of the Commission’s state aid investigations.
When the letter was written in October 2014, Luxembourg had not
provided any details of the transfer pricing analysis carried out by
Amazon as part of the arrangements. The country’s finance
PM-Tax | Wednesday 28 January 2015
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PM-Tax | Our Comment
Update on European Commission investigation (continued)
The Commission announced at the end of last year that it was to
ask all member states to provide information about their tax ruling
practices, following its investigations into the rulings. Commission
president Jean-Claude Juncker has also announced plans for a new
directive on the automatic exchange of information on tax rulings
between member states.
Any companies with favourable tax rulings in Luxembourg or
another EU member state need to consider the state aid
implications. With lawyers who are experts in state aid able to
work closely with our specialist tax team, Pinsent Masons is ideally
placed to advise companies which may be affected.
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.
E: [email protected]
T: +44 (0)161 662 8066
PM-Tax | Wednesday 28 January 2015
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PM-Tax | Our Comment
SDLT: the Project Blue case
by John Christian
The recent decision of the Upper Tribunal in the Project Blue case has been widely awaited as a rare
decision on stamp duty land tax (SDLT) beyond the FTT and as providing some judicial guidance on
section 75A Finance Act 2003.
Project Blue Limited (PBL) contracted to buy the Chelsea Barracks
site from the Secretary of State for Defence (SSD) for £959 million.
Before completing the contract, PBL contracted to sell the site to a
Qatari bank, MAR, for a price of £1.25 billion. On completion of the
sale, SSD transferred the site to PBL, which executed a transfer to
MAR. MAR then entered into a 999 year leaseback at an agreed
formula rental to PBL. The transactions took place in 2008.
payable under all the “scheme transactions” was £1.25 billion and
there was no basis on which the aggregate consideration could be
adjusted on the basis that certain of the transactions were
incidental. The Upper Tribunal reached its decision on the basis of
the Chairman’s casting vote.
Some conclusions that can be drawn from the Upper Tribunal
decision are:
It was agreed between the parties (and the Upper Tribunal
supported the conclusion) that the SDLT ‘subsale’ provisions (in
section 45 Finance Act 2003) applied so that PBL was not treated
as acquiring a chargeable interest for SDLT purposes.
•The Upper Tribunal did not seek to find purposive interpretations
of sections 45 and 71A to bring the transactions within these
provisions. Even though the outcome, absent section 75A, was
that no SDLT would be payable under the legislation in its then
form, the interpretation of the legislation was not strained to
counter what was clearly a flaw.
The next question was whether the ‘alternative finance’ exemption
in section 71A Finance Act 2003 applied to MAR’s acquisition of the
site. The Upper Tribunal agreed that section 71A did apply, with the
result (under section 45 as it stood at the time of the transaction)
that SDLT was payable by neither PBL nor MAR. The legislation was
subsequently amended to prevent the subsale and alternative
finance provisions from combining in this way.
•The Upper Tribunal confirmed that section 75A should not be
limited to applying where avoidance is present as this would
incorrectly give HMRC a discretion as to when section 75A
applied (and it noted that this is contrary to HMRC’s published
practice in this respect). Section 75A therefore has to be applied
to circumstances where avoidance is not present.
The Upper Tribunal, however, found that section 75A applied to the
transactions (confirming the view reached by the FTT). Section 75A
allows a notional land transaction to be substituted for the actual
land transactions that take place and for SDLT to be assessed on
that notional transaction on the aggregate consideration payable
under all “scheme transactions”.
•The leading judgment accepted HMRC’s view that section 75A
can lead to a number of possible outcomes as to which parties
are V and P and the aggregate consideration. As the judgment
shows, it is difficult to find any obvious way of deciding which
outcome is the correct one. The leading judgment seems to reach
its conclusion because it is consistent with PBL being the ultimate
purchaser for a consideration equal to that received by the seller.
This is a sensible conclusion but it is difficult to see how it is
clearly supported (not least because section 75A(5) does not
limit the consideration to that received by the seller). The
dissenting judgement disagrees that the legislation should be
read as allowing multiple options for the identity of V and P, but
does not offer any general guidance on how a single V and P
should be identified. Taxpayers will need to go through the
approach in the leading judgment to demonstrate how they have
arrived at their conclusion as to who is V and P.
Following a lengthy analysis of section 75A and the different
results that could potentially be reached, the Upper Tribunal
concluded that PBL was the person (“P” in section 75A) treated as
acquiring the chargeable interest under section 75A and should be
treated as acquiring the interest for £959 million.
The second judge (Howard Nolan) dissented on the application of
section 75A and decided that only PBL could be P, but that the
consideration was £1.25 billion (the conclusion also reached by the
FTT). This was on the basis that the aggregate consideration
PM-Tax | Wednesday 28 January 2015
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PM-Tax | Our Comment
SDLT: the Project Blue case (continued)
•As section 75A is so widely drafted, a key practical issue is
identifying which steps may be incidental and so disregarded in
applying the provision. The case unfortunately shows two
different approaches. The leading judgment allows a scheme
transaction to be dissected so that an incidental part can be
disregarded if that is consistent with the commercial reality
(linked here to the amount which the seller actually received).
The dissenting approach was to take a literal interpretation and
assume that all scheme transactions should be included even if
this strained the commercial reality (ie that the consideration
was £1.25 billion). It is unhelpful that there are two different
approaches on this key issue.
•It is clearly unsatisfactory that the legislation is so widely drafted
that a number of permutations are possible in how it can apply to
a set of facts, including the basic question of the identity of V and
P, and the consideration under the scheme transactions. Until
guidance is given in an appeal or another decision, the taxpayer
will need to consider section 75A even in commercial nonavoidance situations and be able to evidence an analysis
consistent with their self-assessment.
John Christian is a partner and head of our
Corporate Tax Team. He specialises in
corporate and business tax, and advises on the
tax aspects of UK and international mergers
and acquisitions, joint ventures and partnering
arrangements, private equity transactions,
treasury and funding issues, property taxation,
transactions under the Private Finance
Initiative and VAT.
E: [email protected]
T: +44 (0)113 294 5296
PM-Tax | Wednesday 28 January 2015
PM-Tax | Recent Articles
BEPS: unintended consequences of
interest deductibility proposals
by Heather Self
This article appeared on on 15 January 2015
The BEPS proposals on taxation of interest are some of the most crucial areas in the OECD reforms
and fraught with difficulty, says Heather Self.
The Organisation for Economic Cooperation and Development
(OECD) Base Erosion and Profit Shifting project (BEPS) aims to
combat ‘tax planning strategies that exploit gaps and mismatches
in tax rules to artificially shift profits to low or no-tax locations
where there is little or no economic activity’. In July 2013, the
OECD published an action plan, proposing 15 actions designed to
combat BEPS at an international level. One of the key actions is
action 4, entitled limit base erosion via interest deductions and
other financial payments.
Quantify the problem
Many of those working in professional firms or industry therefore
question whether significant general change is required to the
taxation of interest. However, the approach of the discussion draft is
to assume (with little quoted evidence) that a problem exists, and
then explore potential routes to solving it. The view starting to
emerge strongly from those responding is that it is important to
define and quantify the problem, and then (and only then) look for
the most appropriate solution: taking the opposite approach risks the
outcome that ‘the operation was successful, but the patient died’.
On 18 December 2014, a public discussion draft on action 4 was
issued (the discussion draft), which sets out ‘different options for
approaches that may be included in a best practice
recommendation’. It is important to note that, unlike some other
items within the BEPS action plan, the intention with action 4 is to
identify best practice: there is, therefore, considerable uncertainty
over whether any changes will actually be implemented. However,
the fundamental importance of the taxation of interest means that
this is one of the most crucial areas of the BEPS project.
The discussion draft sets out a number of key issues concerning the
design of rules to address BEPS using interest, and considers
several different approaches which could be used. These include a
particular focus on two possible group-wide rules, either using
interest allocation rules or fixed ratios for deductible interest costs.
In both cases, the objective is to ensure that the net interest
deductions for the group as a whole are equal to the net external
interest costs of the group. Superficially, the objective seems to be
a reasonable one, but it seems hard to envisage a situation where
intra-group deductions would exceed external deductions, except
in the situation where some form of hybrid or payment to a
connected tax haven or exempt entity exists – which should be
addressed by one of actions 2, 3 or 6. Overall, this is therefore a
solution in search of a problem.
Within the action plan, three other actions are particularly relevant
to financing costs. Action 2 on hybrids has a clear policy aim to
remove the tax advantage which could result from using either
hybrid instruments or hybrid entities, so that it should become
difficult to achieve a mismatch between an interest deduction in one
jurisdiction without a corresponding tax charge for the recipient.
There is a further extension to allow a third jurisdiction to negate
the tax benefits of an ‘imported mismatch’, where neither the
primary nor secondary jurisdiction has implemented anti-hybrid
rules, and the payment flows through a third country.
The examples near the beginning of the document highlight where
part of the perceived problem lies. One example shows two
relatively simple structures for outbound and inbound investment.
In both, the conclusion is that by creating intra-group interest
deductions in a high tax jurisdiction, the group is ‘now subject to a
negative effective rate of taxation’. However, this ignores the
crucial fact that the interest receipt is taxable in the hands of the
third party bank.
Action 6 deals with treaty abuse, and proposes either a general
limitation of benefits (LOB) rule or a stronger purpose test, with
the intention of limiting the use of conduit structures. Finally,
Action 3 on controlled foreign companies (CFCs) will propose
stronger rules to prevent the accumulation of passive income in
tax havens.
All that is happening, in both examples, is that a group is choosing to
take an interest deduction in a higher tax, rather than lower tax,
jurisdiction. Many would say that this is perfectly normal behaviour
and does not show any evidence that BEPS is occurring: it is, after all, a
fundamental sovereign right for each country to set its own tax rate.
PM-Tax | Wednesday 28 January 2015
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PM-Tax | Recent Articles
The BEPS proposals on taxation of interest (continued)
there should be provisions allowing for any disallowed interest
expenses to be carried forward to future accounting periods.
However, carry forward provisions would be ineffective for the
infrastructure sector, given the significant period of time that may
elapse before the project generates a profit.
Group-wide rules
With regard to the group-wide rules currently being proposed,
both would limit an entity’s tax deductible interest expense with
reference to the actual position of its worldwide group. The
discussion document explains that a group–wide allocation rule
would operate by ‘allocating a worldwide group’s net third party
interest expense between group entities’; thereby linking overall
interest deductibility in an entity to the position of its group.
Oil and gas sector
It is not only the infrastructure sector that is concerned about the
proposals in the discussion document; the proposals also fail to
consider the impact of group-wide rules on the oil and gas sector.
Akin to the infrastructure sector, the oil and gas industry has
unique characteristics that need to be carefully considered when
designing any group-wide rules restricting interest deductibility.
Conversely, a group-wide fixed ratio rule would apply a fixed ratio
to limit interest deductions. Such a rule would compare a
particular financial ratio of an entity with the equivalent financial
ratio of that entity’s worldwide group, so that an entity would be
able to obtain tax relief for interest expenses up to a specified
proportion of its earnings, assets or equity. The proposal is that
individual countries will determine their own benchmark ratio, and
uses tax EBITDA (earnings before interest and tax, depreciation and
amortisation) ratios in its analysis.
Notwithstanding whether a group-wide interest rule is actually
necessary to prevent BEPS involving interest, the discussion
document fails to consider the huge compliance burden that
multinationals would face when attempting to apply a new
group-wide allocation rule.
In most countries, profits from oil and gas exploration activities are
governed by separate tax rules distinct from the mainstream
corporate tax regimes. In many jurisdictions the tax deductibility of
interest expenses is already restricted. Consequently, the
introduction of group-wide interest allocation rules could be
detrimental to a group containing oil and gas companies. For
example, if an allocation rule resulted in group interest expenses
being allocated to an oil and gas company, any tax relief for that
interest could be lost due to the restrictions on interest
deductibility already imposed on the company.
Such a rule could create significant and possibly unworkable
compliance issues for a global organisation, attempting to collate all
of the necessary information, while managing currency movements,
exchange rates and tax filing requirements in different jurisdictions.
Although a fixed ratio rule would overcome many of the compliance
issues associated with a group-wide allocation rule, it could produce
arbitrary results and would be inappropriate for certain sectors,
where higher debt levels are common for commercial reasons.
Targeted provisions
The discussion document also outlines the possibility of including
targeted provisions in addition to a general group-wide rule limiting
interest deductions. Paragraph 181 of the document lists several
targeted rules that may be needed in addition to the general rules.
The targeted rules deal with scenarios where there would be a specific
BEPS risk. Indeed, several of these rules could be used to effectively
address the concerns regarding BEPS outlined by the OECD.
The OECD working group justifies the potential introduction of
new group-wide interest rules to prevent ‘double non-taxation in
both inbound and outbound investment scenarios’. It is therefore
rather ironic that the rules currently proposed are likely to result in
double taxation across various sectors.
Therefore, it seems that a series of carefully constructed targeted
rules could dispense with the need for a wide-reaching general rule
and avoid the risks of double taxation and other unintended
negative consequences across different industry sectors. We can
only hope that the OECD will understand and address these
concerns: the introduction of general rules which impose severe
compliance burdens and double taxation would be a very poor
outcome of this part of the BEPS project.
Disproportionate impact
Indeed, there is notable concern across UK industry that the
proposed rules could have a disproportionate detrimental effect in
different sectors. For example, in the infrastructure sector, the
availability of debt financing and the tax deductibility of interest
are fundamental to the success of an infrastructure project. Equity
financing is simply unobtainable for many infrastructure
developments and such projects would not proceed without a
proportion of debt financing. The discussion document identifies
that infrastructure projects are ‘typically highly leveraged’ and
therefore, ‘may be sensitive to changes in the tax treatment of
financing costs’. However, it incorrectly asserts that a group-wide
rule may be appropriate for infrastructure projects. Indeed, the
OECD appears to have ignored the fact that the high-gearing of
infrastructure projects is not driven by a BEPS motivation, but
rather constitutes a commercial cornerstone of any new
infrastructure project.
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.
E: [email protected]
T: +44 (0)161 662 8066
We will be putting in a response to the OECD discussion draft on
interest. Please contact Penny Simmons ([email protected] if you have any comments you want us to
take into account in our response.
To safeguard against any unintended consequences of a new
group-wide interest rule, the discussion document asserts that
PM-Tax | Wednesday 28 January 2015
PM-Tax | Recent Articles
Penalties in practice
by Fiona Fernie
This article appeared in Taxation on 15 January 2015
Fiona Fernie looks at how the 2007 penalty regime is really working out on the ground.
When HMRC embarked on their programme to unify penalties across
the whole tax system in 2007, the focus was on issues such as the
mechanism for calculating the amount, whether there was still room
for negotiation and whether the new system would result in generally
higher penalty levels.
penalty legislation only provides a partial answer. It stipulates that
reasonable excuse does not include:
•insufficiency of funds unless the insufficiency is attributable to
events outside the taxpayer’s control
•reliance upon a third party, unless the taxpayer himself took
reasonable care in relation to his own acts and omissions.
The legislation is now operational across all the main taxes, and has
been for some time. It is therefore now possible to gauge how the new
rules appear to be working in practice, not only by reference to
advisers’ experience of agreeing penalties with HMRC but also by
reference to case law.
There is also the amusing list of top ten oddest late tax return
excuses published by HMRC’s press office. These include such gems as:
•My wife won’t give me my mail
Not surprisingly, the majority of decided cases relate to the element of
the statute which is the hardest to define – the concepts of
“reasonable care” and “reasonable excuse”. These are central to
determining whether a taxpayer is liable for a penalty.
•My husband told me the deadline was 31 March and I believed him
•I’ve been cruising round the world on my yacht, and only picking
up post when I’m on dry land
•Our business doesn’t really do anything.
The initial changes to the statutory provisions regarding the
imposition of penalties related to situations where there is an
inaccuracy in a document. The level of penalty incurred depends on
the behaviour leading to the inaccuracy. The behaviours listed
below attract increasingly lower penalties with no penalty at all in
the final category:
•deliberate behaviour with concealment
•deliberate behaviour without concealment
•failure to take reasonable care
•no culpability.
Although I am the first to giggle over a list of this sort, there is a
serious point here. Without a proper definition in statute of
reasonable care and reasonable excuse, there is no guarantee that
these terms will be interpreted in the same way by two different
tax advisers or two different HMRC officers. As a result, two
taxpayers in very similar circumstances could find themselves
paying very different levels of penalty.
Professional advisers
One key area where cases have been decided in the tribunal is
where taxpayers have relied on a professional adviser. The statute
indicates that taxpayers are entitled to rely on professional
advisers. However, in HMRC’s view the degree to which advisers
may be relied on is limited. Some of the case law has expanded on
what the limitations are. For example in JR Hanson (TC2000) the
judge held that the taxpayer was required to check his accountant’s
work, but only to the extent that was reasonable. Factors affecting
what was reasonable would include:
The burden of proving culpability lies with HMRC.
The “failure to notify” provisions use similar categories to levy
penalties, except that failure to take reasonable care becomes
reasonable excuse and the burden of proving reasonable excuse rests
with the taxpayer.
This demonstrates that the concept of “reasonableness” is critical
to the new penalty system. The trouble is that different people
have different views as to what constitutes “reasonable”. The
•the identity and experience of the agent
•the experience and knowledge of the taxpayer
•the nature of the issues being dealt with in the tax return.
PM-Tax | Wednesday 28 January 2015
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PM-Tax | Recent Articles
Penalties in practice (continued)
The judge distinguished between an obvious omission, such as a
source of income or a capital gain, and an error in interpreting the
legislation. The former would almost always be something which
the taxpayer should identify, whereas he could rely on his adviser’s
advice for the latter. In this case, the taxpayer was found to have
taken reasonable care because he had provided his accountant with
all the relevant facts, and he had instructed an ostensibly reputable
firm of accountants whose advice he had no reason to doubt.
As with most of these schemes, HMRC do not believe that it works
and there are at least a number of taxpayers who do not want
continuing uncertainty over their tax affairs and agree to pay the tax.
Based on CH81130, the taxpayers and their advisers are confident
that although tax and interest must be paid, no penalty is due.
Recent experience suggests that in some cases such confidence is
misplaced. While taxpayers who participated in the scheme
through large accountancy firms were not charged a penalty, a
number that participated through one of the smaller boutiques
were not so lucky.
A similar decision was reached by the Special Commissioners in
Rowland (SpC 548), where it was held that the taxpayer was
entitled to rely on her adviser’s advice in relation to the partnership
losses associated with a film partnership. She had instructed a
reputable firm of accountants who held themselves to be specialists
in the area. As a result, the taxpayer was not charged a penalty.
When asked for an explanation, HMRC’s response appeared to be
along the lines that those using the boutique should have known
that it was not a reputable firm on whose advice they could rely,
despite the existence of a favourable opinion from a well known
tax barrister.
Failed planning
The Rowland case brings us to the area of failed planning. HMRC’s
Compliance Handbook Manual at CH81130 states:
This seems extraordinary, unless there was some indication in the
public domain at the time that the schemes were promoted that
the promoters were either dishonest or incompetent. Otherwise
HMRC are using the benefit of hindsight to penalise the taxpayer, a
stance which the tribunal has made clear in Cairns (personal
representatives of Webb) (TC8) is unacceptable.
“Where an inaccuracy in a document has been made despite the
person having taken reasonable care to get things right, no penalty
will be due. Examples of when a penalty would not be due include:
•a reasonably arguable view of situations that is subsequently not upheld
This case involved a return being made on the basis of a valuation
of an asset which later proved to be too low. The tribunal held that
the taxpayer should not be liable for a penalty as long as he
completed the return in good faith and on the basis of reasonable
research into the asset’s value — the equivalent of having counsel’s
opinion on the efficacy of the scheme. In any event, if a lot of
taxpayers have participated in very similar schemes, should not
they be afforded similar treatment to one another? Is not that one
of the points that HMRC are trying to make with the introduction
of follower notices?
•an arithmetical or transposition inaccuracy that is not so large
either in absolute terms or relative to overall liability, as to
produce an obviously odd result or be picked up by a quality check
•following advice from HMRC that later proves to be wrong,
provided that all the details and circumstances were given when
the advice was sought
•acting on advice from a competent adviser which proves to be
wrong despite the fact that the adviser was given a full set of
accurate facts
•accepting and using information from another person where it is not
possible to check that the information is accurate and complete.”
Suspended penalties
Another interesting area of the new regime is the concept of
suspended penalties. HMRC can suspend all or part of a penalty for
careless inaccuracy for up to two years on the basis that the
taxpayer complies with certain conditions.
At first sight that seems fairly straightforward. In practice,
however, it seems that it is not. Not only is the term “reasonably”
open to interpretation, it seems that there are other subjective
tests, such as what constitutes a “competent adviser”.
The conditions must help the taxpayer to avoid becoming liable for
further penalties for careless inaccuracy. HMRC’s initial guidance
regarding suspension of penalties suggests that suspension could
only take place where the error was likely to recur, so that the
conditions could be set to minimise the likelihood of recurrence.
Take, for example, an avoidance scheme which has been marketed
by a number of different promoters, including both large well
known accountancy firms and smaller boutique firms. There may
be minor differences between the schemes being promoted but
fundamentally the schemes are the same. All of the promoters
have obtained an opinion on whether the scheme works (not
necessarily the same opinion) from a reputable tax barrister.
PM-Tax | Wednesday 28 January 2015
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PM-Tax | Recent Articles
Penalties in practice (continued)
In Anthony Fane (TC1075), it was held that the conditions could
relate to avoidance of careless errors in general rather than only
the avoidance of the error which led to the suspended penalty. The
HMRC manuals were updated to reflect the decision in that case,
but there are still examples of HMRC continuing to argue the more
restrictive analysis such as in Cobb (TC1738).
Enhanced penalties
I want to mention one other issue relating to penalties which is
currently very topical. We have, in practice, already seen enhanced
penalties being charged in relation to tax liabilities regarding
income or gains offshore. The level of enhancement of the penalty
is dictated by the degree of transparency of the country involved.
However, it will be interesting to see to what extent the
threatened further increase in penalties for “FATCA hopping” is
actually imposed.
In addition, according to CH83150 onwards the conditions should
include a requirement that the taxpayer’s records should be made
available, so that HMRC can check whether the conditions have
been complied with and should be SMART (specific, measurable,
achievable, realistic, and timebound).
Will those who continually move their money to try and stay one
step ahead of automatic exchange of information be hit with a
substantially greater penalty when they are finally caught,
compared to those who recognise that it is becoming increasingly
difficult to hide and that they might as well stop running now?
In Fane and Philip Boughey (TC2082) it was held that the condition
for suspension could not be merely to submit tax returns on time
without errors. It needs to help the taxpayer to avoid errors in the
future and is thus likely to involve a change to practice, such as
employing a qualified chartered accountant or chartered tax
adviser to prepare returns where formerly the taxpayer prepared
them himself.
As with so many areas of tax statute, the law on penalties,
although extensive, still leaves significant room for interpretation,
since some of the key terms are not defined. Unfortunately, that
means that anomalies can and do appear in the treatment of
different taxpayers facing similar circumstances. While HMRC’s
powers become ever greater, the safeguards for taxpayers are not
keeping pace.
In practice, when agreeing to suspend a penalty, HMRC issue a
letter which sets out the conditions for suspension and which
largely comprises standard wording – wording which in my
experience raises some concerns. Unfortunately, it appears that
HMRC officers do not have the discretion to amend the wording of
such letters – even to make it more compliant with the statute
and/or case law!
Fiona Fernie leads our Tax Investigations team.
She has over 25 years’ experience in assisting
clients subject to investigations/enquiries by
HMRC with particular focus on COP8 and
COP9 (Contractual Disclosure Facility) cases
and large complex investigations.
For example, I have, on a number of occasions, seen penalty
suspension letters stating that the first condition is the taxpayer
must meet all his notification and filing obligations. This not only
flies in the face of the Fane and Boughey decisions but it also
cannot be SMART if (as I have also seen) there are no such
notification and filing obligations in the period of the suspension.
She also assists clients who want to make a
voluntary disclosure of tax irregularities to
HMRC, whether via one of the available
disclosure facilities such as the Liechtenstein
Disclosure Facility or the Crown Dependency
Disclosure Facilities or via an independent
approach outside a formal facility.
Equally, it is useless to set a condition that asks a taxpayer to
demonstrate he has performed a certain task by a given date, but
refuse to put a system in place that ensures HMRC check the task
has been undertaken by the end of the suspension period.
Technically, if HMRC have not seen the evidence by the end of the
suspension period, the taxpayer has demonstrated nothing, the
condition has not been met, and the penalty becomes due. This is
surely not what was intended at all but, in my experience, HMRC’s
response when this is pointed out is to say the only way to get the
penalty suspended is to agree to the conditions.
E: [email protected]
T: +44 (0)20 7418 9589
PM-Tax | Wednesday 28 January 2015
>continued from previous page
PM-Tax |PM-Tax
Our Comment
| Cases
Colaingrove v HMRC [2015] UKUT 0002 (TCC)
The supply of a veranda with a static caravan comprised a single zero rated supply.
Colaingrove operates holiday parks in the UK and sells static
caravans. The sale of caravans is zero rated by virtue of Group 9
Schedule 8 VATA. Colaingrove claimed that a veranda, which is
bolted to the caravan and sometimes also fixed to the land, should
also be zero rated when it is sold with the caravan. It argued that
Card Protection Plan (CPP) applied so that the transaction should be
treated as a single supply of the principal element of a caravan and
an ancillary element of the veranda. HMRC argued that the sale of a
veranda would be standard rated even if sold with the caravan.
The UT said that the ECJ in Talacre had not jettisoned the CPP
principles in relation to zero rating. It said that Talacre simply limits
the effect of a single supply analysis so as to enable the national
legislation, where relevant, to apply zero rating only to a specific
element or specific elements of such a single supply. It said there
was no need to look at how a UK court would have applied the law
before the judgment of the ECJ in CPP. The UT said that the only
question was whether either verandas are excluded from the scope
of the zero-rating or the zero-rating applies only to the caravan
element of the single supply. The UT said that there was nothing in
Group 9 of Schedule 8 to exclude a veranda from the scope of
zero-rating by reason of being part of a single supply of which the
principal supply is a caravan and there was no discernible legislative
intention to exclude it.
In Talacre Beach Caravan Sales Ltd, the ECJ considered CPP. In that
case the taxpayer argued that sale of a caravan and its contents
was a single indivisible supply which should be subject to a single
rate of VAT – and should be zero rated, even though UK legislation
excluded removable contents in a caravan from the scope of the
zero-rating. The ECJ decided that the exclusion in the UK zero
rating prevailed.
The UT therefore allowed Colaingrove’s appeal and decided that the
supply of a veranda with a static caravan comprised a single zero
rated supply.
The FTT found for HMRC and said that verandas were standard
rated. Relying on the FTT decision in McCarthy & Stone, the FTT said
that the CPP single supply rules were ‘trumped’ by the nature of the
zero-rating derogation. It said that in these circumstances the
domestic case law in relation to single and multiple supplies before
CPP had to be applied and this would treat the supplies as multiple
supplies so that the veranda would be standard rated.
This clarification by the UT of the application of the single multiple
supply rules in relation to zero rated supplies is helpful for
Read the decision
PM-Tax | Wednesday 28 January 2015
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PM-Tax | Cases
Cases (continued)
Morrison v HMRC [2014] ScotCS CSIH 113
Damages paid to settle claim for misrepresentation of director could result in repayment of CGT
paid on sale of shares.
Sir Fraser Morrison was a major shareholder in, and the chairman
and chief executive of Morrisons plc. Morrisons was acquired by
Anglian Water plc and Sir Fraser’s shares were acquired in exchange
for shares and loan notes in Anglian, which were transferred into a trust.
In the Court of Session, Lord Tyre disagreed with the UT’s
conclusion, that in order for a contingent liability to be incurred “in
respect of a warranty or representation made on a disposal by way
of sale”, the liability had to be directly related to the value of the
consideration received by the taxpayer on the disposal. The UT had
relied on the decisions in Randall v Plumb and Garner v Pounds. Lord
Tyre said that those cases were concerned with the situation where
the contingent liability did not fall within s. 49(1). He said that in
this case the liability was within s. 49(1) and so there was no need
to adjust the consideration received for the shares. Instead s. 49(2)
provides for such adjustment “as is required in consequence” to
take place “by way of discharge or repayment of tax or otherwise:
in other words, by direct relief”. He said “It does not require or
permit adjustment of the value of the consideration and it is not in
my opinion permissible to read the section as if it did. The focus of
the section is on ascertainment of the chargeable gain and not on
valuation of the consideration.”
During the discussions for the acquisition, Morrisons’ five year plan
including a profit forecast was provided to Anglian by Sir Fraser as
chairman of Morrisons. Subsequently the forecast turned out to be
materially incorrect and Anglian sued Sir Fraser. In settlement of
this claim Sir Fraser paid £12 million. He claimed an adjustment of
£12 million to the CGT liability that he had incurred on disposal of
the Anglian shares and loan notes to the trust. The adjustment was
claimed under s. 49 TCGA 1992, on the ground that the settlement
payment constituted the enforcement of a contingent liability in
respect of a representation made on the disposal of his shares in
Morrisons. HMRC denied the claim on the basis that the
representation was made in Sir Fraser’s capacity as director and not
as shareholder.
He added that even if he was wrong on this point and s. 49(1)(c)
should be construed as imposing a requirement that the contingent
liability be directly related to the value of the consideration received
by the taxpayer on disposal of the property, he thought the
requirement was met. He said there was no reference in s. 49(2)c)
to the capcity of the person making the disposal. Sir Fraser’s
personal contingent liability arose because he made the
representations which induced the purchase of the shares, including
those owned by himself. In these circumstances Lord Tyre said that
the representations should properly be described as having been
made on a disposal by way of sale of the shares.
The FTT found for Sir Fraser, on the basis that the capacity in which
he acted in making the representation was irrelevant. However the
UT found for HMRC.
This decision is welcome and seems like a just result. However, the
case illustrates that it is dangerous to assume that all payments of
damages will necessarily result in the adjustment of the CGT position.
Read the decision
PM-Tax | Wednesday 28 January 2015
>continued from previous page
PM-Tax | Our Cases
Cases (continued)
HMRC v GMAC UK PLC [2015] UKUT 0004 (TCC)
Tribunal makes a supplemental decision ensuring that HMRC could seek leave to appeal on bad debt
relief time limit point
GMAC sold cars under hire purchase agreements requiring the
customer to pay in instalments. If the customer defaulted, GMAC
repossessed the car and sold it at auction. The auction proceeds
reduced the balance due from the customer.
The UT decided to receive written submissions from both parties to
see if the matter could easily be dealt with. However, the UT found
that those submissions did not point in either party’s favour
sufficiently enough for it to change its decision. It pointed to the
fact that the BT case before the Court of Appeal had been decided
on the basis of very specific facts. Therefore, in respect of GMAC the
UT affirmed the conclusions in its previous decision, ensuring that
an appealable decision was handed down. The UT also allowed an
extension of time for HMRC to seek leave to appeal the decision.
In an earlier hearing the UT had ruled in favour of GMAC and its
joint respondent BT, allowing the company to claim VAT bad debt
relief to reduce its VAT liabilities, but also referred an issue to the
ECJ. The CJEU dealt with the issue of whether GMAC obtained an
unfair windfall by paying less VAT than an outright seller, and
found in favour of the taxpayer.
With the Court of Appeal’s judgment in BT being heavily fact
reliant and specific, it is likely that HMRC will seek leave to appeal
in this long-running saga. The UT gave some indications as to how
it might deal with an application for leave to appeal, although, it
suggested that it might be necessary refer the case back to the FTT
for it to make further findings of fact.
Since the UT’s initial decision there was an appeal to the Court of
Appeal by HMRC in relation to the preliminary issues which the UT
decided in the BT appeal. The Court of Appeal upheld the UT’s
decision but for one ground on which it found that BT should be
time barred in making some of its older VAT bad debt claims.
HMRC therefore asked the UT to reconsider the time limit position
in relation to GMAC.
Read the decision
Procedurally, the UT was unsure of its position and whether it had
made an appealable decision in relation to GMAC within the meaning
of section 13 to the Tribunals Courts and Enforcement At 2007.
PM-Tax | Wednesday 28 January 2015
>continued from previous page
PM-Tax | Our Cases
Cases (continued)
Global Foods Ltd and others v HMRC [2014] UKFTT 1112 (TC)
There is no requirement for an exporting trader to register in another member state in order for self
supplies to be zero rated.
Global Foods was an alcohol exporter and exported alcohol to its
warehouse in the Netherlands, claiming that this self-supply was
zero-rated. Through its Dutch warehouse, the company had a
permanent establishment in the Netherlands and should have
been VAT registered there. HMRC refused input VAT recovery as it
said that zero-rating was not available if the Dutch business
establishment was not VAT registered. Global Foods obtained
retrospective registration and then claimed the input VAT.
On this finding, the FTT then dealt with the question of whether
HMRC’s inquiry was a reasonable one under regulation 198(a), VAT
Regulations 1995 because it was made on the basis of requiring the
person in the other member state to be registered. The Tribunal
rejected this argument however, deciding that the inquiry had to
be considered in light of what HMRC knew at the time. The fact
that HMRC’s interpretation was wrong does not preclude the
investigation therefore, because of the uncertain nature of the law
at the time.
HMRC repaid the input tax, but refused to pay repayment
supplement. In a preliminary hearing the FTT found that, as a
matter of EU law there was no registration requirement for a self
supply. It noted however that HMRC Public Notice 725, which adds
the requirement for the recipient to include its VAT sales number,
has force of law under regulation 134 or the VAT Regulations 1995
and section 30(8)(b), VATA.
As the Tribunal found that there was no requirement for an
exporting trader to register in another member state to which it
was making self-supplies, HMRC were liable to pay a repayment
supplement. This provision was initially a penal provision, but for
Global Foods amounted to a compensatory measure because it
was not entitled to interest. A repayment supplement is payable
for any VAT repayment which HMRC take more than 30 days to
pay. The issue for the FTT was when the 30 days started and ended
and it decided, following Alliance and Leicester, that the 30 day
period restarts following the moment when HMRC considers its
investigations to be complete. This means that HMRC have 30
days from the date of the taxpayer answering all HMRC questions
to make any VAT repayment due. As this was only a preliminary
hearing, the factual scenarios of the parties were not considered.
Global Foods said that VAT registration was not required because
this was a self-supply. As such, there would be no VAT invoice,
which HMRC confirmed. The FTT noted that the VAT sales
condition had been upheld in the courts, both domestically and in
the CJEU but not in relation to self-supplies. It therefore rejected
HMRC’s argument that the VAT number implied a VAT registration
requirement, finding instead that the VAT number requirement was
impossible in relation to self-supplies and therefore irrelevant. The
FTT went further, stating that the Principal VAT Directive (PVD)
only requires that the recipient in another member state be a
taxable person. It said that for HMRC to require that person to be
registered “goes beyond the limits of the Directive, and is therefore
contrary to EU law”.
This decision makes sense in relation to self supplies where there is
no need to verify the identity of the person to whom the supplies
are made as the supply is made to yourself. The FTT was concerned
that HMRC had imposed requirements in addition to those in the
PVD for those seeking zero rating for self supplies.
Read the decision
PM-Tax | Wednesday 28 January 2015
PM-Tax | People
Ian Hyde – appointment as a Tax Tribunal Judge
Social Media
We are delighted to announce that Pinsent Masons tax partner, Ian
Hyde has been appointed a Fee-Paid Judge of the First-tier Tribunal,
assigned to the Tax Chamber. This is a part time position and Ian will
combine the role with his tax disputes practice at Pinsent Masons.
We congratulate Pinsent Masons tax partner Heather Self on being
voted number 36 in the #economia50 2014 – a ranking of the
most influential sources of financial news and information on
social media. The readers of economia recently voted for their Top
50 go-to sources on finance, making their nominations by tweeting
the hashtag #economia50.
Professor Judith Freedman CBE
We congratulate Professor Judith Freedman CBE (@JudithFreedman)
on her appointment as an Honorary Fellow of the Chartered
Institute of Taxation (CIOT). This is the highest Honour that the
CIOT can bestow. Judith is the Pinsent Masons Professor of Tax Law
at the University of Oxford.
We also congratulate the other Honorary Fellows appointed this year: Dame Fiona Woolf DBE, the immediate past Lord Mayor
of London – and her Mayoral Consort, Nicholas Woolf, who is
himself a tax practitioner. The appointments were announced at
the annual President’s Lunch of the CIOT, held in Merchant Taylors’
Hall in the City of London on 13 January, an event which Pinsent Masons sponsored.
QC congratulations
We also congratulate tax barristers David Scorey of Essex Court
Chambers, Jolyon Maugham (@JolyonMaugham)of Devereux
Chambers and George Peretz of Monckton Chambers on the
announcement that they are to be appointed Queen’s Counsel
You can follow Heather on twitter at @hselftax. As well as being a
prolific contributor to PM-Tax, Heather also comments regularly
on tax issues on the radio and TV and in the press.
Twitter can be a good place to find out quickly about new
developments in tax and to get instant reactions from tax
You can also follow the Pinsent Masons Tax Team at @PM-Tax plus
individual senior members of our team including Darren MellorClark (@FSVAT) who comments on VAT with a particular focus on
the financial services sector, Ray McCann (@Ray_McCann55) who
comments on HMRC powers and private wealth tax, Suzannah
Crookes (@SuzannahCrookes) who comments on share plans and
PM-Tax editor Catherine Robins (@CRobinstax) who comments on
general tax issues.
Heather spoke recently at the Oxford University Centre for
Business Taxation’s Diverted Profits Tax conference. You can
access the recording of Heather’s session here.
Paris Tax Team
We announced in the last edition of PM-Tax that Franck Lagorce would be joining our Paris tax team as a corporate tax partner. We are now pleased to announce that Associate Steven Guthknecht will also be joining the team.
Tell us what you think
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PM-Tax | Wednesday 28 January 2015
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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