UK: Weekly Tax Update - Monday 17 October 2011

Last Updated: 20 October 2011
Article by Richard Mannion

1. Private Clients

1.1. Child Trust Fund Changes

Regulations have been laid to bring forward the expiry date of Child Trust Fund vouchers from 12 months to 60 days (for vouchers issued on or after 1 January 2012) and increase the annual subscription limit from £1,200 to £3,600 with effect from 1 November 2011.

The £3,600 corresponds with the annual subscription limit for Junior ISAs available from 1 November 2011 for those who do not have a Child Trust Fund.

2. Business tax

2.1. Entitlement to corporation tax loss relief on a change of ownership

This case concerned the taking over of a UK business by a Swiss company (Mindpearl AG) and entitlement to use brought forward losses of the trade taken over. The case was argued that EU treaty article 43 (restrictions on the freedom of establishment of nationals in another member state, now article 49 of the 2010 consolidated treaty on the functioning of the EU) applied, so that there should be equality between the provisions in ICTA s343 (now CTA10 s941) and ICTA s768 (now CTA10 s673) so that entitlement to loss relief on a change of ownership should be equal whether taking over shares in a company (where there is a 50% continuous ownership requirement) or taking over the activities of a business (where there is a 75% continuous ownership requirement).

Mindpearl AG (a 100% subsidiary of Swissair AG) took over the business of a German company operating a call centre for an alliance of airlines. The German company was owned to the extent of 40% by Swissair, 20% by Sabena, 20% by AOM Minerve SA ("AOM") and 20% by Transportes Aereos Portugueses SA ("TAP"). Swissair also owned 49.5% of Sabena and 49% of AOM, so its effective interest in the German company was 59.7%. The Tribunal concluded EU treaty article 43 did not apply as the claimant was a Swiss company and therefore dismissed the appeal. They also concluded that, as the rules on availability of brought forward losses on a change of ownership (whether through change of ownership of a business or a company) applied equally to companies whether they were UK or non UK based, this was not discriminatory and they found the difference between the treatment of companies and businesses (with respect to the 75% and 50% ownership requirements) difficult to regard as discriminatory.

2.2. EU Taxation Commissioner Semeta speech

In a speech on 11 October EU Commissioner Semeta discussed the European Commission's tax policy and main projects, commenting that:

  • In his opinion the time had come to move ahead with active and voluntary negotiations on the Common Consolidated Corporation Tax base (CCCTB).
  • He will shortly propose a strategy to address double taxation in the direct tax arena.
  • That following the green paper on the future of VAT, he will by the end of the year propose to the Commission broad objectives for the future of the VAT system and recommend that they pursue a number of concrete actions as a first step.
  • He will notably improve the communication channel between business, national tax authorities and the Commission and ensure easier access to information on VAT in the EU for businesses.
  • He foresees the use of environmental tax as an important factor in restructuring energy tax to assist the EU's goals with respect to climate change and energy policy and in achieving a shift away from the burden of taxes on labour.
  • He views the recently proposed financial transaction tax as complementary to other regulatory tools in working towards developing a safer financial environment for business and citizens in the EU. ge=EN&guiLanguage=en

2.3. OECD proposals for amendments to the permanent establishment article of the model treaty

The OECD has issued a consultation on proposed reforms to article 5 (permanent establishments) of the OECD model treaty. The proposals cover the following points:

  • The determination of whether a permanent establishment exists is to be determined independently of provisions that apply to profits derived by that enterprise. So for example the profits from a farm or apartment rental office (immovable property, covered by article 6) may or may not be associated with a permanent establishment in the same state.
  • Whether a permanent establishment is to be regarded as 'at the disposal of' a business is to be considered in the light of whether an enterprise can make use of a place to the extent and for the duration it chooses to pursue its own business plan and activities and at the exclusion of the resident enterprise if necessary. In the case of a computer consultant working at a client's premises for say a 20 month project that included preparation for and delivering training sessions (in rooms made available for that purpose), that would constitute a place of business at the disposal of the consultant.
  • The fact that a business in a country is converted from say a supplier to a contract manufacturer, does not on its own create a permanent establishment of the foreign establishment which it supplies.
  • Whether or not a home office constitutes a location at the disposal of the enterprise will depend on the facts and circumstances of each case. There is further text to illustrate the dividing line between what does and does not constitute a permanent establishment.
  • A ship or boat that navigates within territorial waters or in inland waterways is not fixed and does not, therefore, constitute a fixed place of business (unless the operation of the ship or boat is restricted to a particular area that has commercial and geographic coherence). Business activities carried on aboard such a ship or boat, such as a shop or restaurant, must be treated the same way.
  • The general rule is that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, i.e. if it is not of a purely temporary nature. A permanent establishment does not normally exist unless it is in existence for a minimum period of six months. The proposals introduce some examples of exceptions which include: (i) An individual resident of State R rents a stand at a commercial fair in State S for 15 consecutive years where he sells sculptures during a period of five weeks each year. In that case, it could be considered that the time requirement for a permanent establishment is met due to the recurring nature of the activity regardless of the fact that any consecutive presence lasts less than 6 months; (ii) where an individual associated with film production sets up a restaurant facility (for example at a property which is at their disposal) in a foreign country for the duration of a filming project, that restaurant is situated in the country for the whole of that business's life. It will therefore constitute a permanent establishment even if for less than six months. However where a company which is a resident of State R and which operates various catering facilities in State R would operate a cafeteria in State S during a four week international sports event, that is a temporary establishment in State S.
  • Further text is to be added to clarify that where a foreign enterprise's personnel are temporarily seconded to a subsidiary in another state, clearly to work on the business of the subsidiary in that other state, but for administrative reasons the employment contract is not changed, the foreign enterprise should not be considered to be carrying on its own business at the location where these individuals will perform that work.

Other proposals put forward cover the following issues:

  • Main contractor who subcontracts all aspects of a contract
  • Application of paragraph 3 to joint venture and partnership activities (whilst members of a partnership would each have a permanent establishment if the partnership had one, the situation would be different in the case of a true joint venture that did not constitute a partnership.)
  • Meaning of place of management
  • Additional work on a construction site
  • Must the activities referred to in paragraph 4 be of a preparatory or auxiliary nature?
  • Relationship between delivery and the sale of goods in subparagraph 4 (a)
  • Does a development property constitute a PE? (An enterprise acquiring the use of facilities for storing, displaying or delivering its own goods or merchandise does not as a result of that fact alone create a permanent establishment if it is maintained for the purpose of storage, display or delivery. However this does not apply to goods or merchandise which comprise real property or data)
  • Do goods or merchandise cover digital products or data?
  • Carrying on various activities listed alternatively in subparagraphs 4 (a) and (b)
  • Negotiation of import contracts as an activity of a preparatory or auxiliary activity
  • Fragmentation of activities
  • Meaning of 'to conclude contracts in the name of the enterprise'
  • Is paragraph 5 restricted to situations where sales are concluded?
  • Does paragraph 6 apply only to agents who do not conclude contracts in the name of their principal?
  • Assumption of entrepreneurial risk as a factor indicating independence
  • Activities of fund managers (the European Venture Capital Association put forward a request for clarification on when certain fund activities constituted a permanent establishment. It was agreed each case was very dependent on particular facts and circumstances, but the consultation contains some further guidance using an analysis of the application of the concepts of 'enterprise of a Contracting State' and 'permanent establishment' in the case of a venture capital fund set up as a limited partnership
  • Clarification of paragraph 8 of the Commentary on Article 5
  • Activities of insurance agents.

2.4. Updates to HMRC Corporate Finance manual and debt/equity swaps

HMRC recently updated its corporate finance manual for the following:

  • Clarification that trade 'bad debts' are within the loan relationships rules.
  • Guidance updated for Corporation Tax Act 2010.
  • New guidance on debt/equity swaps (CFM33204).
  • Paragraph added (to CFM35810) on amounts disallowed subsequently written off.
  • Clarification of the definition of 'financial institution'.
  • Further details of what an application to reduce the chargeable profits of a CFC should include (CFM93050).

In relation to the new guidance on debt/equity swaps, the guidance formerly at CFM33200-33202 (last amended on 16 July 2010) has now been amended to cover CFM33200 – 33204 (new pages 33203 and 33204). The guidance covers situations where CTA09 s322 (4) applies, when no credits need to be brought into account under the loan relationship regime on the release of a debit where the release is in exchange for equity.

The previous guidance commented:

This does not mean, however, that a release of debt merely needs to be accompanied by an issue of shares in order to come within the exemption. The legislation requires that the release is 'in consideration of shares'. It will not apply if, on the facts, the creditor has no interest in being a shareholder in the debtor company and is releasing the debt gratuitously, with shares being issued merely to obtain a tax advantage for the debtor company - see examples below.

Whether or not a debt has been released in consideration of shares will depend on the facts in any particular case. HMRC staff should not argue that S322(4) does not apply solely because there is a wide disparity between the debt released and the market value of the shares that are issued, although exceptionally there may be other facts that point to part of the debt having been released for no consideration.

The updated guidance now comments:

In the majority of cases, there will be no doubt that a debt/equity swap that forms part of a commercial debt restructuring, undertaken as an arm's length transaction, will fall within the exemption in CTA09/S322(4).

There is no requirement for the shares issued by the debtor company to be held for any particular length of time. Indeed, regulatory capital requirements may lead a bank to sell on the shares received as part of a debt/equity swap.

Commonly any on-sale of the shares will be to an unconnected third party. On the other hand there may, for example, be arrangements (contractual or other) in place for the lender to divest itself immediately of the shares to a company connected with the borrower for nominal consideration. If so, the consideration the lender receives may be the cash it gets, not the shares; the release of the debt may be entirely gratuitous and a realistic view of the transaction may be that the shares are issued merely to obtain a tax advantage for the debtor company.

A new example is added (the examples are on CFM33203 instead of CFM33202) to indicate a situation where HMRC would consider the lender had no real interest in becoming a shareholder and the release would therefore be taxable for the borrower. This might occur where the lender enters into arrangements to immediately sell the shares back to a person connected with the borrower.

It is understood the revised guidance sets out what HMRC have been approving in clearances concerning the application of CTA09 s322.

3. VAT

3.1. Letting of storage units

The First Tier Tribunal has heard another case concerning the VAT treatment of storage units. This case concerned UK Storage Company (SW) Ltd, which entered into contracts with customers whereby the customer had access to a storage unit (consisting of steel cladding with a roller door that was assembled as a unit on site and slotted into a concrete base by lifting and dropping the unit into place using a vehicle with a telescopic boom). Although the units were moveable and the contract was structured so as to be a licence rather than a lease, the overall nature of the supply might be regarded as the entitlement to use storage facilities on land for an agreed term. In common with other storage providers there was a term in the contract which indicated UK Storage Company (SW) Ltd would have the right to require the customer to move his stored items to a new unit.

HMRC initially asked for the case to be stood over pending the outcome of an appeal to the Upper Tribunal in the case of David Finnamore trading as Hambridge Storage Services (Tax Update 9 May 2011). HMRC's appeal was lodged on 5 July 2011. This is outside the normal 56 day time limit (the First Tier Tribunal decision was released on 2 February 2011) and so HMRC would have to apply for permission to extend the time limit and show good grounds for doing so. The stand-over action was refused and the Tribunal heard the case.

HMRC contended that the units were not immovable property as they could be easily moved and the contract did not guarantee exclusive possession of the land for the period of the contract. In the event that the company was engaged in the letting of immovable property HMRC contended that this was only one element of a composite supply which would need to broken down for VAT purposes.

The taxpayer contended that the storage units were a building forming part of the land within the meaning of the EU VAT directive and that the customer did effectively have exclusive use of the unit through the licence and that therefore the contract was a grant of an interest or right in or over land for VAT purposes and therefore VAT exempt in the absence of an option to tax.

The Tribunal concluded that the storage units could be regarded as much more permanent and immovable than the units in the case of David Finnamore and taking account of all the circumstances could be considered as immovable property. They considered the main reason for the clause in the contract providing that the company could require the customer to move units was to prevent the customer establishing that he had a lease, rather than any substantive need to move customers to different units. They also concluded that the essential feature of the transaction was a single supply of a licence to occupy, rather than a combination of separate services the customer was looking for. They therefore concluded the supply was an exempt supply of land and allowed the appeal.

3.2. Partial exemption special method and hire purchase transactions

The dispute between Volkswagen Financial Services (UK) Limited ("VWFS") and HMRC concerns what is a fair and reasonable apportionment of residual input tax on costs incurred by VWFS in a particular sector of its business, the Retail sector, which is one of a number of sectors included in VWFS's approved partial exemption special method ("PESM"). Specifically, the dispute relates to the recovery of residual input tax in respect of hire purchase transactions which, it was accepted, involved both a taxable supply of the vehicle being financed, and an exempt supply of finance.

VWFS's preferred methodology was to quantify the ratio of taxable transactions to total transactions, counting every HP agreement as two transactions (one taxable, one exempt), every leasing transaction as two transactions (both taxable) and every fixed price service and maintenance contract as one (taxable) transaction. On this basis, 50% of the residual input tax referable to HP transactions is recoverable.

HMRCs preferred method was to allocate input tax between HP transactions, leasing transactions and service and maintenance contracts on a contract count basis and then to apportion the tax using the value of taxable and exempt outputs in each sub-sector. In relation to HP transactions, however, no account was taken of the value of the vehicle. This substantially eliminated the taxable value of the HP transactions, and resulted in most of the residual input tax apportioned to those transactions being irrecoverable.

The Tribunal concluded that a partial exemption special method that provides for the partial attribution of the residual input tax incurred by VWFS to the taxable supplies of vehicles that it makes available under the HP transactions is fair and reasonable, whereas one that does not so provide is not fair and reasonable. As this was the only dispute on the methodology adopted by VWFS, it followed that the Tribunal decided that VWFS's methodology was fair and reasonable, and HMRC's proposed methodology was not.

3.3. Place of supply and business establishment

The Court of Justice of the European Union has clarified that in relation to supplies of staff to business customers established in the EU (but in another country to the supplier) or to any customer located outside the EU, where a person has established the seat of his economic activity in country A from which he is supplying the staff, that is sufficient for him to establish that he does not have a taxable presence in country B. The place of personal residence of the taxable individual would only be relevant if there was no link between the economic activity of the supply of staff and the business establishment of the taxable person.

The case concerned a businessman who relocated his personal residence and business to Austria. While he operated the business from Austria and was VAT registered there, as a matter of fact it was found that he was personally resident in Germany. The business activity was the supply of staff to German customers to perform transport services throughout Germany. Under the EU VAT directive the place of supply of these services in the case of cross border supplies to business customers is the place where the services are consumed, and therefore the business customers in this instance needed to account for VAT using the reverse charge procedure. The German authorities had attempted to assess the owner of the supplying business for the VAT, contending that he should have been VAT registered in Germany as a result of his personal residence in the year in question.

The place of supply of staff would be covered by the general VAT rule now set out in the articles 43 and 44 of the EU VAT directive. The case is of interest for the interpretation of the place of establishment of a business. Guidance now applicable on this concept is set out in EU regulations 282/2011, and at article 10 this is described as follows:

The place where the business of a taxable person is established shall be the place where the functions of the business's central administration are carried out. In order to determine the place [where a taxable person is established] account shall be taken of the place where essential decisions concerning the general management of the business are taken, the place where the registered office of the business is located and the place where management meets. Where these criteria do not allow the place of establishment of a business to be determined with certainty, the place where essential decisions concerning the general management of the business are taken shall take precedence. The mere presence of a postal address may not be taken to be the place of establishment of a business of a taxable person. 421/10&nomusuel=&docnodecision=docnodecision&allcommjo=allcommjo&affint=affint&affclose=affclose &alldocrec=alldocrec&docdecision=docdecision&docor=docor&docav=docav&docsom=docsom&docinf=do cinf&alldocnorec=alldocnorec&docnoor=docnoor&docppoag=docppoag&radtypeord=on&newform=newfor m&docj=docj&docop=docop&docnoj=docnoj&typeord=ALL&domaine=&mots=&resmax=100&Submit=Re chercher

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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