Corporate activity continues to be very strong; Brexit uncertainty is affecting the structure and pace of some transactions. There is a lot of pressure to innovate a path around theoretical obstacles.
If you could make one change to a tax law or practice, what would it be?
I would like to see the ‘independence’ test in ITEPA 2003 Sch 5 adapted to make it easier for private-equity backed companies to grant EMI options. The policy justification would be to spread the benefits of entrepreneurs’ relief more consistently and fairly amongst the employees driving growth amongst mid-stage businesses backed by private equity.
How do you see multinationals addressing the challenges of the future?
The drive within BEPS towards greater international transparency has ushered in an era of ‘super-compliance’. This challenges MNEs to coordinate the collation and delivery of a huge amount of information. I think this will push for a greater than ever cooperation between accounting, tax and legal functions. This is all the more so because of the growth in unilateral measures pre-empting further collective action by OECD members and fellow travellers. I anticipate working ever more closely with colleagues in our transfer pricing and litigation and regulatory teams to assist clients in managing these issues.
Has a recent tax case caught your eye?
The decision of the FTT in Warshaw [2019] UKFTT 268. The FTT upheld the taxpayer’s argument that preference shares that paid a fixed rate per cent on both the subscription price and the aggregate unpaid dividend from previous periods were ‘ordinary share capital’ for the purposes of the entrepreneurs’ relief tests. As some sort of compounding of unpaid dividends is likely to represent commercial common sense, the FTT’s conclusion is unhelpful (but is not binding on other tribunals). The FTT appeared to accept the matter as difficult but was ultimately swayed by the argument that there should not just be a fixed rate per cent, but a fixed amount by reference to which it was computed. This was not possible if the unpaid accrual was not known. This suggests that it may be better for certainty to compulsorily roll up the entire coupon until redemption, in which case applying the same fixed rate could (presumably) have got the FTT over to HMRC’s side on the basis that the total fixed return could have been computed from ‘day one’. In any event, the variation of the dividend by reference to unpaid distributions appears to be of a different nature to the examples from case law referred to in argument. HMRC’s commentary (Corporation Tax Manual at CTM00514) now helpfully expresses doubt on the court’s reasoning, but it describes a situation where there is compounding or an interest rate added to unpaid dividends as ‘borderline’ in distinguishing between ordinary share capital from fixed rate preference shares. HMRC states: ‘If the rate is fixed and cumulative arguably the shares are not ordinary share capital as there is in the end nothing beyond a right to a return at a fixed rate, albeit that the coupon compounds’. However, if a ‘further’ (presumably ‘different’) fixed interest rate applies, HMRC indicates that the issue is whether the additional interest is seen as ‘a return on the original investment, which would support fixed rate. But if seen as a separate return on amounts outstanding there would be a right to two differing fixed rates, and the tiered dividends analysis would apply’.
What new developments are you looking out for?
There are plenty of things to keep ‘on the radar’, but two are: (1) the VAT reverse charge for construction services coming into effect on 1 October 2019; and (2) from April 2020 non-resident companies with income from UK property will stop being charged income tax and will be subject to corporation tax.
You may not know this about me but…
In 1985, whilst on an archaeological dig, I fell head first into a 15th century cess pit in northern France. Five hundred year’s composting made this less hazardous than it could have been.
Corporate activity continues to be very strong; Brexit uncertainty is affecting the structure and pace of some transactions. There is a lot of pressure to innovate a path around theoretical obstacles.
If you could make one change to a tax law or practice, what would it be?
I would like to see the ‘independence’ test in ITEPA 2003 Sch 5 adapted to make it easier for private-equity backed companies to grant EMI options. The policy justification would be to spread the benefits of entrepreneurs’ relief more consistently and fairly amongst the employees driving growth amongst mid-stage businesses backed by private equity.
How do you see multinationals addressing the challenges of the future?
The drive within BEPS towards greater international transparency has ushered in an era of ‘super-compliance’. This challenges MNEs to coordinate the collation and delivery of a huge amount of information. I think this will push for a greater than ever cooperation between accounting, tax and legal functions. This is all the more so because of the growth in unilateral measures pre-empting further collective action by OECD members and fellow travellers. I anticipate working ever more closely with colleagues in our transfer pricing and litigation and regulatory teams to assist clients in managing these issues.
Has a recent tax case caught your eye?
The decision of the FTT in Warshaw [2019] UKFTT 268. The FTT upheld the taxpayer’s argument that preference shares that paid a fixed rate per cent on both the subscription price and the aggregate unpaid dividend from previous periods were ‘ordinary share capital’ for the purposes of the entrepreneurs’ relief tests. As some sort of compounding of unpaid dividends is likely to represent commercial common sense, the FTT’s conclusion is unhelpful (but is not binding on other tribunals). The FTT appeared to accept the matter as difficult but was ultimately swayed by the argument that there should not just be a fixed rate per cent, but a fixed amount by reference to which it was computed. This was not possible if the unpaid accrual was not known. This suggests that it may be better for certainty to compulsorily roll up the entire coupon until redemption, in which case applying the same fixed rate could (presumably) have got the FTT over to HMRC’s side on the basis that the total fixed return could have been computed from ‘day one’. In any event, the variation of the dividend by reference to unpaid distributions appears to be of a different nature to the examples from case law referred to in argument. HMRC’s commentary (Corporation Tax Manual at CTM00514) now helpfully expresses doubt on the court’s reasoning, but it describes a situation where there is compounding or an interest rate added to unpaid dividends as ‘borderline’ in distinguishing between ordinary share capital from fixed rate preference shares. HMRC states: ‘If the rate is fixed and cumulative arguably the shares are not ordinary share capital as there is in the end nothing beyond a right to a return at a fixed rate, albeit that the coupon compounds’. However, if a ‘further’ (presumably ‘different’) fixed interest rate applies, HMRC indicates that the issue is whether the additional interest is seen as ‘a return on the original investment, which would support fixed rate. But if seen as a separate return on amounts outstanding there would be a right to two differing fixed rates, and the tiered dividends analysis would apply’.
What new developments are you looking out for?
There are plenty of things to keep ‘on the radar’, but two are: (1) the VAT reverse charge for construction services coming into effect on 1 October 2019; and (2) from April 2020 non-resident companies with income from UK property will stop being charged income tax and will be subject to corporation tax.
You may not know this about me but…
In 1985, whilst on an archaeological dig, I fell head first into a 15th century cess pit in northern France. Five hundred year’s composting made this less hazardous than it could have been.
