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Cases: quarterly review (Spring 2018)

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1. Christa Ackroyd Media: personal service company

In Christa Ackroyd Media v HMRC [2018] UKFTT 69 (10 February 2018), the First-tier Tribunal (FTT) found that the intermediaries legislation (ITEPA 2003 ss 48–61) was engaged and that a BBC presenter should be treated as employed by the BBC even though she provided her services through a personal service company.

Ms Ackroyd was a television journalist who had been engaged in a variety of media roles since the 1970’s. She had worked at the BBC under two fixed term contracts between the BBC and her company CAM. It was accepted that CAM was a ‘personal service company’ and HMRC contended that under the intermediaries legislation, Ms Ackroyd’s status was that of an employee so that CAM should account for income tax and NICs. HMRC had issued determinations and imposed penalties on that basis. Ms Ackroyd considered that she was a self-employed contractor.

The FTT summarised the issue as follows: ‘If the services provided by Ms Ackroyd were provided under a contract directly between the BBC and Ms Ackroyd, would Ms Ackroyd be regarded for income tax purposes as an employee of the BBC?’ The FTT referred to the criteria established in Ready Mixed Concrete [1968] 2 QB 497 for the purpose of determining whether an employment contract exists.

It found that the pre-requisite for an employment contract, mutuality of obligation, was present. Ms Ackroyd was required to work for the BBC for at least 225 days in any one year, and the BBC was required to pay the fees set out in the contract. It also found that the BBC did have ultimate control in ‘how, where and when Ms Ackroyd carried out her work’ and that this was an implied term of the hypothetical contract, in particular because Ms Ackroyd would have to comply with editorial guidelines. The BBC did act on Ms Ackroyd’s advice and suggestions, however, this was a reflection of the fact that she was an experienced and successful journalist. The FTT added that there was no right for Ms Ackroyd to provide a substitute, indeed this was expressly excluded. Finally, ‘the existence of a seven year contract meant that Ms Ackroyd’s work at the BBC was pursuant to a highly stable, regular and continuous arrangement’ and this pointed towards employment.

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Why it matters: Although this was not a lead case, the appeal was one of a number of other appeals involving television presenters and personal service companies. Having found that the intermediaries legislation was engaged, the FTT observed: ‘We do not criticise Ms Ackroyd for not realising that the IR35 legislation was engaged. She took professional advice in relation to the contractual arrangements with the BBC and she was encouraged by the BBC to contract through a personal service company.’ Writing in Tax Journal (22 March 2018), Caroline Harwood and Susan Ball (Crowe Clark Whitehill) observed: ‘Public sector engagers should be particularly careful to take note of the key points raised in Christa Ackroyd Media. This is the first IR35 case since the new rules were introduced.’

2. Lomas: whether statutory interest is yearly interest

In HMRC v A V Lomas and others [2017] EWCA Civ 2124 (19 December 2017), the Court of Appeal found that statutory interest was yearly interest for the purpose of ITA 2007 s 874.

The administration of Lehman Brothers had begun in September 2008. Contrary to initial expectations, the administration had resulted in a substantial surplus (estimated to be between £6.6bn and £7.8bn) available for distribution to creditors.

The issue was whether the statutory interest payable on the debt (under the Insolvency Rules 1986 rule 2.88(7) and then the Insolvency Rules 2016 rule 14.23(7)) was yearly interest within the meaning of ITA 2007 s 874, so that the joint administrators were required to deduct basic rate income tax from the payments and to account for the tax to HMRC.

The court found that it was not open to the administrators, in the light of the decision in Riches v Westminster Bank [1947] AC 390, to contend that statutory interest is not interest for the purposes of s 874. This decision determined that the fact that the interest is payable from the date of judgment and is calculated retrospectively is irrelevant when deciding whether interest is yearly interest. Instead, the House of Lords had concentrated on the duration of the liability if looked at hypothetically at the start of the period to which it related. In this respect, the court found that it would be wrong to treat statutory interest as a short term liability. The obligation of the administrators to pay interest on the proved debts: was unlimited in point of time under rule 2.88(7) (now rule 14.23(7)); was calculated by reference to a per annum rate of interest; and contemplated a period of administration which could in many cases last over a prolonged period of time and had, in fact, endured for a number of years in this case. It did therefore satisfy the definition of yearly interest in Bebb v Bunny (1854) 1 K & J 216, in that it was payable from year to year whilst accruing from day to day.

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Why it matters: This was a unanimous decision by the Court of Appeal, which covered over two centuries of legislation and case law on yearly interest and concluded that statutory interest can be yearly interest, based on the duration of the liability. Yet, the High Court had found that statutory interest is not yearly interest on the basis that it is of ‘a very different nature from that payable on contractual debts, judgment debts or other analogous debts’. The amount payable by way of statutory interest was estimated to be in the region of £5bn. Writing in Tax Journal (22 February 2018), Heather Self (Blick Rothernberg) observed: ‘For the more common situation of an inter-company debt, the case provides a useful summary of the principles to be applied in determining whether a loan gives rise to payments of annual interest. The key issue is the intention of the parties at the outset of the loan, and the difficulty in practice is that this is often not well-documented. Where a loan is genuinely intended to be short term, this information should be captured in formal board minutes as soon as possible.’ (An article reviewing the CA judgment will be published later this month.)

3. Rowe: PPNs were valid

In R (on the application of Rowe and Others) v HMRC [2017] EWCA Civ 2105 (12 December 2017), the Court of Appeal dismissed an appeal against the decision of the High Court, itself dismissing claims for judicial review of partner payment notices (PPNs).

Mr Rowe had participated in a scheme established by Ingenious Media. The taxpayers in the various appeals grouped with Mr Rowe had made ‘carry-back’ claims, ‘sideways claims’ or a combination of such claims in respect of their share of partnership losses. HMRC opened an enquiry into Mr Rowe’s 2004/05 tax return and subsequently issued a closure notice removing any of the claimed losses from the return. HMRC later on wrote to the taxpayers who had engaged in the Ingenious scheme, including Mr Rowe, warning them that they would shortly be issuing PPNs in respect of the partners’ loss claims. The PPNs were duly sent.

Mr Rowe’s first ground was that the issue of the PPN was outside the statutory purpose in FA 2014 because the aim of the legislation was to disincentivise the use of tax avoidance schemes, and the tax scheme implemented by Mr Rowe had been used before FA 2014. However, the court found that the object of the powers conferred on HMRC was to disincentivise other taxpayers from entering into such schemes. The court added that the power to issue accelerated payment notices (APNs) should only be available if the designated officer forms the view that the tax scheme does not work, ‘having diligently weighed up to the appropriate extent all the information available’. HMRC should therefore take a view on the effectiveness of a scheme before issuing an APN. 

The second issue was whether HMRC could fairly apply the APN/PPN regime retrospectively to those taxpayers who had entered into marketed tax schemes before the FA 2014 was enacted. The court found that the presumption against retrospectivity could be excluded by clear words. In any event, the issue of the APNs had not changed the taxpayers’ entitlement to claim losses; it had only created an obligation to make a payment on account.

The court also found that there had been no breach of natural justice, since taxpayers could make representations and HMRC had to consider the effectiveness of the scheme. Finally, the European Convention on Human Rights (Art 6) did not apply, as the issue of APNs did not involve the exercise of punitive powers.

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Why it matters: Rowe was the lead case for 81 taxpayers who had participated in schemes established by Ingenious Media PLC. The decision runs to some 231 paragraphs, thus covering in detail every possible argument against the validity of APNs – only some of which are summarised above. In particular, writing in Tax Journal (8 February 2018), Adam Craggs and Constantine Christofi (RPC) observed: ‘This decision, whilst confirming that HMRC was entitled to issue the notices, provides helpful clarification in relation to certain statutory requirements referred to in FA 2014, which must be satisfied before HMRC can issue an APN/PPN. In particular, for the purposes of FA 2014 s 220(3) and Sch 32 para 4(2), the designated officer must reasonably conclude on the information available to him that the underlying arrangements are ineffective and that the tax claimed will ultimately be found to be payable.

In another case on APNs/PPNs, The Queen (on the application of M Carlton and others) v HMRC [2018] EWHC 130 (30 January 2018), the High Court dismissed an application for judicial review of partner payment notices (PPNs).

The claimants contended that there was no evidence to support the conclusion that the claimants’ purpose in entering into the arrangements had been the obtaining of a tax advantage, so that FA 2014 Sch 32 para 3 condition B was not fulfilled. The court considered that condition B simply required an increase or reduction in the partnership’s statement of its return, which resulted in a tax advantage for the partners. In particular, the condition could not be read as importing the concept of taxpayer’s purpose contained in s 201(3). The condition was therefore fulfilled in this case; the qualifying expenditure had substantially reduced the partnerships’ statements leading to loss relief for the partners.

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Why it matters:  Rather worryingly for taxpayers, the High Court made it clear that Condition B focuses on the benefit to the taxpayer rather than on his purpose in entering the contentious arrangements. This is in line with the DOTAS legislation but this objective test is likely to be harsher for taxpayers.

4. Hicks: invalid discovery assessments

In J Hicks v HMRC [2018] UKFTT 22 (12 January 2018), the FTT found that discovery assessments were not valid.

HMRC had issued discovery assessments in relation to trading losses claimed by Mr Hicks, which resulted from arrangements devised by Montpelier.

The first issue was whether there had been a discovery by HMRC. Mr Hicks contended that the discovery had become stale by the time the assessment was issued. The inspector’s involvement had begun in January 2014, when HMRC was gathering information on the scheme in relation to three representative members (who did not include Mr Hicks). However, the assessment had only been issued in March 2015. The FTT found that the inspector had clearly ‘crossed the threshold’ of discovery in November 2014, when he had written to Mr Hicks informing him that he had concluded that the scheme was ineffective. In the view of the FTT, this nine months delay between the discovery and the assessment was acceptable.

Secondly, the FTT had to decide whether TMA 1970 s 29(5) was satisfied. The FTT observed that the information in Mr Hick’s return had included his participation in the scheme referred to by the scheme reference number. It had also showed a significant tax loss and a matching non-taxable receipt. All this had led HMRC to open an enquiry. The information made available to them before the closure of the enquiry window had included details of the dividend trades claimed to give rise to the loss; ‘reasonably extensive’ information in relation to the transactions implemented under the scheme; and information regarding the trading activities undertaken before the scheme trades by Mr Hicks in his regular financial trade. The FTT concluded that the hypothetical officer had sufficient information, at the time the enquiry window had closed, to establish an insufficiency of tax. This was particularly so as the central issues, which related to ICTA 1988 s 730 and trading, were not matters of great complexity.

Finally, the FTT found that it is not necessarily careless (for the purpose of TMA 1970 s 29(6)) to enter into a packaged tax avoidance scheme, even in the knowledge that HMRC might challenge the promoter’s interpretation of the legislation. The FTT also rejected HMRC’s argument that Mr Hicks had been careless to claim a loss in his 2010/11 return, when his 2009/10 return was under enquiry in relation to the scheme. In the view of the tribunal, at that time the enquiry into the 2009/10 return was still a ‘typical HMRC enquiry into a marketed tax scheme’.

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Why it matters:  The tribunal considered that ‘the practical effect of Sanderson  [2016] EWCA Civ 19 is to require the exercise to focus on the level of disclosure in any particular case, and the extent to which that disclosure arms the hypothetical officer with sufficient information to justify the making of an assessment’. This approach clearly helped the taxpayer in this case. Writing in Tax Journal (22 March 2018), Adam Craggs and Constantine Christofi (RPC) observed: ‘The tribunal postulated what many taxpayers would consider to be the key question to ask when considering whether sufficient information has been provided to HMRC, namely: “What more need I have disclosed to have placed the officer in a position to be justified in raising an assessment?” If the answer to that question is “virtually nothing”, then it is likely that HMRC will be prevented by s 29(5) from raising an assessment.’

5. Stadion Amsterdam CV: single supply with different rates

In Stadion Amsterdam CV v Staatssecretaris van Financiën (Case C-463/16) (18 January 2018), the CJEU found that a single supply, which included two individually priced elements, was taxable at the rate of the principal supply.

Stadion Amsterdam operates a multi-purpose building complex, known as the Arena, which includes the museum of the Ajax football club. It hires the stadium out to third parties as a venue for sports competitions and for performances by performing artists. It also offers visits to the Arena in the form of tours with an admission charge, which include admission (without a guide) to the museum.

The issue was whether, in circumstances where the tour of the Arena and admission to the museum formed a single supply (with a principal element and an ancillary one), but, if they had been provided as separate services, different VAT rates would have applied, VAT could be charged at two different rates.

Referring to its own case law, in particular Bog and others (Case C-497/09) and Baštová (Case C-432/15), the CJEU held that to subject the various elements of a single supply to the different rates of VAT applicable to those elements would mean artificially splitting that supply and risked distorting the functioning of the VAT system. The fact that the price of each element could be easily identified did not alter the analysis. To find otherwise would jeopardise the principle of fiscal neutrality as the VAT treatment would depend on whether a price apportionment is possible.

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Why it matters: Since French Undertakers (Case C-94/09) and Talacre (Case C-251/05), there has been much confusion as to the circumstances in which the different elements of a single supply can be taxed at different rates. This case confirms that the above two judgments apply in specific and narrow circumstances; the general rule remains that a single supply made up of several elements is taxable at the rate of the principal supply.

Writing in Tax Journal (2 March 2018), Lee Squires and Fiona Bantock (Hogan Lovells) observed: ‘Where a single supply, such as the one in this case, comprises two distinct elements – one principal and the other ancillary, which if supplied separately would be subject to different rates of VAT – the supply must be taxed solely at the rate of VAT applying to the single supply, based on the rate applicable to the principal element. That is the case even if the price of each element within the full price paid by the customer can be identified.’


Issue: 1393
Categories: Cases , cases , quarterly review