OECD BEPS plan comes under attack

A senior tax figure has criticised plans to reform global tax rules – by the Organisation for Economic Cooperation and Development (OECD) – saying their legal implementation would be ‘troublesome, time consuming and patchy’.

The comments from Omleen Ajimal, director of international tax at Squire Patton Boggs, were made after a presentation by Raffaele Russo, the OECD’s head of the Base Erosion and Profit Shifting (BEPS) programme, at an International Business Structuring Association conference in London to discuss the future of digital tax.

Ajimal said that despite the intentions of the plans, in practice, it meant ‘nothing yet’ for business and that it could take 20 years to implement.

‘The OECD is doing a lot of insightful and intelligent work but right now, all this is, is a debate because it doesn’t have the force of law. Everybody recognises that proper strategic collaboration by governments around the world is central to making this happen,’ she said.

Following conversations with businesses in various jurisdictions, including the Far East and Africa, Ajimal felt that BEPS was less of a priority for most, compared to ‘long suffering professionals and academics’.

‘In places like Africa, there are some saying we need to fix this but for most, BEPS is not an issue – local grassroot issues matter a lot more. The fact is opinion varies widely on this,’ she said.

Focusing on the discussion on the digital economy, Russo said BEPS had achieved progress since in the past there had been no agreement about what it meant.

‘Now we’re heading into the space in which we talk of the “digitised economy” as ICT penetration is increasingly affecting every sector of business. Everything is becoming digitised so there’s no point in trying to ring fence this. At the same time these are generating new business models or enhancing the scale of existing models.

‘The broad challenge for BEPS is to ensure that in all the areas of work – from transfer pricing to indirect tax – all the work does target the digital economy,’ said Russo.

He added that critical questions included the best way to allocate taxable profits based on value creation and considering whether the right rules and principles were applied to discussions around the characterisation of income.

Blackfriars scheme refused court hearing as SDLT rules proportionate

Steps taken by the Chancellor to close a potential stamp duty land tax (SDLT) loophole have been given the judicial stamp of approval by one of the country’s top judges. She ruled that they were not ‘disproportionate’.

Mrs Justice Andrews rejected a challenge by participants in a stamp duty avoidance scheme who claimed that the government used retrospective legislation to close it down.

They argued that the move, announced by the Chancellor in Budget 2012, was ‘disproportionate’ because it would only save the Exchequer around £7m. But the judge told them in her written decision: ‘However attractively that submission has been dressed up by counsel, my conclusion that it is wholly without merit may come as little surprise.’

For the case to proceed to a full hearing she said that the claimants needed to show they had a real prospect of success and added: ‘They fall short of that threshold by a considerable margin.’

In a complex judgment, she said: ‘Benjamin Franklin famously identified tax as one of life’s two certainties.

 ‘However, the aphorism must be subject to some qualification; for as long as taxes have existed, people have been devising ways to avoid paying them without breaking the law.’

The judge said that these claimants took part in the so-called Blackfriars scheme, structured by advisers Blackfriars Tax Solutions LLP to minimise their exposure to SDLT.

They sought to challenge provisions of the Finance Act 2013 which amended section 45 of the Finance Act 2003 with retrospective effect from 21 March 2012, making stamp duty chargeable in full on transactions under the Blackfriars scheme. However, rejecting claims that the step was disproportionate, the judge said: ‘It was and is a legitimate and important aim of UK public policy in fiscal affairs to ensure that everybody buying property pays their fair share of SDLT.

‘It was, therefore, within the permissible area of discretionary judgment of parliament to legislate, with retrospective effect, to prevent taxpayers from using, by wholly artificial arrangements, s45 of the Finance Act 2003 so as to produce an outcome which was the very opposite of what parliament had intended.’

The scheme involved a double agreement under which A exchanges contracts to sell a property to B at market value but on the same day as completion B grants C an option to purchase the property.

SDLT would apply to the option, not the property sale, but would only be due on exercise many years into the future. The intention would be that the option would never be exercised.

HMRC forced to revise IR35 guidance after Lords report on PSCs

Following criticism from the House of Lords’ select committee on the use of personal service companies (PSC), HMRC is to publish updated guidance on IR35 for taxpayers along with more detailed information on the costs of complying with the legislation later in the year.

This is part of a package of measures in response to the House of Lords select committee’s PSC report issued in April 2014.

The government said: ‘We accept that the guidance will never be able to give absolute certainty to taxpayers of their status in relation to IR35 but we agree that the current guidance is far from satisfactory.’

New guidance will be published shortly following a comprehensive review during which HMRC worked closely with stakeholders to understand user needs.

This autumn HMRC will publish an updated administrative impact assessment note setting out the current administration costs which taxpayers incur when dealing with IR35.

There will also be a review of the use of IR35 and impact of business entity tests, which will be fed back to the IR35 Forum, a taxpayer body, later this year.

The Lords PSC committee report was critical of HMRC, citing the absence of reliable information that the tax department had collected concerning the use of PSCs. The report recommended that HMRC should ‘look again at whether they require complete and accurate responses to the “service company” questions on the personal tax return SA100 and the real time information (RTI) employer year end declaration (formerly P35)’. It wanted this information to be compulsory.

HMRC has said it will make any necessary changes ‘at the earliest practicable date’. It will also look at the misuse of dispensations as part of a move to tackle non-compliance by umbrella companies. The PSC committee report also said HMRC needed to do more to demonstrate that the revenue protection it claimed for the IR35 legislation outweighs the costs it imposes.

Baroness Noakes, chairman of the committee, said: ‘HMRC failed to demonstrate that they had a sound basis for the £550m of tax and national insurance that they cited as being at risk if IR35 were to be abolished or suspended. The deterrent nature of the IR35 legislation is its main rationale. We recommend that HMRC publish a detailed assessment of this figure.’

The government’s response includes a note, Estimating the cost of abolishing IR35, which provides more analysis of HMRC’s £550m estimate, based on figures for 2010-11, which it describes as ‘robust’.

This puts the direct cost to the Exchequer at £30m, which is the difference between tax paid on salary taken from the company (where IR35 applies) and tax that would be payable if the individual adopted the most tax efficient remuneration strategy in the absence of IR35.

Case: relief from inheritance tax for gifts to charities granted

In the case of Giles v The Royal National Institute for the Blind & Ors [2014] EWHC 1373 (Ch) Ms Giles, the administratrix and executrix of the estates of two sisters, H Bolton and E Bolton, brought a claim for rectification of a deed of variation which purported to alter the provisions of the will of H Bolton, pursuant to the Inheritance Tax Act 1984 (IHTA 1984), s142, with a view to reducing inheritance tax (IHT).

H Bolton died and left a property and the residue of her estate (from which IHT was paid) to her sister E Bolton, who died the following year leaving her estate to four charities equally.

The combined effect of the two wills was that H Bolton’s estate passed ultimately to the four charities but by passing via E Bolton’s estate incurred an IHT liability along the way.

Accordingly, a deed of variation was entered into so that H Bolton’s estate would pass directly to the charities and benefit from relief under IHTA 1984, s23. However, the wording used in the deed of variation had the effect of redirecting only the residue of the estate, leaving the specific devise of the property to E Bolton unchanged.

As the deed of variation had no effect on the IHT chargeable on the property, Ms Giles submitted that the court could rectify the deed in exercise of the administratrix and executrix’s discretion.

The court considered the case of Racal Group Services Ltd v Ashmore [1995] STC 1151 (CA) as the leading authority for the grant of the discretionary remedy of rectification.

It found that the documents as a whole did establish that the intention was for the whole of H Bolton’s entitlement, not just the residue, to be redirected to the charities and there was no evidence of any contrary intention. Accordingly, the ‘convincing proof of error’ requirement was satisfied.

In addition, the effect of the deed of variation did not reflect clear intention to redirect the entirety of H Bolton’s entitlement to the charities rather than just her entitlement in the residue, and the objective of relieving the charities of the indirect burden of IHT was no bar to rectification.

Furthermore, what was actually intended to be the effect of the deed of variation was established, namely to redirect the entirety of E Bolton’s entitlement under H Bolton’s will to the four charities, rather than just her entitlement in respect of the residue.

The court upheld the claim for rectification of a deed of variation to benefit from relief.

Case: liability to account for interest arising in the UK

Ardmore Construction Ltd v Revenue & Customs [2014] UKFTT 453 (TC) concerned Ardmore, a UK resident company running a building and civil engineering trade solely within the UK. Ardmore was owned in equal shares by two brothers. Each brother established a trust under Gibraltar law in which each of them had an interest in possession. Each Gibraltar trust acquired the entire issued ordinary share capital of a British Virgin Islands (BVI) incorporated, Gibraltar administered, company.

Ardmore subscribed £4m for one redeemable share in each of the BVI companies, the majority of the subscription proceeds remaining unpaid as outstanding share premium.

In the first in a series of similar transactions, Ardmore paid £1.35m to each of the BVI companies in part payment of outstanding share premium. Each BVI company lent £1.35m to the Gibraltar trusts which then made unsecured loans of £1.35m each to Ardmore.

The issue was whether the interest arising on the loan, from the Gibraltar trusts to Ardmore, should be treated as ‘arising in the UK’ for the purposes of Income Tax Act 2007 (ITA 2007), s874. If it was treated as such the company would have an obligation to deduct income tax at source from the interest payments.

The FTT concluded that Ardmore was resident for all purposes in the UK; the site of the debt, although not a determinative factor, was also in the UK as was the source or origin of the funds used to pay the debt interest.

On this basis the interest was determined to have arisen in the UK within the meaning of ITA 2007, s874, and consequently Ardmore was liable to account for income tax deducted at source under ITA 2007, s957.

The FTT also said that HMRC should not be permitted to rely on the unpublished decision of the special commissioners in the case of Poldi UK Ltd v Inland Revenue Commissioners (Poldi).

In the tribunal’s view such an authority was persuasive and would normally be followed by the FTT, but said that it cannot be right or just to permit HMRC to rely on such unpublished decisions.

Case: reasonable excuse for late payments of PAYE in Anaconda

In Anaconda Equipment International Ltd v Revenue & Customs [2014] UKFTT 388 (TC), building trade company Anaconda made nine late payments of PAYE during 2011–12.

HMRC charged Anaconda a penalty of £5,550 (3% of the total amount of PAYE paid late in the tax year (ignoring the first late payment)). Anaconda appealed the penalty on various grounds, most of which the FTT rejected. However, the combination of these two factors persuaded the tribunal that the taxpayer did have a reasonable excuse for the late payments.

Anaconda was under financial pressure from its bankers throughout 2011–12. Ulster Bank had restricted its overdraft from £1m to £355,000 with further monthly reductions of £20,000.

While the FTT appreciated that this had caused severe deterioration to the company’s financial circumstances, they found that this alone would not have amounted to a reasonable excuse. As Anaconda was aware of the circumstances, it should have reorganised its affairs to ensure its PAYE was paid on time.

In addition, Anaconda lost two contracts, caused by the recession in the building trade, and this led to a 67% reduction in turnover from £6.2m in 2008 to just over £2m in 2010.

This had a sudden and material impact on Anaconda which was entirely beyond its control.

The tribunal accepted that Anaconda’s insufficiency of funds was acceptable to establish the reasonable excuse defence as set out in Finance Act 2009, Sch 56, para 16(2) (a) and hence allowed the appeal.

Case: director personally responsible for PAYE and NIC

In Febrey v Revenue & Customs [2014] UKFTT 401 (TC), Mr Febrey was the sole director of a company (Company A) in the construction sector. His long-term partner, Ms Rogers owned all the shares in the company. They were also 50/50 shareholders in another company (Company B), of which Rogers was the sole director until April 2007 when Febrey replaced her.

Febrey claimed that Company B had evolved over time to become the conduit through which he and Rogers were able to share income of their business activities equally (by way of dividend). In spring 2007 Febrey and Rogers separated, and Febrey put in place a form of service contract with Company A in order to secure his position with the company financially.

Company A was declared insolvent and liquidators were appointed in November 2008. Company A’s records showed director’s drawings on the loan account, reduced by credits for salary paid in the 200708 tax year.

Draft accounts for the periods covered by the 2005–06 and 2006–07 tax years included period end adjustments to such loan accounts by way of postings of consultancy fees and dividends.

There were no company records (in the shape of Forms P14 or P35) of any sums of income tax or employee’s NICs having been deducted under PAYE, with respect to any of these amounts.

Companies A and B had not filed corporation tax returns for the relevant periods, which would have shown the treatment of any such items.

No written evidence of the declaration of dividends was produced nor had Febrey included any amounts of consultancy income or dividends in his 2005–06 or 2006–07 tax returns.

Following an enquiry into Febrey’s 2007–08 tax return, HMRC amended that return (to remove the credit claimed by Febrey for ‘tax deducted’ (under PAYE) against his declared salary income), and also raised discovery assessments on Febrey for income under-declared for the 2005–06 and 2006–07 years (on the basis that the amounts drawn in those years represented remuneration).

On appeal, the First Tier Tribunal (FTT) concluded that neither the consultancy fees nor dividend items qualified for the description attached to them. However, since both items represented withdrawals from the director’s loan account, they constituted remuneration in Febrey’s hands, which was liable to income tax and NICs. Accordingly, HMRC’s assessments for 2005–06 and 2006–07 tax years were upheld.

For the 2007–08 year, Febrey had given no instructions to Company A’s in-house accountant as to the existence of his service contract, and it was clear that no tax or NICs was accounted for on the sums drawn as salary.

The tribunal did not regard the engagement of professional advisers by the company as sufficient to exclude Febrey from personal liability. As sole director, he had full control of the company.

On the evidence provided, the tribunal found there was a deliberate failure to deduct tax and Febrey was aware of that failure. The fact that he was not responsible for maintaining the company’s records, and entrusted that matter to its in-house accountant, was not an acceptable excuse. Accordingly, Febrey’s appeal was dismissed.

Case: FTT upholds CJEU ruling on claim to consortium relief

Following a decision by the Court of Justice of the European Union (CJEU) on 1 April 2014 (Felixstowe Dock and Railway Company Ltd & Others v R&C Comrs (Case C-80/12)) , the FTT in Felixstowe Dock & Railway Company Ltd & others v Revenue & Customs [2014] UKFTT 452 (TC) has confirmed that the requirement in Income and Corporation Taxes Act 1988, s402(2) for the ‘link company’ to be resident in the UK (or carrying on a trade in the UK through a permanent establishment) was contrary to the freedom of establishment rights of the claimant companies, and that the claimant companies could rely on this in support of their claims to consortium relief.

There are still a few outstanding points in this case which were not referred to the CJEU but are currently under appeal to the UT. This includes the extent to which the non-discrimination provisions of the UK/Luxembourg double taxation convention impacted upon the claimant companies’ claims for consortium relief.