In Lloyds Bank Leasing (No. 1) v HMRC [2015] UKFTT 401 (14 August 2015), the FTT found that the obtaining of capital allowances had been one of the main objects of a transaction, so that tax relief was not available.
Lloyds Bank Leasing (LBL), a finance leasing company, had incurred nearly £200m in expenditure on the purchase of two ships. The issue was whether the main object, or one of the main objects, of the relevant transaction — which had included the letting of the ships — had been to obtain writing-down allowances. If this was the case, capital allowances should be denied under CAA 2001 s 123(4).
The FTT noted that the draftsman had not intended to confine the application of s 123(4) to those who enter into artificial or contrived arrangements, or to transactions with no other purpose than the securing of an allowance. It added that the subjective purpose of the 'shaper' of the transaction must be examined.
The FTT explained that in the paradigm case (a case which unambiguously falls under the common definition of the term), s 123(1) was intended to apply to a ship purchased outright by an established UK shipping company and leased to an overseas customer. The purpose of s 123(4) was to exclude from the benefit of the allowance those transactions which did not fall within the paradigm.
The FTT found that the evidence could only lead to the conclusion that the agreements were structured as they were not only for commercial reasons, but also in order that the requirements of s 123(1) should be met; therefore, the securing of the allowances was a main object of the transactions.
Why it matters: This decision is the latest instalment of a judicial saga which started in the FTT in 2011, before proceeding to the UT and the Court of Appeal, which remitted the case to the FTT. Criticising the drafting of s 123(4), the FTT pointed out that it was challenging to identify the dividing line between an object which, though not paramount, is a main object and between an object which is a subsidiary object. This case fell on the wrong side of the line, as capital allowances had been considered when structuring the transaction.
Tax Journal comment: ‘Here is a tax case in which it was agreed that the transactions had a ‘paramount’ commercial purpose, and yet the FTT (at its second attempt) held that a main object of ‘at least some of the transactions’ was to obtain capital allowances, and so those allowances would be denied’ (see ‘Lloyds Bank Leasing: the main objects test’ (Heather Self) Tax Journal, 11 September 2015).
In Anson v HMRC [2015] UKSC 44 (1 July), the Supreme Court found that a member of a US limited liability company (LLC) was eligible for double tax relief in the UK on his share of the profits.
Mr Anson was resident but not domiciled in the UK for UK tax purposes. He was liable to UK income tax on foreign income remitted to the UK.
He was a member of an LLC, which was classified as a partnership for US tax purposes. He was therefore liable to US federal and state taxes on his share of the profits. Mr Anson remitted the balance to the UK, and was therefore liable to UK income tax on the amounts remitted, subject to double tax relief.
HMRC considered that Mr Anson was not entitled to double tax relief, on the basis that the income which had been taxed in the US was not his income but that of the LLC. Mr Anson contended that, even assuming that US tax was charged on the profits of the LLC and that he was liable to UK tax only on distributions made out of those profits, the US and UK tax were nevertheless charged on 'the same profits or income', within the meaning of the UK/US double tax treaty. He also argued that, as a matter of UK tax law, he was liable to tax in the UK on his share of the profits of the trade carried on by the LLC, which was the same income as had been taxed in the US.
The Supreme Court rejected the first ground, noting that the context of the treaty and its history did not suggest such a wide approach to the concept of income. However, in relation to the second ground, it found that Mr Anson was entitled to the share of the profits allocated to him, rather than receiving a transfer of profits 'previously vested in the LLC'. His 'income arising' in the US was therefore his share of the profits, which was the income liable to tax both under US law and under UK law — to the extent that it was remitted to the UK. His liability to UK tax was therefore computed by reference to the same income as was taxed in the US and he qualified for double tax relief.
Why it matters: The classification of foreign entities and of the profits they generate continues to raise difficult questions. In this case, the FTT had found that the members of the LLC had an interest in the profits as they arose; therefore, the Supreme Court found that double tax relief was due. It remains to be seen whether HMRC will consider that this applies to all LLCs or only to a specific category of LLCs.
Tax Journal comment: Following this decision, HMRC published Revenue and Customs Brief 2015/15 on 25 September 2015. The brief confirms that HMRC will continue to treat US LLC’s as companies. This is on the basis that the decision was fact specific so that it does not need to be applied generally. The brief also explains that individuals relying on the decision in order to claim double tax relief will be considered on a case by case basis (see news, Tax Journal, 2 October 2015).
In Intelligent Managed Services v HMRC [2015] UKUT 341 (7 July), the UT found that the transfer of a business to a company which was part of a group, and which was to make supplies internal to the group, could qualify as a TOGC.
The appeal related to HMRC's decision that the transfer of Intelligent's (IMS's) banking support services business to Virgin Money (VM), a member of Virgin Money Group (VMG) VAT group, was not a 'transfer of a going concern' (TOGC).
Because VMG was a VAT group, it was treated as carrying on the VM business as part of its overall business of the provision of retail banking services, so that the banking engine services provided internally by VM to the group were incorporated into the broader retail banking services supplied by VMG to its customers. The question was whether this fiction, created by the VAT group rules, meant that VMG was not to be treated as using the assets transferred in carrying on the same kind of business as IMS.
The UT noted that it was necessary to have regard to all the circumstances in determining whether the transaction had been a mere transfer of assets, or a transfer of an undertaking which could carry on an independent economic activity. The UT held that the activities of VM contributed directly to the economic activity of the group as a whole; and that it would be wrong in principle to seek to identify the nature of the group's activity as a whole by reference solely to the external supplies it made. The fiction of the VAT group did not extend to treating the group as carrying on a different, amalgamated business, in which the separate businesses of the group lost their individual identity.
Why it matters: The FTT had found that there could not be a TOGC where the transferee was to be part of a VAT group and was to only make supplies to members of that group. The UT has now confirmed that the VAT fiction of a business carried out by a group does not extend to ignoring the fact that each group company carries on a separate business. It remains to be seen whether the decision will be appealed.
Tax Journal comment: ‘The UT decision is to be welcomed, as it should provide clearer guidance as to what is a TOGC, applying the CJEU case law, in particular Zita Modes, and should help to clarify the concept of TOGC going forwards, for the benefit of all of us, taxpayers, government, and tribunals and courts’ (see ‘VAT groups: an ‘Intelligent solution to TOGC issues?’ (Peter Mason) Tax Journal, 7 August 2015).
In Copthorn Holdings v HMRC [2015] UKFTT 405 (14 August), the FTT remitted the case to HMRC for it to reconsider yet again its policy on the retrospective inclusion of a company into a VAT group.
Copthorn was challenging HMRC's refusal to exercise its discretion, under VATA 1994 s 43B(4), to concede the retrospective inclusion of two group companies into its VAT group.
The dispute resulted from several errors made by various companies of the Copthorn group, as the result of which the group had suffered a forfeiture of a deduction for input tax in excess of £2m. The mistakes had been caused by frequent changes of staff and HMRC accepted that the group had never intentionally excluded the two companies from its VAT group. Indeed, Copthorn had mistakenly believed that the companies were part of the group.
In an earlier decision on the same matter ([2013] UKFTT 190), the FTT had found that the matter should be remitted to HMRC for further consideration. This was on the basis that the statutory power conferred on HMRC to backdate the inclusion of companies in a VAT group was a general and open discretion; therefore, it was wrong for HMRC to have publicised a policy (VAT Notice 700/2) that prescribed the only limited circumstances in which it would exercise this power, thus altogether precluding backdating in all other situations. Copthorn now complained that the very minor changes made by HMRC to its official policy had not improved matters.
Agreeing with Copthorn, the FTT decided to remit the matter to HMRC for the following reasons:
Why it matters: HMRC is in the embarrassing position of having to change its policy on retrospective inclusion in a group yet again. This time, the FTT has suggested that a distinction should be drawn between groups which simply 'change their minds' and those which have assumed that a particular company was a member of the group and have made all filings accordingly. Although retrospective inclusion should not apply in the first case, it should apply in the second. The FTT also recommended that HMRC 'pay some regard to fairness and common sense'.
Tax Journal comment: ‘A change in [HMRC’s] policy, generally to allow repair of situations where a group registration application has been omitted in error, but the behaviour was as if it had been made, would be a sensible change, falling well within the discretion which has been granted by Parliament’ (see ‘Copthorn and VAT group registration’ (Graham Elliott) Tax Journal, 11 September 2015.
In Nigel Rowe and others v HMRC [2015] EWHC 2293 (31 July), the High Court found that partner payment notices (PPNs) had been validly issued by HMRC.
The 154 claimants had all participated in Ingenious Media schemes, which HMRC alleges, were designed to generate tax losses. The claimants substantive appeals are being litigated in the FTT and HMRC has issued PPNs (under FA 2014 ss 219–229). The taxpayers contended that the PPNs were unlawful and of no effect for the following reasons:
The High Court found that the statutory scheme was not unfair, since the situation created by the PPN was only temporary. Furthermore, recipients of PPNs were afforded the opportunity to make representations; however, such representations could not extend to the merits of the substantive appeal as contended by the appellants.
The High Court also found that the PPN scheme operated regardless of the mechanics of the tax advantage. The offset loss claimed by the taxpayers therefore fell within the scope of the legislation.
Additionally, no legitimate expectation was established, in the absence of a well recognised practice by HMRC of making 'carry back' repayments. In any event, the new provisions expressly removed pre-existing rights.
The ground that HMRC's decision had been irrational also failed, on the basis that 'there is nothing wrong with a general rule that when the statutory criteria are met, the discretion will be exercised by issuing the notice, save in exceptional circumstances'. Furthermore, the requirement to pay tax which had been avoided for ten years through the implementation of a scheme did not amount to 'significant human suffering'.
Finally, the taxpayers' claim under their substantive appeal was not a property right for the purpose of ECHR; and art 6 did not apply when the state determined a person's liability to pay tax.
Why it matters: The taxpayers' arguments essentially challenged the legality of the advance payment statutory scheme itself. They were robustly rejected by a High Court, which reiterated the notion that taxpayers who engage in tax planning should make provision for the eventuality that the tax may become payable.
Tax Journal comment: Rowe is an important watershed. It provides an opportunity to consider whether the grounds of appeal should be refined. Should further information be requested from HMRC (as to the policy and decision making process for issuing notices)? Should claimants provide further evidence of their individual circumstances? Rowe underlines the importance of progressing enquiries and outstanding appeals to judgment or settlement. Will the new regime encourage HMRC to delay matters once the moneys are sitting in its bank account? (see ‘Rowe and accelerated payments’ (Michael Conlon QC and Julian Hickey) Tax Journal, 4 September 2015).
In Lloyds Bank Leasing (No. 1) v HMRC [2015] UKFTT 401 (14 August 2015), the FTT found that the obtaining of capital allowances had been one of the main objects of a transaction, so that tax relief was not available.
Lloyds Bank Leasing (LBL), a finance leasing company, had incurred nearly £200m in expenditure on the purchase of two ships. The issue was whether the main object, or one of the main objects, of the relevant transaction — which had included the letting of the ships — had been to obtain writing-down allowances. If this was the case, capital allowances should be denied under CAA 2001 s 123(4).
The FTT noted that the draftsman had not intended to confine the application of s 123(4) to those who enter into artificial or contrived arrangements, or to transactions with no other purpose than the securing of an allowance. It added that the subjective purpose of the 'shaper' of the transaction must be examined.
The FTT explained that in the paradigm case (a case which unambiguously falls under the common definition of the term), s 123(1) was intended to apply to a ship purchased outright by an established UK shipping company and leased to an overseas customer. The purpose of s 123(4) was to exclude from the benefit of the allowance those transactions which did not fall within the paradigm.
The FTT found that the evidence could only lead to the conclusion that the agreements were structured as they were not only for commercial reasons, but also in order that the requirements of s 123(1) should be met; therefore, the securing of the allowances was a main object of the transactions.
Why it matters: This decision is the latest instalment of a judicial saga which started in the FTT in 2011, before proceeding to the UT and the Court of Appeal, which remitted the case to the FTT. Criticising the drafting of s 123(4), the FTT pointed out that it was challenging to identify the dividing line between an object which, though not paramount, is a main object and between an object which is a subsidiary object. This case fell on the wrong side of the line, as capital allowances had been considered when structuring the transaction.
Tax Journal comment: ‘Here is a tax case in which it was agreed that the transactions had a ‘paramount’ commercial purpose, and yet the FTT (at its second attempt) held that a main object of ‘at least some of the transactions’ was to obtain capital allowances, and so those allowances would be denied’ (see ‘Lloyds Bank Leasing: the main objects test’ (Heather Self) Tax Journal, 11 September 2015).
In Anson v HMRC [2015] UKSC 44 (1 July), the Supreme Court found that a member of a US limited liability company (LLC) was eligible for double tax relief in the UK on his share of the profits.
Mr Anson was resident but not domiciled in the UK for UK tax purposes. He was liable to UK income tax on foreign income remitted to the UK.
He was a member of an LLC, which was classified as a partnership for US tax purposes. He was therefore liable to US federal and state taxes on his share of the profits. Mr Anson remitted the balance to the UK, and was therefore liable to UK income tax on the amounts remitted, subject to double tax relief.
HMRC considered that Mr Anson was not entitled to double tax relief, on the basis that the income which had been taxed in the US was not his income but that of the LLC. Mr Anson contended that, even assuming that US tax was charged on the profits of the LLC and that he was liable to UK tax only on distributions made out of those profits, the US and UK tax were nevertheless charged on 'the same profits or income', within the meaning of the UK/US double tax treaty. He also argued that, as a matter of UK tax law, he was liable to tax in the UK on his share of the profits of the trade carried on by the LLC, which was the same income as had been taxed in the US.
The Supreme Court rejected the first ground, noting that the context of the treaty and its history did not suggest such a wide approach to the concept of income. However, in relation to the second ground, it found that Mr Anson was entitled to the share of the profits allocated to him, rather than receiving a transfer of profits 'previously vested in the LLC'. His 'income arising' in the US was therefore his share of the profits, which was the income liable to tax both under US law and under UK law — to the extent that it was remitted to the UK. His liability to UK tax was therefore computed by reference to the same income as was taxed in the US and he qualified for double tax relief.
Why it matters: The classification of foreign entities and of the profits they generate continues to raise difficult questions. In this case, the FTT had found that the members of the LLC had an interest in the profits as they arose; therefore, the Supreme Court found that double tax relief was due. It remains to be seen whether HMRC will consider that this applies to all LLCs or only to a specific category of LLCs.
Tax Journal comment: Following this decision, HMRC published Revenue and Customs Brief 2015/15 on 25 September 2015. The brief confirms that HMRC will continue to treat US LLC’s as companies. This is on the basis that the decision was fact specific so that it does not need to be applied generally. The brief also explains that individuals relying on the decision in order to claim double tax relief will be considered on a case by case basis (see news, Tax Journal, 2 October 2015).
In Intelligent Managed Services v HMRC [2015] UKUT 341 (7 July), the UT found that the transfer of a business to a company which was part of a group, and which was to make supplies internal to the group, could qualify as a TOGC.
The appeal related to HMRC's decision that the transfer of Intelligent's (IMS's) banking support services business to Virgin Money (VM), a member of Virgin Money Group (VMG) VAT group, was not a 'transfer of a going concern' (TOGC).
Because VMG was a VAT group, it was treated as carrying on the VM business as part of its overall business of the provision of retail banking services, so that the banking engine services provided internally by VM to the group were incorporated into the broader retail banking services supplied by VMG to its customers. The question was whether this fiction, created by the VAT group rules, meant that VMG was not to be treated as using the assets transferred in carrying on the same kind of business as IMS.
The UT noted that it was necessary to have regard to all the circumstances in determining whether the transaction had been a mere transfer of assets, or a transfer of an undertaking which could carry on an independent economic activity. The UT held that the activities of VM contributed directly to the economic activity of the group as a whole; and that it would be wrong in principle to seek to identify the nature of the group's activity as a whole by reference solely to the external supplies it made. The fiction of the VAT group did not extend to treating the group as carrying on a different, amalgamated business, in which the separate businesses of the group lost their individual identity.
Why it matters: The FTT had found that there could not be a TOGC where the transferee was to be part of a VAT group and was to only make supplies to members of that group. The UT has now confirmed that the VAT fiction of a business carried out by a group does not extend to ignoring the fact that each group company carries on a separate business. It remains to be seen whether the decision will be appealed.
Tax Journal comment: ‘The UT decision is to be welcomed, as it should provide clearer guidance as to what is a TOGC, applying the CJEU case law, in particular Zita Modes, and should help to clarify the concept of TOGC going forwards, for the benefit of all of us, taxpayers, government, and tribunals and courts’ (see ‘VAT groups: an ‘Intelligent solution to TOGC issues?’ (Peter Mason) Tax Journal, 7 August 2015).
In Copthorn Holdings v HMRC [2015] UKFTT 405 (14 August), the FTT remitted the case to HMRC for it to reconsider yet again its policy on the retrospective inclusion of a company into a VAT group.
Copthorn was challenging HMRC's refusal to exercise its discretion, under VATA 1994 s 43B(4), to concede the retrospective inclusion of two group companies into its VAT group.
The dispute resulted from several errors made by various companies of the Copthorn group, as the result of which the group had suffered a forfeiture of a deduction for input tax in excess of £2m. The mistakes had been caused by frequent changes of staff and HMRC accepted that the group had never intentionally excluded the two companies from its VAT group. Indeed, Copthorn had mistakenly believed that the companies were part of the group.
In an earlier decision on the same matter ([2013] UKFTT 190), the FTT had found that the matter should be remitted to HMRC for further consideration. This was on the basis that the statutory power conferred on HMRC to backdate the inclusion of companies in a VAT group was a general and open discretion; therefore, it was wrong for HMRC to have publicised a policy (VAT Notice 700/2) that prescribed the only limited circumstances in which it would exercise this power, thus altogether precluding backdating in all other situations. Copthorn now complained that the very minor changes made by HMRC to its official policy had not improved matters.
Agreeing with Copthorn, the FTT decided to remit the matter to HMRC for the following reasons:
Why it matters: HMRC is in the embarrassing position of having to change its policy on retrospective inclusion in a group yet again. This time, the FTT has suggested that a distinction should be drawn between groups which simply 'change their minds' and those which have assumed that a particular company was a member of the group and have made all filings accordingly. Although retrospective inclusion should not apply in the first case, it should apply in the second. The FTT also recommended that HMRC 'pay some regard to fairness and common sense'.
Tax Journal comment: ‘A change in [HMRC’s] policy, generally to allow repair of situations where a group registration application has been omitted in error, but the behaviour was as if it had been made, would be a sensible change, falling well within the discretion which has been granted by Parliament’ (see ‘Copthorn and VAT group registration’ (Graham Elliott) Tax Journal, 11 September 2015.
In Nigel Rowe and others v HMRC [2015] EWHC 2293 (31 July), the High Court found that partner payment notices (PPNs) had been validly issued by HMRC.
The 154 claimants had all participated in Ingenious Media schemes, which HMRC alleges, were designed to generate tax losses. The claimants substantive appeals are being litigated in the FTT and HMRC has issued PPNs (under FA 2014 ss 219–229). The taxpayers contended that the PPNs were unlawful and of no effect for the following reasons:
The High Court found that the statutory scheme was not unfair, since the situation created by the PPN was only temporary. Furthermore, recipients of PPNs were afforded the opportunity to make representations; however, such representations could not extend to the merits of the substantive appeal as contended by the appellants.
The High Court also found that the PPN scheme operated regardless of the mechanics of the tax advantage. The offset loss claimed by the taxpayers therefore fell within the scope of the legislation.
Additionally, no legitimate expectation was established, in the absence of a well recognised practice by HMRC of making 'carry back' repayments. In any event, the new provisions expressly removed pre-existing rights.
The ground that HMRC's decision had been irrational also failed, on the basis that 'there is nothing wrong with a general rule that when the statutory criteria are met, the discretion will be exercised by issuing the notice, save in exceptional circumstances'. Furthermore, the requirement to pay tax which had been avoided for ten years through the implementation of a scheme did not amount to 'significant human suffering'.
Finally, the taxpayers' claim under their substantive appeal was not a property right for the purpose of ECHR; and art 6 did not apply when the state determined a person's liability to pay tax.
Why it matters: The taxpayers' arguments essentially challenged the legality of the advance payment statutory scheme itself. They were robustly rejected by a High Court, which reiterated the notion that taxpayers who engage in tax planning should make provision for the eventuality that the tax may become payable.
Tax Journal comment: Rowe is an important watershed. It provides an opportunity to consider whether the grounds of appeal should be refined. Should further information be requested from HMRC (as to the policy and decision making process for issuing notices)? Should claimants provide further evidence of their individual circumstances? Rowe underlines the importance of progressing enquiries and outstanding appeals to judgment or settlement. Will the new regime encourage HMRC to delay matters once the moneys are sitting in its bank account? (see ‘Rowe and accelerated payments’ (Michael Conlon QC and Julian Hickey) Tax Journal, 4 September 2015).
