UK: Tax Update - 17 September 2012

Last Updated: 19 September 2012
Article by Smith & Williamson

1. General news

1.1. Autumn Statement

The Chancellor will make his Autumn Statement on Wednesday 5 December 2012 at 12.30pm.

1.2. Financing capital infrastructure - speech by the Chief Secretary to the Treasury

On 10 September the Chief Secretary to the Treasury the Right Honourable Danny Alexander MP, delivered a speech on financing capital infrastructure at the London Stock Exchange Centre forum. While there was acknowledgement of the receipt of many representations on this area and comment on progress on various infrastructure projects, there was no indication that capital allowances were being considered for extension to infrastructure projects that do not otherwise qualify.

www.hm-treasury.gov.uk/speech_cst_100912.htm

1.3. DOTAS

HMRC has updated its list of withdrawn DOTAS scheme reference numbers (SRNs) where there is no longer a duty to notify HMRC. The relevant extract is as follows:

Notices under S312(6) and S312A(4) FA 2004 - promoters and clients

Clients and parties who have received these SRN no longer have a duty to notify the SRN to HMRC on their tax returns or on form AAG4 from the date shown below.

From 4 November 2008: 38761513, 72309880, 97965110.

From 13 January 2009: 04770813.

From 18 November 2011: 83962302, 63617726, 37528580, 81010479, 03985775.

From 28 August 2012: 59985782.

Notices under S312A(4) FA 2004 - clients only

From the date shown below clients who have received these SRN no longer have a duty under S312A FA 2004 to notify the SRN to other parties to the arrangements. They still have a duty under S313 FA 2004 to notify the SRN to HMRC on their tax returns or on form AAG4 if they are themselves party to the arrangements.

From 9 December 2009: 41527653.

www.hmrc.gov.uk/aiu/srn.htm

2. Private Clients

2.1. Gift Aid Small Donations

Draft regulations under the Small Charitable Donations Bill, and a technical note have been published for consultation. The draft regulations set out the general administrative framework for the Gift Aid Small Donations Scheme, which is due to be introduced from 6 April 2013. Most of the draft regulations will apply the administrative provisions of the Taxes Acts that are used to administer Gift Aid claims.

Currently in order to qualify as a donation under Gift Aid, donors must give the charity or CASC a Gift Aid declaration, including their name and address. The new Scheme removes the requirement for charities to obtain a Gift Aid declaration from individual donors in order to claim a payment from HMRC. It applies to donations of £20 or less, up to an annual total of £5,000 of donations per charity. Removing the need for a Gift Aid declaration breaks the link between the donor's tax record and the payment to the charity and means that payments under the Scheme will be classified as public spending. This means the Scheme cannot be legislated through the annual Finance Bill process and use the tax code already in place, but must be legislated for separately. However the intention is that the new Scheme should be administered under a similar legislative framework to Gift Aid.

www.hmrc.gov.uk/drafts/small-donations.htm

www.hmrc.gov.uk/drafts/donations-regs.pdf

www.hmrc.gov.uk/drafts/donations-technote.pdf

2.2. HMRC High Net Worth unit brings in an extra £500m in tax

HMRC has issued a press release commenting that in 2011/12, the tax yield from the HNWU intervention work hit £200 million, up from £162 million in 2010/11 and £83 million in 2009-10. http://hmrc.presscentre.com/Press-Releases/Tax-targets-deliver-extra-500-million-67ff0.aspx

3. Business tax

3.1. Loss relief involving cross border issues

The group and consortium relief rules are now set out in CTA10 part 5. In relation to consortium relief the rules were changed following Finance (No 3) Act 2010 so that with effect for accounting periods beginning on or after 12 July 2010 if the link company in a consortium group relief claim is not UK related (a UK resident company or a UK trading PE of a non-UK resident company), it can be established in the EEA, provided it is a member of the same group of either the claimant company or surrendering company and that group relationship is not derived through a company not established in the EEA (see CTA10 s133 and s143A). This followed an announcement made in the March 2010 Budget to permit such relief, that also announced an intention to "ensure that access to Consortium Relief is given only in proper proportion to the member company's involvement in the consortium". These further changes did not resolve what some regarded as restrictions that continued to contravene the EU Treaty and introduced further rules that also do not appear to be fully EU compliant.

The FA(No 3) Act 2010 changes followed shortly after a First-tier Tribunal decision in the case of Philips Electronics UK Ltd ([2009] UKFTT 226) where that company succeeded in claiming for consortium relief for its share of the losses of a UK permanent establishment of a joint venture between a Dutch subsidiary of the Philips group and the LG Electronics Group between 2001 and 2004.

An appeal in November 2009 by HMRC against that decision, for a hearing in June 2010 at the Upper Tribunal, was cancelled as questions arising in the case were referred directly to the CJEU under case reference C-18/11. The questions referred to the CJEU considered the UK legislation applicable between 2001 and 2004, in particular the difference between the operation of ICTA s403D(1) and s403E(2). These provisions were introduced in Finance Act 2000 Sch27 and have now been re-written (largely unchanged) as CTA10 s107(6) and CTA10 s106(5).

There is a difference between the restriction on losses surrendered by a UK resident (CTA10 s106) and those surrendered by a non-UK resident (CTA10 s107). S106(5) indicates that where a person other than the surrendering company is able to use the loss in the overseas territory, then the UK relief will be restricted. S107(6) has a similar restriction but this applies if any person (including the surrendering company) is to use the loss overseas (not restricted to any territory).

The clear distinction here is that, as permitted by CTA10 s106(5), if a UK resident company incurring the overseas loss has no other related entities in the overseas territory who could use the overseas loss, then there is no restriction on the use of that loss elsewhere in the group. This enables the UK resident company to offset those overseas losses against its own profits (perhaps generated in the UK) or against profits of other group companies (wherever those profits were generated), provided the foreign losses could not be used by a related entity in the foreign territory.

For a non-UK resident company incurring a loss in a UK permanent establishment, however, a further restriction is placed on the use of those losses if the company which incurred the loss could use the UK branch losses itself (perhaps to offset against profits arising in its territory of residence). This is because CTA10 s107(6) (formerly ICTA s403D(1)) requires that the loss cannot be used by any company, including the company itself.

Concerning the use of overseas branch losses from an EU perspective, this creates an advantage for a UK company establishing branches in other EU countries, over EU companies establishing branches in the UK.

The decision of the CJEU in the Philips case (c-18/11, released on 6 September 2012) was fully in favour of the taxpayer, and directs the national court to disapply the national legislation which is contrary to the principle of freedom of establishment.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=126440&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=1732006

The First-tier Tribunal decision in this Philips case ([2009] UKFTT 226 (TC)) was released on 18 August 2009. Finance (No 3) Act 2010 did not change the legislation with respect to what is now CTA10 s106(5) and s107(6). In addition, whilst it did permit link companies in consortium relief claims to be located in other EU member states (amending CTA10 s133 and introducing new s134A), this change was not made retrospective (it only applies for accounting periods beginning on or after 12 July 2010). Furthermore the additional restriction in the Finance (No 3) Act 2010 placed on the link company, that it must be a member of the same group as either claimant or surrendering company where that group relationship is not established through a non-EEA established company, was not a part of the Philips case and also appears to be contrary to the principle of freedom of establishment. This is despite the fact that since 2000 it has been possible to establish a 75% group relationship for UK group relief purposes through a holding company without restriction on where that holding company is located. The restriction before 2000 was in any case held to be ineffective in the case of a US holding company and the application of the UK/US double tax treaty in the case of FCE Bank plc (see item 3.6 Informal 24 October 2010 and [2010] UKFTT 136 (TC)).

The issues have come up again in the case of claims for consortium relief by UK companies in the Hutchison Whampoa Group which has referred further questions to the CJEU, this time concerning what was ICTA s410 (now CTA10 s154-156).

There has been a further CJEU case considering the use of cross border losses, although this has not reached the decision stage yet. The Advocate General's opinion in the A Oy case (C-123/11) comments in relation to the M&S case and the balanced allocation of taxing rights, and calls into question the reasoning used in the M&S loss case (that there is a need to exhaust all possibility of using a loss in the foreign state before being able to use the loss against profits in other member states).

http://curia.europa.eu/juris/document/document.jsf?text=&docid=125201&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=1732047

The following extract from that opinion indicates the issues raised:

Applicability of the Marks & Spencer exception

49. However, the Court's case-law has continued to develop since Marks & Spencer. As I showed in my opinion in Philips Electronics, according to the later development of the case-law, the crucial factor for the justification is that the national legislation pursues the objective of preserving the allocation of the power to tax. (23) The objective of preventing the double use of losses is not an autonomous justification. (24)

50. The exception developed by the Court in Marks & Spencer is no longer appropriate for justifying the preservation of the allocation of the power to tax, that justification having in the meantime been recognised as independent. (25) With regard to preserving the allocation of taxation powers among the Member States it is immaterial whether there is a possibility of using losses in the Member State which has the power to tax a particular business activity. It is only relevant to which activity and, therefore, to which taxing power a loss belongs.

51. If the justification of preservation of the allocation of taxation powers among the Member States is taken as a criterion, this gives an entirely different perspective for assessing the need for a national measure. With regard to that justification, it is not a less restrictive measure if the Member State which does not have the right to tax has to take account of losses incurred under the taxing power of another Member State in a case where that possibility no longer exists there. In fact, in such a case, the objective of preserving the allocation of taxation powers is not achieved at all.

52. The further development of the significance of the justifications which were referred to in Marks & Spencer in parallel at first has therefore also altered the scope of the exception formulated in that judgment. That exception may now be referred to for examining the need for a national measure only if the prevention of the double use of losses is recognised as an independent justification. If, on the other hand, the justification is based on the allocation of taxation powers among the Member States alone, the development of the case-law means that the Marks and Spencer exception can no longer be applied.

53. That is the approach taken by the Court in its most recent judgment on the cross-border transfer of losses. Whereas in the X Holding judgment the Court based the justification solely on the objective of preserving the allocation of taxation powers, it was consistent in making no mention of the Marks & Spencer exception, although it considered at length the need for a national measure. (26) 54. Consequently the restriction of the freedom of establishment by refusing the transfer of foreign accumulated losses is necessary in view of the objective of preserving the allocation of taxation powers, and the question of whether it is still possible for the Swedish subsidiary to have its accumulated losses taken into account in its State of residence is irrelevant.

What implications does this have in relation to cross border loss relief?

We will need to await the CJEU decision in the A Oy case for further developments on the requirement to consider the 'no possibilities test' where there are overseas losses incurred by overseas subsidiaries. However for those companies affected by the Philips decision (where the UK legislation has been deemed to unfairly restrict the use of branch losses by foreign companies), and where other restrictions introduced by Finance (No3) Act 2010 restrict the ability to obtain effective relief, should be reconsidering their position and the potential for making protective claims.

3.2. Draft HMRC guidance for anti-avoidance rules on leasing

HMRC is currently updating the Business Leasing Manual to reflect changes to the leasing legislation. As part of this, it is introducing a new chapter to bring together the guidance on the anti-avoidance legislation that has been introduced from 2004 onwards; it alao seeks to make application of the current legislation clearer. It has therefore issued draft guidance on the changes, for comment by 31 December 2012.

www.hmrc.gov.uk/drafts/draft-rules-leasing.htm

3.3. New tax relief for North Sea brown field sites

The Chancellor of the Exchequer announced on 7 September a new tax measure aimed at supporting billions of pounds of new investment in older oil and gas fields in the North Sea. A tax allowance for certain mature fields, known as brown fields, will shield a portion of income from the Supplementary Charge, which the Givernment hopes will encourage companies to invest in getting the most out of existing fields and infrastructure in the UK Continental Shelf.

The Brown Field Allowance will shield up to £250m of income in qualifying brown field projects, or £500m for projects in fields paying Petroleum Revenue Tax, from the 32% Supplementary Charge rate (providing tax relief of up to £80m or £160m respectively). The level of relief available to an individual project will depend on its size and unit costs.

A qualifying project will be an incremental project increasing expected production from an offshore oil or gas field as described in a revised consent for development which is authorised by the Department of Energy and Climate Change (DECC) on or after 7 September 2012, and has verified expected capital costs per tonne of incremental reserves in excess of £60. The maximum level of allowance will be £50/tonne and will be available to projects with verified expected capital costs of £80/tonne or above.

www.hm-treasury.gov.uk/press_78_12.htm

4. VAT

4.1. Consultation on extending VAT exemption for Higher Education to services provided by 'for profit' enterprises

The EU VAT directive (article 132(1)(i)) provides for the following VAT exemption in relation to education:

"...the provision of children's or young people's education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects..."

This has been implemented into UK VAT legislation for the following entities (in note 1 to Group 6 of schedule 9 VATA):

b) a United Kingdom university, and any college, institution, school or hall of such a university;

c) an institution- i) falling within section 91(3)(a), (b) or (c) or section 91(5)(b) or (c) of the Further and Higher Education Act 1992; or

ii) which is a designated institution as defined in section 44(2) of the Further and Higher Education (Scotland) Act 1992; or

iii)managed by a board of management as defined in section 36(1) of the Further and Higher Education (Scotland) Act 1992; or

iv) to which grants are paid by the Department of Education for Northern Ireland under Article 66(2) of the Education and Libraries (Northern Ireland) Order 1986;

d) a public body of a description in Note (5) to Group 7 below;

e) a body which- i) is precluded from distributing and does not distribute any profit it makes; and

ii) applies any profits made from supplies of a description within this Group to the continuance or improvement of such supplies;

Note (5), Group 7 to Schedule 9 of the VAT Act 1994 says:

In item 9 "public body" means-

a) Government department within the meaning of section 41(6);

b) a local authority;

c) a body which acts under any enactment or instrument for public purposes and not for its own profit and which performs functions similar to those of a Government department or local authority.

Currently, the majority of for-profit providers of higher education (HE) do not qualify as eligible bodies and cannot exempt their HE courses in the way that universities and not-for-profit HE providers that are eligible bodies can. The consultation therefore seeks views on extending the exemption to this category to satisfy the UK Government's aim to facilitate a more diverse and competitive HE sector that offers greater student choice and is responsive to student demand.

Consultation responses are requested by 5 December 2012. Subject to review of responses, HMRC may carry out another consultation later in the year on the legislative wording for a specific proposal for reform depending on the outcome of this consultation. It therefore seems unlikely any possible changes would be included in Finance Bill 2013.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&columns=1&id=HMCE_PROD1_032304

5. Tax Publications

NTBN230 - Patent Box

This briefing note discusses the Patent Box regime effective from 1 April 2013 as introduced by Finance Act 2012.

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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