UK: Weekly Tax Update - Monday 04 July 2011

Last Updated: 6 July 2011
Article by Richard Mannion


1.1. Office of Tax Simplification – future projects

The Office of Tax Simplification has written to the Exchequer Secretary to the Treasury as follows:

"1. In your letter of 9 May, you asked the OTS to develop proposals for a range of further simplification reviews. As a result of consultations and meetings of our Board, the following are the areas we want to focus on:

  1. Pensioner taxation.
  2. Share schemes.
  3. A project to examine where and why "intense" complexity remains in the tax system.
  4. Small business taxation.

2. The first three projects are new and we will tackle them alongside the next stage of our review into small business taxation, which does of course include the work the Chancellor has already asked us to take forward.

3. The proposed projects reflect the lessons learnt from our first year and consultation with taxpayers, tax professionals and the many businesses that played such an important part in helping us to formulate our first two reports.

4. This list reflects the projects which we believe will deliver a real simplification dividend when judged against the following criteria:

  1. Benefit a significant number of taxpayers.
  2. Tackle legislative complexity.
  3. iii)Simplify and streamline administration.

5. Our new projects are:

  1. Pensioner taxation – where we would propose to look for ways of simplifying the tax system for the estimated 5.6 million people of pensionable age who pay tax. This area of taxation is widely acknowledged as causing too many problems for a group, some of whom are the least able to cope with them. The project would highlight policy changes capable of delivering to pensioners a much more straightforward way of dealing with their tax affairs, especially when they have small levels of income from multiple sources.
  2. Share schemes – this would be a two stage project. Initially looking at the scope for streamlining the over 6,000 approved share schemes, with over 1 million members, and then moving on to tackle the complexities inherent in the rules surrounding unapproved share schemes. Our consultations with business confirm that these schemes are a very complex area of the tax code with too many traps for the unwary, especially the HR departments that often have run such plans. There is also scope to use some of the methodology developed during our Reliefs project to see how well policy objectives are being met.
  3. Identifying complexity - During our first year we learnt a lot about where taxpayers, Parliament and commentators felt that future work should be conducted about continuing legislative and administrative complexity in the tax system. We recognise that to tackle all the issues that were raised with us is currently beyond our present resources. However we do believe that work should now be done to define and catalogue where the really "intense" forms of complexity are in the tax system. This exercise would be extremely valuable in helping to define the future long term priorities for the OTS whilst not deflecting us from projects with a shorter time scale.

6. I would confirm that in arriving at our proposals we have had constructive input from both HM Treasury and HMRC.

7. We have developed outline project plans and timescales and would be happy to share these with you.

8. Looking further ahead, we would like to review the whole field of employee benefits and expenses. Such a project has great potential to:

  1. Simplify rules for employers, making the system easier to operate.
  2. Make the tax code in this important area more logical and understandable for employees.
  3. Test how well the current rules encourage the behaviours that policies intend, and;
  4. review the need for rules to be modernised to meet current and future working patterns.

However, we do not think that now is the right time to conduct a thorough review in this area. For one thing, the Budget announcement to look at merging the operation of tax and NIC may well have an impact. It is also a potentially huge project that we would first like to do some scoping work on early in 2012.

9. Our letter to you in February also set out ideas for projects looking at harmonising definitions of terms across tax legislation and reviewing numerical thresholds across the tax system. We have discussed these subjects informally with a number of interested parties. The OTS Board's conclusion is that we should not rule out looking into them at some future stage, but do not feel they should be an immediate priority.

10. The project on identifying complexity would also contribute to developing our thinking with reference to employee benefits and harmonising definitions across the tax system.

11. We would very much welcome the chance to discuss these proposals more fully when we meet on 22nd June with a view to finalising our programme of work, for the rest of 2011/12. We hope you will feel able to concur with our proposals."


2.1. PAYE reconciliations

We have received the following note from HMRC:

"HMRC wants to let you know that it expects to start the PAYE end of year reconciliation process for 2010-11 in the second half of July.

This reconciles customer accounts by checking the PAYE tax deducted against their taxable income. The majority of customer accounts will reconcile as balanced (typically more than 80%). But where too much or too little tax has been paid, usually because a customer's circumstances have changed during the year, HMRC will send a tax calculation, on a form 'P800' to the customer.

This is the second time HMRC has used the automated end of year reconciliation functionality on the National Insurance and PAYE Service (NPS). Like last year, the start of the issue of the P800s follows extensive testing which has gone well.

Once the process starts HMRC will deal first with cases where the customer has paid too much tax. P800 tax calculations will start landing on doormats towards the end of July. HMRC hopes to complete this work by the end of September.

Tax calculations will be sent to customers with underpayments later in the year. HMRC expects to complete the work for customers where it holds all the relevant information by the end of December. This will allow time for customers to query or object to the calculation before the start of the 2012-13 annual coding programme. For most customers the underpayment will be included in the 2012-13 tax code. In cases of financial difficulty HMRC can make alternative payment arrangements.

You will recall that last year HMRC temporarily increased the £50 tolerance to £300 for 2008-09 and 2009- 10 because of the number of calculations expected to be produced and to best manage the process operationally. For 2010-11 the tolerance has reverted to £50. The return of the tolerance is a sign of restored service because there is no justification for a higher tolerance as there was last year. The tolerance will remain at £300 for the years 2007-08 to 2009-10.

HMRC is in a much better position on PAYE than last year and is starting the EoYR process several months earlier than in 2010. HMRC ran a successful annual coding exercise with a very high accuracy rate compared to the issues that arose in the previous year. They are more up to date in dealing with customer correspondence and contact centres are also providing a better service than this time last year."

2.2. Gifts of pre-eminent objects and works of art to the nation

The Government has published proposals for consultation on a new scheme to encourage people to donate pre-eminent objects or works of art to the nation. In return, donors will receive a reduction in their income tax and CGT liability, based on a set percentage of the value of the object they are donating. The Government is seeking views on a number of areas of detailed policy design for the scheme and welcomes submissions from all interested parties. The consultation runs until 21 September 2011.

The aim of this new scheme is to stimulate lifetime giving by encouraging taxpayers to donate pre-eminent objects, or collections of objects, to the nation. In return, donors will receive a reduction in their tax liability based on a set percentage of the value of the object they are donating. The Government anticipates that this new scheme will appeal to owners of objects and collections who want to see them placed in appropriate institutions during their lifetime, and to be held in perpetuity for others to enjoy. Importantly, donating the object to the nation will ensure that the object will remain within the UK, bolstering UK heritage. This approach will also provide the Government with the means to ensure that the objects are made available to the public and are maintained in good condition.

The new scheme will share some elements with the existing IHT Acceptance in Lieu (AIL) scheme which will continue to operate in parallel with this new scheme. The Government envisages that the existing AIL panel of experts will form the basis of the expert panel that will assess gifts made to the nation under the new scheme. Both schemes will share the annual limit that has been available to date for the existing IHT AIL scheme (currently set at £20m per year).

There are also some differences between the two schemes. Importantly, to qualify for a tax reduction under the new scheme, the object has to be first and foremost a gift to the nation. Also, while the existing IHT AIL scheme covers pre-eminent objects, land and buildings, the new scheme will be limited to pre-eminent objects only. Donors may already claim income tax relief or corporation tax relief on gifts to charities of land and buildings.

2.3. High risk areas of the tax code: Relief for income tax losses

HMRC has issued a consultation document covering relief for income tax losses.

The Budget announced the intention to strengthen the legislative framework in areas of the tax code that have repeatedly been subject to avoidance. HMRC is aware from disclosures under the Disclosure of Tax Avoidance Schemes (DOTAS) regime and other sources that, despite the changes to the legislation, avoidance arrangements purporting to provide income tax losses are still being used by a small but significant number of people and involve substantial amounts of tax.

These arrangements may insert artificial steps intended to circumvent the anti-avoidance rules in place or may rely upon a set of facts (for example, that persons work actively in a trade for at least 10 hours a week) disputed by HMRC.

HMRC believes that the current legislation is effective against the avoidance arrangements that are currently in use, but is concerned that new arrangements are continually being devised. Furthermore, it may be necessary to carry out a detailed investigation of the arrangements and the activities of individual taxpayers to resolve the loss claim and to take the case to litigation.

Spotlight 8 (8 February 2010) warned taxpayers that HMRC considers that tax avoidance arrangements intended to generate trade losses for use against general income or capital gains do not meet the commercial and other fundamental requirements for relief so that no relief is available.

The policy objective is to strike the appropriate balance between ensuring that genuine business losses and employment losses are relieved while effectively deterring taxpayers from entering into tax avoidance arrangements intended to exploit these loss reliefs.

The availability of sideways loss relief for deduction against general income or capital gains has led to it being regularly targeted by persons seeking to abuse the intention of the reliefs for tax avoidance purposes. This has resulted in the introduction of a significant number of restrictions both historically and in recent years:

  • general anti-avoidance rule preventing sideways relief where the main purpose of the arrangements is to obtain a tax advantage;
  • the trade must be carried on commercially with a view to the realisation of profits;
  • a cap of £25,000 on losses for non-active traders;
  • loss restricted to the capital contribution in the case of a partner.

HMRC's view is that the current restrictions provide a robust defence against tax avoidance and that arrangements entered into with the intention of exploiting sideways loss relief do not achieve the tax advantage sought. However, they say that the avoidance increasingly relies upon some element of misrepresentation or concealment of the facts, thereby, disguising tax avoidance as commercial activity and artificial losses as trade losses.

The consultation paper says that although the types of tax avoidance involving sideways loss relief vary in detail they all share the basic characteristic that the amount of loss relief claimed greatly exceeds the actual economic loss, if any, to the taxpayer concerned.

Typical features of tax avoidance activity intended to access sideways loss relief include:

  • a wealthy individual who derives most of their income from their day-to-day activities making an investment with a view to accessing losses for use as sideways loss relief against their general income and/or capital gains;
  • the individual having no real involvement in a business, but claiming to be trading either alone or in partnership on the basis that they have invested money in the business;
  • the structuring of an investment so as to put the investor at no risk of losing their money;
  • the supplementing of the investor's own money by loan finance, often notional or circular, so that the amount of loss claimed is substantially in excess of the amount of the individual's own money put at risk;
  • artificially created costs, expenditure not matched by taxable receipts, or assets and/or income located/diverted overseas.

In many cases, the individual taxpayer has no connection with, or expertise in, the type of activity supposedly generating the loss and has no involvement in the day-to-day running of the business. These individuals are subject to the maximum £25,000 cap on sideways loss relief that applies to "non-active" traders and limited partners. HMRC believe that this has led to non-active individuals claiming to be active on the basis that they undertake an activity loosely connected to that type of business for the required average of ten hours a week.

HMRC's view as set out in Spotlight 8 is that activities undertaken by these individuals, for example, reading scripts or medical journals, watching TV or DVDs etc. are not undertaken on a commercial basis with a view to a profit with the result that any trade loss would be subject to the sideways loss relief restrictions for nonactive traders and limited partners.

HMRC also has concerns about claims for losses arising in a property business atrtributable to a capital allowances or agricultural connection ("property loss relief against general income").

In addition HMRC is concerned about claims for employment losses. In the past such losses generally arose where the employee had a contract that made them liable for some of their employer's loss or an office holder was liable for expenses of the office. For example, a departmental manager may have been remunerated by a percentage of the profits of their department and responsible for a corresponding percentage of any losses, or a commercial traveller may have been liable for bad debts arising from orders obtained by them.

HMRC is aware of only a handful of legitimate claims made by employees in the past 45 years and none since the 1990s and suggests that with the introduction of national minimum wage for all employees except directors there is little likelihood of legitimate claims to the relief.

Legislation was introduced by Finance Act 2009 to counter losses arising on contrived employment arrangements, but HMRC is aware that tax avoiders continue to argue that these highly contrived arrangements involve valid claims to employment loss relief and that there is no tax avoidance purpose.

The consultation sets out a number of approaches that could be considered to achieve the policy objective of providing appropriate relief whilst deterring avoidance including:

  • Principle-based legislation, for example restricting the relief to the amount of the economic loss irrevocably suffered in the trade, profession, vocation, property business or employment.
  • Mechanistic rules, for example applying a £25,000 cap in any one tax year on losses that can be relieved against general income or capital gains.
  • Administration of the claims, for example no repayment or credit for claims for losses in a tax year in excess of £25,000 until a claim is agreed by HMRC.

2.4. Income tax loss schemes – Spotlight 8

We continue to see schemes offering tax loss relief for the last three years which rely on the individual demonstrating that they are personally engaged in the business for 10 hours a week on average. In this connection the latest consultation paper includes a timely reminder about Spotlight 8 issued by HMRC in February 2010 and which is reprinted below:

Spotlight 8: Investments to obtain trade loss reliefs ('sideways loss relief') (8 February 2010)

HM Revenue & Customs (HMRC) are aware of schemes seeking to exploit sideways loss relief by generating trade losses for individuals. Typically, a large loss is generated, either in partnership or alone, by accounting for the arrangement as a trade and either writing down the value of trading stock or claiming deductions or allowances for purported trading expenditure. Often these schemes are funded in part by borrowing and may include a mechanism that means repayment is guaranteed. The individuals claim the loss as sideways loss relief against their other tax liabilities. HMRC's view is that these schemes fail to meet the commercial and other fundamental requirements for sideways loss relief so that no relief is available to the participants.

In addition to not meeting the fundamental requirements for sideways loss relief, HMRC's view is that individuals participating in these schemes also do not meet the requirement that at least ten hours a week are spent personally engaged in commercial activities of the trade carried on with a view to earning profits from those activities. HMRC's view is that the activities which these schemes claim are sufficient to meet the test, for example reading scripts or medical journals, watching TV or DVDs etc, are not undertaken on a commercial basis with a view to profit with the result that any trade loss would be subject to the sideways loss relief restrictions for non-active traders.

For arrangements made on or after 21 October 2009 a general restriction will also apply preventing sideways loss relief for a loss arising to a person from a trade, profession or vocation where a main purpose of the arrangements is to obtain a reduction in tax liability.

Whenever arrangements have been entered into to obtain a tax reduction by way of sideways loss relief HMRC will actively challenge these arrangements and the activities of individual participants and litigate, if necessary. HMRC will also withhold repayments of tax resulting from claims to sideways loss relief in appropriate cases.


3.1. HMRC toolkit on business profits

HMRC has issued the expected toolkit on business profits.

3.2. Corporate Capital Gains and value shifting

Finance Bill 2011 introduced refinements to the Corporate Capital Gains rules in relation to value shifting (Sch9), degrouping charges (Sch10), and capital losses on a change of ownership (pre entry losses – Sch11). This note highlights some of the benefits of the new degrouping provisions and highlights a potential trap with the value shifting provisions.


The changes on degrouping charges helpfully treat the gain triggered on a degrouping as extra consideration for the vendor company on the disposal of its subsidiary with the asset subject to the degrouping charge. Thus where the subsidiary being sold qualifies for the substantial shareholdings exemption so that any gain on disposal is exempt from corporation tax, the degrouping charge will now also be exempt. There are also provisions for facilitating the incorporation of a division and access to the substantial shareholdings exemption with the SSE time limit for the new company being assessed with respect to the length of time the CGT assets (but not, currently, assets subject to the corporate intangible asset regime) subject to incorporation were used by the group. These Finance Bill 2011 provisions will generally have effect from the date of Royal Assent. However in relation to the changes to degrouping provisions it is possible to make an election for them to apply with effect from 1 April 2011. Further information can be found in briefing note 161.

Value Shifting

An area of reform that might have received less attention is the simplification of the value shifting rules. These were previously covered by TCGA s30-s34 and have been simplified by amending s30 and replacing s31-34 with a newly drafted s31. The simplification can result in some differences which could be adverse for some taxpayers. This is illustrated below:

Assume a corporate structure as illustrated, with Sellerco unable to take advantage of the substantial shareholding requirement. Assume Sellerco has transferred a valuable asset to Buyerco at a time when the market value of the asset was 100 and base cost was 40, and either received from Buyerco cash of 100 or Buyerco shares of 100. Assume Buyerco has been sold outside the group within six years of the transfer of the valuable asset, and either itself qualified for SSE, or the degrouping charge has been assessed. When considering the rationalisation of the group and assuming Sellerco is no longer required, the question now arises as to how to deal with its winding up. Options could include a dividend of reserves followed by either a return of share capital, or a recapitalisation to create nominal share capital and a further distributable reserve.

In considering the winding up one would need to consider the value shifting provisions, as the Sellerco's base cost to Topco is 40, but its value (assuming no further increase since the transaction with Buyerco) is 100.

Under the pre Finance Bill 2011 provisions the value shifting rules under the old TCGA s31 were triggered in the case of distributions within a group followed by a disposal of shares if three conditions were met:

  1. Sellerco had either: sold an asset subject to a s171 nil gain nil loss transfer; undertaken an exchange of shares treated as a re-organisation under s135 or 136; revalued an asset in its accounting records;
  2. during the period beginning with the transaction referred to at (i) and ending immediately before the event potentially triggering a TCGA s30 disposal (of investment in Sellerco), there was no disposal of the 'asset with enhanced value' (such as A in the diagram above) to any person other than a disposal to a group company meeting the requirements for s171(1), and no s179 charge had arisen in that period on the 'assets with enhanced value';
  3. immediately after the section 30 disposal the 'asset with enhanced value' (eg A in the above diagram) is owned by a person other than the person making that disposal (e.g. Topco in the above diagram) or a company associated with it.

Thus where Buyerco in the above example had been sold outside the group, condition (ii) above would not have been met, and the value shifting provisions would not have applied to the realisation of the value in Sellerco through winding it up.

Under the new rules the old s31 is replaced so that the value shifting provisions are triggered where three different conditions are met:

  1. arrangements have been made whereby the value of those shares or securities, or any relevant asset, is materially reduced,
  2. the main purpose, or one of the main purposes of the arrangements is to obtain a tax advantage, and
  3. the arrangements do not consist solely of the making of an exempt distribution.

The last of these conditions seems to indicate that the only possible arrangement that can occur to avoid the application of the value shifting rules is the making of an exempt distribution and example 1 included in HMRC's draft guidance ( The condition in (c) would be met for example where there are any other events apart from an exempt distribution (for example a capital reduction and distribution of the reserve created on reduction).

It might then be relevant to consider whether if Sellerco is wound up and its assets distributed this might meet the definition of a distribution. CTA10 1000 sets out the meaning of a distribution, which can include (at B) a distribution out of assets in the company except that which represents a repayment of share capital or is equal to any new consideration received by the dividend paying company for the distribution. However CTA10 s1002(2) and s1021 specify that in the case of Topco and its 100% subsidiary Sellerco this cannot amount to a distribution.

The result in the example highlighted above, unless Sellerco meets the conditions for substantial shareholdings exemption itself, there is a risk of the value shifting provisions being triggered to bring the increase in value of Sellerco over its cost into charge to corporation tax. This situation could arise where larger groups have undertaken corporate transactions, but for whatever reason, delayed the simplification of their corporate structures.

3.3. Controlled Foreign Companies Reform

HMT and HMRC have published a more detailed consultation document on extending the interim improvements to the regime already included in Finance Bill 2011. This consultation highlights the following main points:

  • The new CFC regime will adopt a proportionate approach (in contrast to an entity approach). Thus the regime will determine what proportion profits, if any, of the CFC represent profits artificially diverted from the UK and bring them fully into the UK tax net.
  • As currently, there will be a range of exemptions, but the proposals seek to modernise these to take account of modern business practices.
  • It is proposed the new CFC regime will apply to the new foreign branch exemption regime.

Basic definitions for coming within the regime

  • The definition of a controlled foreign company could have three options for approach: (i) principles based, (ii) accounting standards based, or (iii) a more mechanical approach.
  • Consideration is being given to options for increasing the deminimis limit. Option (i) increases the limit from £200,000 to £500,000, but places a limit on the amount of investment income to be included (say 10%). Option (ii) considers increasing the deminimis limit in line with group turnover, so that there would be a range from a lower limit of £200,000 to an upper exempt limit of £1m.
  • Reform of the excluded countries regime is being considered, with a preference for something designed along the lines of the existing excluded country regime. The lower level of tax will be based on the computation of UK taxable profits and assessed against tax actually paid overseas.
  • There are some points still to be resolved, including how dual resident companies are dealt with. There is a proposal to consider that US LLCs (which do not have a territory of residence) could meet the excluded countries exemption and territorial business exemption.
  • A temporary exemption period of up to 3 years is being considered for companies that are first brought within the CFC regime as a result of a commercial acquisition or re-organisation.

Specific exemptions

  • Specific exemptions will apply where CFCs can meet one of the following:
  • Territorial Business and Sector Specific Exemptions (TBEs). Three mechanical TBEs are proposed: (i) a profits rate safe harbour, (ii) a manufacturing trade safe harbour and (iii) a more general exemption for a CFC carrying on a commercial trade. In addition a principles based approach to exemption is also being considered – either as an alternative or a supplement to the mechanical exemptions.
  • A general purpose exemption (GPE): this will fulfill the same role as the existing motive test.
  • Specific exemptions could apply to certain overseas property investment and operating lease activities, and also to banking and insurance activities meeting certain requirements.

Monetary assets and intellectual property

  • The new regime will in particular target CFCs that in the Government's view pose a high risk to the UK tax base. These will include CFCs involved with:
  • Monetary assets. Recognising the move to a more territorial tax regime a finance company partial exemption system will be introduced to tax one quarter of the overseas finance income. Rather than focusing on balance sheet tests, the proposal is for an apportionment of either finance income or finance profit of the CFC (thus avoiding a debt equity ratio hurdle). There is also the suggestion that it may be possible to introduce a full exemption where profits are invested overseas and UK members of the group have no net borrowing costs. Along with partial exemption there will be a corresponding apportionment of the amount of applicable foreign tax credit that can frank any UK tax charge. There will need to be an appropriate level of local management and decision making in the CFC for the partial exemption to apply. As noted above, there will be an exemption for insurance and banking activities that meet certain criteria.
  • Intellectual Property. CFCs that hold IP as a passive investment which is more than incidental to their activities will be targeted, and there is guidance on how the government envisages it would target these activities. Consideration is also given to a tapering charge depending on the length of time since the IP left the UK.

The document also sets out the government's interpretation of how EU law interacts with the way it proposes to operate, and currently operates, the CFC rules, though whether the sentiments expressed are discernible from the legislation will require further review.

Responses and input to the consultation are requested by 22 September 2011, so that draft legislation can be issued in the autumn for consideration, with finalised legislation scheduled for Finance Bill 2012.

4. VAT

4.1. Input VAT recovery on corporate acquisition costs

The Upper Tribunal has overturned the First Tier Tribunal decision in the BAA case concerning input VAT recovery on corporate acquisition costs (see Informal of 15 Feb 2010 for coverage of the FTT decision, also reproduced below; the acronyms used for the summary of the Upper Tribunal are the same as those referred to at the First Tier).

While the Upper Tribunal concluded that ADIL undertook an economic activity, it found that the costs, the input VAT on which was subject to this dispute, had no direct and immediate link to any taxable supply made by ADIL and that therefore the First Tier Tribunal had erred in law in its conclusions.

The Upper Tribunal disagreed with the First Tier Tribunal's interpretation of the Faxworld case. In that case a partnership (Faxworld GbR) incurred VAT on costs in setting up a business which it was always intended would be carried on in corporate form (eventually through Faxworld AG and to whom the business and assets were transferred). The circumstances of that transaction can be closely compared to the UK's transfer of a going concern (TOGC) rules, so that it is understandable that to maintain tax neutrality for VAT purposes, the activities of the partnership and the company could be understood to be a continuing fiscal unity. The Upper Tribunal concluded the circumstances surrounding Faxworld could be distinguished from those surrounding ADIL and BAA, as BAA was already carrying on taxable activities both before and after ADIL became part of the group and the pre-acquisition costs incurred by ADIL did not change that fact.

The Upper Tribunal noted the conclusions of the First Tier Tribunal that there was no evidence to support the contention that ADIL had the intention of joining the BAA VAT group prior to completion of the BAA takeover. ADIL initially applied to submit further evidence as to its pre-completion intentions, but subsequently withdrew. As there was no evidence of any intention to join the BAA VAT group prior to completion, and as ADIL made no supplies to BAA prior to completion, The Upper Tribunal concluded there was no direct and immediate link between the input VAT incurred by ADIL and subsequent taxable supplies by the VAT group.

As the Upper Tribunal concluded ADIL had not made taxable supplies as a result of the costs which were subject to the disputed VAT, it concluded that there was no possibility of ADIL being able to rely on HMRC's 'discretionary' powers to permit pre-registration input VAT recovery (the input VAT had not been incurred on making subsequent taxable supplies).

The points to take away from this are that in order for there to be input VAT recovery on pre-acquisition costs, it is important to show a direct and immediate link between the taxable supplies actually made as a result of the acquisition. The Upper Tribunal commented that the acquisition of shares was a different matter to the acquisition of a business and assets, and that all share transactions should be treated similarly for VAT purposes, whatever the business of the acquired target company.

While reference was made to Floridienne SA and another v. Belgian State (Case 142/99) [2000] STC 1044 for the proposition that the making available of capital – for example, by advancing capital by way of interest bearing loans – is not of itself a taxable activity, there was no further comment by the Upper Tribunal on HMRC's contention that the First Tier Tribunal's less restrictive view of the provision of loan finance should have been directed to conclude that there was no taxable activity.

On the assumption that this decision is not appealed, those businesses making corporate acquisitions should very carefully examine their entitlement to input VAT recovery on costs associated with the acquisition of shares.

The summary of the First Tier Tribunal decision as reported in Informal of 15 Feb 2010

HMRC disputed the claim to input VAT recovery amounting to £6.7m by BAA plc. The disputed VAT related to residual input VAT claimed under of BAA's partial exemption method on costs incurred during the acquisition of BAA by Frerrovial, through a bid vehicle known as ADIL (Airport Development and Investments Limited – incorporated on 27 March 2006).

BAA plc became a wholly owned subsidiary of ADIL on 1 July 2006. ADIL had incurred acquisition costs in the period July to October 2006 the disputed amounts of which totalled around £38m (VAT after partial exemption being £6.7m). Once the acquisition was complete ADIL applied to join the BAA VAT group and was eventually admitted with effect from 22 September 2006. It is not clear from the case summary whether ADIL was registered for VAT before September 2006, but its intended business activity in the group was for supplies to other group members totalling around £100k annually and no supplies to members outside the VAT group. BAA's partial exemption special method permitted full recovery of input VAT on overhead costs. Any input VAT on costs incurred on services within 6 months of registration for VAT can be recovered provided they were incurred for the purposes of the business, and provided no sales have been supplied by the taxable person registering and provided the services were not performed on goods.

The majority of the disputed costs related to a £30m acquisition fee due to Macquarie bank which was part of a contract providing for £30m in respect of a successful acquisition and £20m in respect of successful funding negotiations for extended bank facilities. Despite the fact that ADIL intended to make sales within the group, no intragroup service invoices had been raised.

HMRC contended that the input VAT on disputed costs had been incurred solely on the acquisition of the business and not for any taxable supply made by the BAA group. In their opinion it was only once the acquisition was complete could the activities of ADIL be described as carrying on an economic activity where input VAT can be reclaimed on costs. They contended that there was no link between the activities pre and post the acquisition and that ADIL could not contemplate taking part in BAA's business until the acquisition was complete. The BAA VAT group contended that the VAT was incurred for the purpose of carrying on the airport business with ADIL acting in a strategic, governance and advisory capacity, including successfully negotiating further financing for the BAA group's future capital expenditure plans.

The Tribunal found that there was no distinction between the acquisition as an investment and the carrying on of the airport business by Ferrovial through ADIL. In particular HMRC's contention that the chain of events on which costs were incurred which could be carried through to relate to the business, was not broken once the acquisition was complete. Thus ADIL was held to be carrying on an economic activity. This was despite the fact that it did not actually make a taxable supply in its own right. Commenting that intragroup supplies were a non-event for VAT purposes, the Tribunal clarified that the principles outlined by the ECJ in the Faxworld case (C-137/02) entitled ADIL to take advantage of the taxable transactions of the BAA VAT group, and thus be regarded as a taxable person within the meaning of the Sixth Directive and entitled to recover input VAT as there was a direct and immediate link to the supplies of the BAA group as a whole.

While the BAA case concerned input VAT in connection with a business acquisition, it may be pertinent to also refer to the ECJ case of AB SKF (C-29/08) where it was held that input VAT connected with the disposal of a business could be reclaimed in line with the owner's input VAT recovery proportion, not withstanding that the disposal was of a wholly owned subsidiary (see informal 2 November 2009).


NTBN185 - IHT – How to avoid investigation

HMRC has increased its yield from IHT investigations. This note considers how to reduce the prospect of HMRC successfully challenging an IHT return.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Richard Mannion
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Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.