UK: Weekly Tax Update - Monday 22 July 2013

Last Updated: 31 July 2013
Article by Smith & Williamson


1.1 Finance Act 2013

Finance Bill 2013 received Royal Assent on 17 July 2013. The Act can be found at:

1.2 DOTAS: Draft Regulations to include ATED schemes

Finance Act adds ATED to the list of Taxes covered by DOTAS. HMRC has now published draft regulations setting out the types of ATED arrangements to be disclosed to HMRC.

If implemented as drafted the regulation will apply from 1 October 2013. There are transitional rules for arrangements arising between 13 December 2012 and 30 September 2013. Certain arrangements are excluded from the need for disclosure and these are where:

  1. the transferor and transferee are not connected persons, and the transfer is on arm's length terms;
  2. the transferor and the transferee are members of the same group of companies, the transfer is on arm's length terms and the transferee meets the ownership condition;
  3. the transfer constitutes a company distribution, and the transferee is an individual, a corporation sole or a person who meets the ownership condition; or
  4. the transfer constitutes a settlement.

The arrangements are prescribed (disclosable) if they do not comprise excluded arrangements under the Schedule to these Regulations and as a result of the arrangements, or any element of the arrangements—

  1. a company, partnership or collective investment scheme ceases to meet the ownership condition in respect to the chargeable interest;
  2. the taxable value of the chargeable interest is reduced to £2 million or less; or
  3. the taxable value of the chargeable interest is reduced with the consequence that the chargeable interest falls within a lower tax band than it otherwise would.

1.3 DOTAS: Draft Regulations concerning confidentiality and employment income hallmarks

HMRC has issued a response document to its earlier consultation (Lifting the Lid on Tax Avoidance Schemes) and included a draft regulation for further consultation.

In relation to the confidentiality hallmark, the test of confidentiality from HMRC will be whether "it might reasonably be expected that a promoter would...wish to keep the way in which any element of these arrangements (including the way in which arrangements are structured) that secures, or might secure, the tax advantage confidential from HMRC". The hallmark will apply whether or not there are specific conditions of confidentiality on the client.

When applying this test the promoter should first consider its own position and if it concludes that it would want to keep the arrangement confidential from HMRC then the arrangement is within the hallmark. If the promoter concludes that it does not want to keep the arrangement confidential from HMRC then it needs to consider whether it might reasonably be expected that another promoter would wish to keep the arrangement confidential.

The document also proposes a new hallmark for disguised remuneration arrangements. Arrangements will be disclosable if the statutory conditions are met where:

  • the arrangements are intended to circumvent Part 7A; and
  • none of the Part 7A exclusions is in point.

Further details can be found in the consultation document. If implemented as drafted it will come into force on 1 October 2013. Responses to the consultation are requested by 28 August 2013.

1.4 Sharing and publishing data for public benefit

HMRC has published a consultation paper on sharing and publishing data for public benefit. The introduction by David Gauke is copied below:

"The data held by the public sector is among the most useful and valuable anywhere. This is why the UK Government is at the forefront in making a step change in the availability of data held by the public sector, with the potential to deliver significant public benefits.

Last month, the Government took two major steps towards realising these benefits. First, the Government published its response to the Shakespeare Review of Public Sector Information, setting out a framework for pursuing this agenda in the public sector. Secondly, the UK helped secure the G8's Open Data Charter, which presumes that the data held by Governments will be publicly available unless there is good reason to withhold it.

It is important that HMRC plays a full part. HMRC`s relationship with businesses and individuals is unique, and this is reflected in the scope and depth of the information HMRC collects, creates and protects on behalf of taxpayers.

HMRC operates under a strict legislative framework that limits data sharing. This provides all of us with the assurance that our information will be protected, essential to the effective operation of the tax system.

There are, however, potential uses of HMRC data which could generate public benefits without compromising the core principle of taxpayer confidentiality. This consultation brings forward three options:

  • wider sharing of aggregated and anonymised tax data, for example, for the purposes of research or policy development;
  • release of basic non-financial VAT registration data as public data; and
  • sharing more detailed VAT registration data on a more restricted and controlled basis for specific purposes, such as credit referencing.

There are potentially significant benefits, including: improving policy making across government; supporting the Government's transparency and growth objectives by helping improve access to credit for business; and making it easier to protect against fraud. VAT registration data could also provide a foundation for private sector business registers. There are likely to be further positive uses which emerge only once the data is available.

But it is paramount that any data release has appropriate safeguards, essential to maintaining taxpayer confidence and protecting HMRC's reputation. None of the proposals introduced in this consultation proposes release of individual taxpayers' financial or tax payment data.

The Government will reflect on responses to this consultation when deciding whether - and, if so, how - to take forward the proposals. Should the Government do so, legislation would be required, with further opportunity for public and Parliamentary scrutiny.

This consultation explores important issues of how publicly-held data should be used and how HMRC should undertake its public functions. I welcome it and would encourage all interested parties to participate."


2.1 ISA: Qualifying investments for a stocks and shares component

The Statutory Instrument enabling a wider scope of holding within an ISA was laid before the House of Commons on 12 July and comes into force on 5 August 2013.

5) In regulation 7 (qualifying investments for a stocks and shares component)—

  1. in paragraph (2)(a)(ii) for the words "officially listed on a recognised stock exchange, and" substitute "either officially listed on a recognised stock exchange or, in the European Economic Area, admitted to trading on a recognised stock exchange, and",
  2. in paragraph (3) before "if" insert ", or the condition as to admission to trading in paragraph (2)(a),",
  3. in paragraph (3)(a)—

    1. before "within" insert "or admitted to such trading",
    2. before "would be qualifying investments" insert "or trading".

Regulation 5 amends regulation 7 of the Regulations to include as qualifying investments, shares in a company which are admitted to trading on a recognised stock exchange in the European Economic Area.

2.2 Consultation on transfer of assets abroad

HMRC has published a consultation on further changes to the transfer of assets abroad legislation. This includes further responses to the July 2011 consultation (further to those published on 11 December 2012) and proposals for greater certainty on how benefits provided to a UK resident person are matched to relevant income of a person abroad,

The Government accepts that the current rules can give rise to uncertainty and that legislation now enacted in Finance Act 2013, while providing greater certainty, may not provide an equitable result in some cases. The Government, therefore, proposes to set up a working party comprising of HMRC and external volunteers to discuss the concerns raised and develop detailed options for reform. The Government anticipates that any legislative reforms arising from the working party would be introduced by Parliament within the Finance Bill in 2014 [with draft legislation published later this year].

Options for reform include:

  • Amend the December 2012 draft legislation;
  • Provide greater clarity and certainty through guidance;
  • Amend the current legislation (the legislation in force prior to FA2013);
  • Introduce a new set of matching rules.

Responses are requested by 10 October 2013.


3.1 Draft National Insurance Contributions Bill

HMRC has published a policy paper setting out the draft National Insurance Contributions Bill.

The measures contained in the Bill include a general anti-abuse rule, provisions to make offshore employment intermediaries liable to NICs, changes to partnership tax arrangements in relation to National Insurance contributions and four other changes.

3.2 Late P11D submissions: problems with new online service

Employers who have been unable to submit forms P11D, P11D(b) and P9D due to problems with the new online service should submit their forms as soon as possible. If they do this before 4 August 2013 but are then issued with a penalty notice they should write to HM Revenue & Customs (HMRC), at the address below, and appeal, explaining that they tried to file on time but experienced problems with the new online service.

Write to HMRC at:

Customer Operations Employer Office
Room BP4009
Chillingham House
Benton Park View
Newcastle Upon Tyne
NE98 1

If HMRC is satisfied the employer experienced problems with the new service and the forms are filed before 4 August 2013, the penalties will then be cancelled but only after a written request has been received. HMRC cannot cancel penalty notices over the telephone.

3.3 RTI update – payment and filing

HMRC has issued an update on RTI regarding an earlier messages about the PAYE filing and payment position for employers reporting PAYE in real time, as this month is also when:

  • those who pay HMRC quarterly will make their first payment of the year
  • any Class 1A National Insurance contributions (NICs) payment for 2012-13 is due.

There is also an update on week 53 payments and filing obligations.

There is a further note on RTI and casuals employed at harvest time.

Further tips are offered by HMRC on getting RTI submissions right first time.


4.1 Consultation on national insurance processes for the self employed

HMRC has issued a consultation for comment by 9 October 2013 on whether class 2 NI should be collected alongside collections for self-assessment income tax and class 4 NI for the self-employed.

4.2 Taxation and retirement benefits guidance for barristers

The Bar Council has published updated taxation guidance for barristers to help them manage their tax position. This reflects the changes to the tax system introduced by the Finance Act 2013, including the new cash basis.

4.3 Enhancing the transparency of UK company ownership

The Department for Business, Innovation and Skills has published a discussion paper 'Transparency and trust: Enhancing the transparency of UK company ownership and increasing trust in UK business'. The overview of the proposals is copied below:

"This paper considers a range of proposals to enhance the transparency of UK company ownership and increase trust in UK business. This will help prevent illegal activity; better enable companies to be held to account; and provide businesses, investors, employees and consumers with confidence that companies are acting fairly.

Ensuring that we know who really owns and controls UK companies

At the UK-chaired G8 Summit in June, the UK committed to introduce new rules requiring companies to obtain and hold information on who owns and controls them; implement a central registry of company beneficial ownership information; and to review the use of bearer shares (which do not require the identity of the holder to be entered in the company's publicly available register of members) and nominee directors (which can be used to conceal the identity of the person really controlling the company). This paper invites views on the following areas:

  • We propose that the registry should hold information on the beneficial owners (i.e. on individuals with significant control or influence) of all UK companies, but consider whether companies already subject to stringent disclosure rules should be exempt.
  • We intend to give all companies statutory tools to identify their beneficial ownership; and we consider what additional requirements might be required to ensure beneficial ownership information on all companies is indeed obtained.
  • We look at what information should be provided to the registry; how frequently it should be updated; and how to ensure that it is as accurate as possible.
  • We consider whether information in the registry should be made public – noting the strong case for openness but recognising that there may be concerns.
  • We propose that the creation of new bearer shares should be prohibited; and that existing bearer shares should be converted to ordinary registered shares.
  • We consider options to enhance transparency around the use of nominee directors; and whether companies should be prohibited from being appointed company directors, i.e. whether we should ban corporate directors.

Ensuring that the UK is a trusted place to do business and invest

We think there may be ways to strengthen the system for tackling the small minority of company directors that don't follow the rules. This is especially important in the light of the company failures during the financial crisis. The paper starts this debate by putting forward a number of proposals:

  • Following the Parliamentary Commission on Banking Standards' recommendation that directors of banks should have a primary responsibility to ensure the safety and stability of their firms, we consider whether to amend directors' statutory duties in key sectors such as banking and whether to allow sectoral regulators to disqualify directors in their sector.
  • We consider what additional factors the court might take into account in director disqualification proceedings, such as the nature and number of previous company failures a director has been involved in.
  • We look at options to help creditors receive compensation when they have suffered from a director's fraudulent or reckless behaviour.
  • We propose that the time limit for bringing disqualification proceedings in insolvent company cases should be extended from two to five years.
  • We propose directors who have been disqualified should be offered education or training to equip them with the skills they need to go on to run a successful company.
  • We consider whether individuals subject to foreign restrictions should be prevented from being a director of a UK company; and whether directors convicted of a criminal offence in relation to the management of an overseas company should be able to be disqualified in the UK."

4.4 Business Premises Renovation Allowance technical document

In a written statement on 18 July 2013, the Exchequer Secretary, announced that HMRC would be conducting a technical review of the Business Premises Renovation Allowances legislation:

"The Business Premises Renovation Allowances (BPRA) scheme provides 100 per cent capital allowances for the capital costs of converting or renovating empty business property in certain disadvantaged areas of the UK, where the property has lain empty for at least a year, in order to bring the premises back into business use.

The Government remains committed to the objectives of BPRA, which is to foster the regeneration of deprived areas, by helping to increase private investment, enterprise and employment in deprived communities.

HMRC has, however, brought to the Government's attention a recent increase in DOTAS (Disclosure of Tax Avoidance Schemes) disclosures, involving BPRA, which appear to contain features aimed at exploiting the relief in ways that Parliament had not intended.

The Government is fully committed to tackling tax avoidance to ensure the Exchequer is protected and fairness is maintained for the taxpayer.

The Government has, therefore, authorised HMRC to conduct a technical review of the BPRA legislation, with a view to making its policy purpose even clearer, so that the scheme may be made simpler and more certain in its application, at the same time reducing the risks of exploitation.

HMRC will shortly be publishing this technical review, along with an associated Spotlight article to alert people to the fact that almost all of the disclosed BPRA schemes appear to be seriously flawed and that HMRC will investigate anyone using them.

The technical review will invite comments on new legislative proposals, with a view to introducing new legislation in 2014."

4.5 Interaction of SDLT sub-sale relief and alternative finance relief: Project Blue

Following on from last week's summary of the outcome of the Project Blue case (item 4.4 Tax Update 15 July 2013) the following further points may be of interest.

This was a resounding victory for HMRC as they won on all points, and it will certainly embolden them in their application of the SDLT anti-avoidance provision in FA03 s75A.

The case includes discussion of whether an avoidance motive had to be present in order for s75A to be engaged. On behalf of the Project Blue Ltd (PB) it was argued that Shari'a financing had to be used for commercial reasons and therefore there was no avoidance purpose. PB was a 100% subsidiary of Project Blue Guernsey Ltd, which was itself an 80% subsidiary of the Qatar Diar Real Estate Investment company which would have required Shari'a compliant financing in financing arrangements it was involved in.

It was also argued for PB that the headings and side notes and explanatory notes accompanying Finance Bill 2007 for the introduction of FA03 s75A could be used to consider its purposive interpretation. PB's counsel therefore concluded that the purpose behind s75A was not to catch every transaction, but only to catch transactions structured to avoid the tax. It was also pointed out the HMRC's technical guidance also indicated the intention of s75A was to counter schemes to reduce SDLT. In putting forward its case, PB's counsel considered that the purchaser in the transaction for analysing the impact of s75A was the intermediary Islamic Finance bank, and not PB. In their opinion the bank acquired the freehold interest which was the most valuable.

HMRC's counsel submitted the argument that while headings and side-notes were permissible aids in determining the statutory context of legislation, they could not alter the plain language of the statutory provision. It was also argued that the purchaser for analysing the impact of s75A for this purpose was PB and not the intermediary Islamic Finance bank. The bank was indemnified from all SDLT costs of the transaction and it was PB that acquired an interest of value for the purpose of analysing the impact of s75A.

Factors which did not help PB's case were that no valuation evidence was provided and there was no supporting evidence to demonstrate that PB had no tax avoidance motive in structuring its acquisition as the tax structure paper was not made available due to legal professional privilege).

The Tribunal considered the 2004 House of Lords case of R v Montila (UKHL50) as providing support for taking account of headings and side-notes in construing a statutory provision. They concluded s75A was a targeted anti-avoidance rule, but that it was purposely widely drawn and parliament included a provision permitting HM Treasury to make an order to limit its application (s75C(11)), but that it had not been used.

The Tribunal considered HMRC's guidance issued on 28 February 2011 concerning the scope of s75A indicating that HMRC considered it only applied where there was avoidance of tax and they would not seek to apply it where they considered transactions had been properly taxed. The Tribunal did not consider this statement could be reconciled to HMRC's obligation to collect the tax imposed by Parliament (subject to concessions arising from hardship cases etc).

Taking account of the wide terms on which s75A was drafted, the Tribunal determined it was not necessary to demonstrate an avoidance motive for s75A to apply. If the conditions set out within the section were present, the section applied.

For reference Section 1 of the Interpretation Act 1978 says:" Every section of an Act takes effect as a substantive enactment without introductory words".

Notwithstanding this, the judge went on to consider whether, if it was necessary for there to be an avoidance motive, this was present.

Given that as a matter of fact SDLT had been avoided, the Tribunal judge considered that the burden of proof rested with the appellant company to show that avoidance was not a main purpose. He did not consider that they had discharged such burden. It had been argued that an Ijara financing structure had to be used to meet religious requirements. However, the judge found that this was a requirement of the 'lender'. The taxpayer had brought forward no evidence to support any argument that, from its perspective, the structure was driven by religious considerations.

In the course of the discussion on a tax avoidance motive, the Tribunal judge made a couple of comments which give rise to some concerns and need some careful thought as to their ramifications.

Regarding the determination of the motive of a transaction

At para 229 the Tribunal judge commented: "However, the fact that a transaction may be carried out for commercial reasons does not mean that it does not also have a tax avoidance motive. In our experience, there can often be many different ways of structuring the same overall commercial transaction, some of which have more beneficial tax consequences than others."

This goes beyond what might be considered a reasonable approach of determining that once it is shown that something is being done for good commercial reasons it is open to the taxpayer to structure it in the way that results in the least possible tax burden. However, the judge's comment almost suggests that, unless a transaction is structured in a way that maximises the tax, there will be a tax avoidance motive. The question then becomes whether tax avoidance in any particular case would be a main purpose, although this may not help where the legislation does not contain a main purpose filter,. The comment should be considered in the context of SDLT as a transactional tax. It would otherwise be very easy to counter any challenge on transaction motive with the response that the main purpose is to acquire the property, which is entirely commercial. However, it is to be hoped that HMRC do not seek to take this comment out of context.

Regarding the implications of making a DOTAS disclosure

The Tribunal judge considered that the fact that the lawyers, Clifford Chance, had made a DOTAS disclosure was strong evidence that there was, indeed, a tax avoidance motive. He said, at para 232 and 233:

"We do, however, attach significance to the fact that Clifford Chance submitted a notification on 1 February 2008 (i.e. immediately after the transactions involved in this appeal were undertaken) under SDLT Tax Avoidance (Prescribed Description of Arrangements) Regulations (SI 2005/1868). Clifford Chance clearly considered that the arrangements could fall within the Regulations. As noted above, section 306 (1) and the above-mentioned Regulations require transactions to be disclosed if the main benefit, or one of the main benefits, that might be expected to arise from the arrangements was obtaining an SDLT advantage.

Whilst we recognise that legal advisers may well err on the side of caution, it is clear from this notification that the Appellant's advisers were well aware, and we infer that the Appellant was as well, that the manner in which the acquisition from the MoD and the Shari'a-compliant financing with MAR were being structured involved an SDLT advantage and which was one of the main benefits of the transaction structure."

This is despite the fact that the disclosure had been made as a 'belt and braces' prudent approach to DOTAS; and HMRC has said that it would not assume that just because a disclosure is made there is necessarily avoidance. If this is going to be the approach to DOTAS disclosures then advisers will need to think very carefully about whether a disclosure is genuinely required rather than making one 'just in case' to protect themselves.

We are aware that some banks are also concerned about HMRC's apparent inference that just because something is disclosed under DOTAS there is a tax avoidance motive. FA04 s306 indicates that notifiable arrangements are those that fall within a description prescribed by regulation and enable the person to obtain a tax advantage, where the obtaining of that tax advantage is (or might be expected to be) a main benefit of the arrangements. Tax advantage for the DOTAS regime includes relief or increased relief from tax and deferral of payment of tax, without a tax avoidance purpose having to be present. This means the DOTAS rules can apply in situations other than those described as 'tax avoidance', some of the characteristics of which have been set out at:

The case includes a discussion of what the words "involved in connection with" the acquisition and disposal mean. The judge observed that, although "in connection with" is used elsewhere in the taxes acts, the use in combination with "involved" is not. This was relevant as it was argued that, although the sub-sale and Shari'a financing transactions were involved in connection with the acquisition, the same could not be said for the disposal as the seller (the MoD) had no involvement in them. This argument, if successful, would of course have rendered s75A toothless. However, the judge found that because the sub-sale etc was intended to finance the transaction and was dependent on the transfer of the freehold by the MoD, it was "involved in connection with" both the disposal and acquisition.

It was surprising that the case had relatively little discussion on s75A(7). This says:

This section (75A) does not apply where subsection (1)(c) is satisfied only by reason of – (a) sections 71A to 73..

Those sections are the ones that deal with Shari'a compliant financing. Structuring a transaction on Shari'a compliant lines will necessarily involve a "scheme" as there are a number of transactions. S75A(1)(c) will apply where the avoidance is in place because no SDLT is payable. This will be the case where, due to the combined use of s45 sub-sale relief and s71A relief for Shari'a financing no SDLT is payable. Therefore, it appears that subsection (7) would not be a barrier to s75A applying as the lower SDLT liability is not only by reason of s71A, and this was the conclusion the Tribunal reached.

However it might have been helpful if the case had discussed that, to take the view that s75A(7) does not provide protection in cases where s45 and s71A are used together, misunderstands what the relief in s45 does. Although commonly referred to as 'a relief' this is not, in fact, what it is. What s45 does is to identify the chargeable transaction, which is the hypothetical secondary contract postulated in s45. Once you have identified that secondary contract then the only reason that it is not chargeable to SDLT is because s71A relief applies to it. On this view one might consider that s75A(7) does provide protection from application of s75A where s45 is used in conjunction with s71A.

A final irony is that, as a result, the SDLT bill for the taxpayer ended up over £11m more than it would have been if they had not tried to avoid the charge and had simply paid SDLT on the consideration paid to the MoD. This is because the way the Ijara financing works is that the sub-sale on to the bank is for the consideration paid to the vendor plus all the financing costs. S75A says that the chargeable consideration for the notional transaction is the highest consideration payable in respect of any of the scheme transactions. Hence SDLT was payable on £1.25bn rather than £959m.

HMRC had not noticed this at first but it was allowed to bring it in as a late argument. This brought into play arguments involving Article 14 of the Convention on Human Rights. This was because the SDLT ended up higher as a result of the use of Shari'a financing than it would have done had they used conventional financing or taken into account only the amounts of financing paid. The judge rejected this on the grounds that the taxpayer had not established that it entered into Shari'a complaint financing for religious reasons (as noted earlier, it brought forward no evidence of its motives in structuring the transaction in this way) and therefore it had not shown that it suffered religious discrimination.

The comments in this case on the extent of reliance that can be placed on side notes and headings when interpreting the purpose of legislation, and also the reliance that can be placed on HMRC statements of guidance are also interesting in the context of considering whether the GAAR might apply to a particular transaction. The indications are that it is not going to be easy for taxpayers or advisers to determine the dividing line between a transaction to which the GAAR does or does not apply.

4.6 HMRC guidance on pre-completion contracts

HMRC has issued guidance on the Stamp Duty Land Tax (SDLT) rules for pre-completion transactions. These rules are in Schedule 2A of the Finance Act 2003and replaced the old regime for transfers of rights. They are effective for pre-completion transactions entered into on or after 17 July 2013.

4.7 Draft regulations concerning the taxation of regulatory capital securities

At Budget 2013 the Government announced that it intended to provide the financial sector and investors with certainty on the tax treatment of Additional Tier 1 ("AT1") and Tier 2 ("T2") regulatory capital securities that financial institutions need to issue to meet their regulatory requirements. The features of both AT1 and T2 securities make their tax treatment uncertain and these draft regulations redress that uncertainty by prescribing the tax treatment for both the issuers and holders of AT1 and T2 securities. A technical note with draft regulations has been issued for comment by 15 September 2013.

The draft regulations provide that regulatory capital securities will be treated as loan relationships. The derivative contracts rules in Part 7 CTA 09 will not apply to AT1 or T2 securities. As a result for convertible AT1 and T2 securities that contain an embedded derivative any movements on the derivative element will not be brought into account. For the purposes of the capital gains tax and grouping rules AT1 and T2 debt instruments are normal commercial loans. Any coupons are not distributions for corporation tax purposes and the coupons will be treated as interest for all purposes of the Tax Acts. There are exceptions from the duty to deduct and stamp duty. In addition there is an anti-avoidance clause and an exclusion from the alternative finance rules.

4..8 Spotlight on Business Premises Renovation Allowances

HMRC has issued the following note on its Spotlights page on business premises renovation allowances:

Business Premises Renovation Allowances (BPRA) is intended to support the regeneration of deprived regions of the UK by allowing business investors to claim a tax allowance for 100 per cent of the amount they invest in converting or renovating empty business premises. HMRC is aware of a number of tax avoidance schemes which aim to exploit BPRA. HMRC's early enquiries indicate that almost all of these schemes are seriously flawed and HMRC will investigate anyone using them.

The disclosed BPRA schemes typically include one or more of the following or similar features:

  • claims for costs other than the actual direct capital costs of renovating or converting an empty building in a deprived area, which qualify under the BPRA rules
  • limited-recourse, often circular loans
  • expenditure contractually incurred when the building is occupied and in use, or only recently vacated, or when some of the agreed works may not start for several years, if at all

The majority of people who claim BPRA are making a valuable investment which will help to revive areas of the UK which have suffered particular economic hardship. They claim the correct amount of tax relief on their investment which Parliament intends them to have. Despite the attempts of tax avoiders to exploit BPRA, the Government wishes to preserve the integrity of the relief without making the rules more complex and difficult to apply. HMRC is therefore conducting a technical review to make the rules simpler, more certain and less susceptible to attempts to manipulate them.

In addition, the Government is currently consulting on proposals which will specifically address schemes where profit or loss allocations are manipulated within partnerships in order to reduce tax.

4.9 Consultation on venture capital trusts and share buy-backs

As set out at Budget 2013, the Government has become concerned about the use of certain share buy-back and re-investment arrangements between VCTs and their investors. Following informal engagement with a range of stakeholders since that announcement, and further consideration of the issue, the Government has decided that it will be necessary to take some action to limit the potentially damaging effect of these arrangements and to ensure that upfront tax relief is given only for genuine new investment in VCTs.

The technical consultation document sets out the background and rationale for this policy change, before describing in some detail proposals for reform and seeking views.

It is envisaged that any legislative changes will take effect from April 2014.

The consultation proposes to impose a restriction either where an investor subscribes for shares in a VCT within a certain period of a sale of shares held in that VCT or another VCT managed by the same fund management group; or where a VCT's re-purchase of shares is subject to any understanding that the investor will re-invest in the same VCT or another from the same fund management group. This approach would restrict the amount of tax relief available to investors making reinvestments into the same VCT or a related VCT.

Other options for change are considered but thought to be less effective in achieving the Government's policy aims.

4.10 OECD work on base erosion and profit shifting

The OECD has published an action plan on its BEPS project and comments:

OECD's Action Plan on Base Erosion and Profit Shifting (BEPS) offers a global roadmap that will allow governments to collect the tax revenue they need to serve their citizens. It also gives businesses the certainty they need to invest and grow.

Produced at the request of the G20 and introduced at the G20 Finance Ministers' meeting in Moscow, the Action Plan identifies 15 specific actions that will give governments the domestic and international instruments to prevent corporations from paying little or no taxes.

"This Action Plan, which we will roll out over the coming two years, marks a turning point in the history of international tax co-operation. It will allow countries to draw up the coordinated, comprehensive and transparent standards they need to prevent BEPS," said OECD Secretary-General Angel Gurría. "International tax rules, many of them dating from the 1920s, ensure that businesses don't pay taxes in two countries – double taxation. This is laudable, but unfortunately these rules are now being abused to permit double non-taxation. The Action Plan aims to remedy this, so multinationals also pay their fair share of taxes.

There is also a list of frequently asked questions on BEPS.


5.1 VAT exemption for services supplied to a Member State party to the North Atlantic Treaty

In 2009 the First-tier Tax Tribunal (FTT) ruled that the services of dismantling decommissioned US Navy ships by Able UK Ltd in the UK was exempt from VAT.

The specific supply in dispute was the dismantling of ships within the United Kingdom. The ships had been formerly used in the service of the United States Navy. As part of the contractual arrangements the Appellant also made supplies to MARAD of services of towing the ships to the United Kingdom. The towing services were not part of the dispute. HMRC accepted that these services were exempt from VAT.

At the FTT HMRC had argued that the purpose and scope of the exemption under Article 151(1)(c) was to provide relief in respect of supplies made to NATO visiting forces so as to ensure that the host country did not receive a fiscal advantage from the presence of those forces within its territory by taxing the expenditure of the visiting forces incurred as part of its visit. But the exemption did not extend to all expenditure incurred by or on behalf of a NATO force. The NATO agreement defined a civilian component of a NATO force as civilian personnel accompanying a force. Finally HMRC submitted that the exemption for civilian staff under Article 15(1)(c) should be construed in conjunction with the exemption for armed forces, in which case the qualification to civilian staff accompanying them provided the context for interpreting armed forces as visiting forces. The words accompanying them implied that the civilian staff were travelling with the armed forces.

The FTT regarded HMRC's interpretation as too restrictive. HMRC's appeal to the Upper Tribunal resulted in a reference to the CJEU where a decision was given in April 2012 in case C-225/11, which concluded that:

"a supply of services such as that at issue in the main proceedings, made in a Member State party to the North Atlantic Treaty and consisting in dismantling obsolete ships of the Navy of another State party to that treaty, is exempt from VAT under that provision only where:

  • those services are supplied for staff of the armed forces of that other State taking part in the common defence effort or for the civilian staff accompanying them, and
  • those services are supplied for members of the armed forces who are stationed in or visiting the Member State concerned or for the civilian staff accompanying them."

This decision supported the decision of the FTT. The Upper Tribunal has released a note indicating HMRC has withdrawn its appeal and therefore the decision in favour of Abel UK Ltd's appeal is confirmed.∂=1&cid=2828054

5.2 Zero rating of construction of a new residential home incorporating an existing church

The dispute between HMRC and Astral Construction Ltd was whether the company's development of a 72 bed nursing home on the site of a redundant church, which was itself retained as a part of the development, was zero rated (VATA Sch8 group 5 item 2 – a supply in the course of the construction of a building intended solely for use as a home or institution providing residential accommodation) or subject to the reduced rate of VAT of 5% (Sch7A group 6 item A).

HMRC considered the development was a conversion of and/or an extension to an existing building, the church, thus taking the supply out of zero rating by virtue of Notes 16(a) and 16(b).

The development carried out by Astral retained the church as its centrepiece. Two new 2-storey wings were built, one to the north and one to the south of the church. Each wing contained, on each of the two floors, en suite bedrooms situated opposite each other divided by a central corridor and at the end of each of the corridors on both floors were large dayrooms. Each of the two wings, at their rear, were connected into a further wing running at right angles to each of them. This further wing contained further bedrooms, bathrooms, dining rooms, dayroom and treatment rooms. There had therefore, in effect, been created three new sides of a square with the church and each of the ends of two of the wings making up a fourth side. To the rear of the connecting wing, and connected into it, at ground floor level were kitchen and staff facilities. The three new wings were all connected into the church by five brick and glass walkways, three at ground floor level and two at first floor level.

The church itself, while retaining its original exterior had been altered internally. A mezzanine floor had been created which was described on the plans as containing a dayroom and gallery storage. The ground floor consisted of an entrance/ reception area at the front, an office to the right and a shop and activity room to the left and a small chapel at the rear. The remaining central large internal area was described on the plan as "dayroom, sitting area and function space".

In terms of area footprint, the original church was 315 sq.m, and the new mezzanine added 140 sq m (together 13.5% of the total area). The new build extensions totalled 2910 sq m (86.5% of the total area).

In order to determine whether the construction was an enlargement or an extension the FTT directed themselves to considering a comparison of the building or buildings before and after the work was carried out.

The examination of the works involved a question of fact, degree and of impression. Whilst enlargement clearly involved some addition to the existing building and an increase in space, it will be a question of fact and degree whether something can properly be described as an enlargement of an existing building. The additional works may be so extensive in comparison with the original that that would be a misnomer (following the 1996 guidance of the Court of Appeal in Marchday Holdings Ltd. After examining the evidence the FTT concluded:

"... the structure which now exists is one single fully functioning nursing home. As a matter of impression, size, shape, function and character it is so vastly different from the existing church that it cannot be said to constitute the conversion of the church or an enlargement of or extension to the church. We therefore find that the works do fall to be zero rated within Item 2 and we reject the Commissioners' contention that they are taken out of zero rating by Notes 16(a) or 16(b). The appeal is therefore allowed."

5.3 VAT treatment of pathology services provided to NHS trusts

The High Court case of GSTS Pathology LLP, Serco Ltd and Guys & St Thomas NHS Foundation Trust (Guys) v HMRC granted GSTS Pathology LLP interim relief from the implementation of HMRC's revised view of the VAT treatment of pathology services. As noted below HMRC had directed the services be exempt from 1 May 2013. GSTS has exercised its right to appeal against the HMRC decision to the First Tier Tribunal. The notice of appeal was filed on 15 February 2013. GSTS has been attempting to expedite the appeal and has invited HMRC to agree directions for a hearing in the week beginning 29 July 2013, which is the earliest date the tribunal has been able to offer. It is to be expected that the tribunal would hand down its decision within a month or so of the hearing.

GSTS applied to the High Court for an injunction to restrain HMRC from implementing its decision until three months after the decision of the First Tier Tribunal is handed down. HMRC, as well as setting out their grounds for contesting the application, offered to engage in what was described as a "stand still", such that although the change of VAT treatment would be implemented on 1 May 2013, no tax would actually be collected by HMRC until after the tribunal appeal had been decided. GSTS responded that such an arrangement would not assist as it would still have to provide for the tax in its accounts, and, unless it immediately embarked on a restructuring, would expose it to an unacceptable financial risk with effect from 1 May 2013.

The High Court has concluded on the basis of the evidence submitted that, for HMRC to implement its decision before the end of a period for which an injunction is sought would not be a proportionate or just exercise of power. In reaching its conclusion it considered whether GSTS LLP would have had a legitimate expectation of being able to rely on the 2008 HMRC decision if the application had been for judicial review and concluded it would.

The outcome of this case may have prompted HMRC's Brief 16/13 (see item 6.5 Tax Update 8 July 2013) commenting that the provision of such pathology services is in their opinion VAT exempt.


Guys established a joint venture vehicle (the GSTS Pathology LLP), which would incur VAT on certain goods and services which are purchased. On the preferred model, these would include staff costs because there were advantages if the LLP did not employ all its staff but had them seconded to it. It was anticipated that VAT would be chargeable on the supply of staff seconded to the LLP.

If the pathology services supplied by the LLP to Guys was be exempt from VAT then no VAT would be chargeable on the supply of its services. However the LLP would not be entitled to deduct the input tax paid to its suppliers. The LLP would thus have to bear the input tax as a cost of its business. If, on the other hand, the pathology services supplied by the LLP were not exempt, the LLP would have to charge VAT to Guys and deduct the input tax payable to its suppliers in full.

Under Section 41 (3) of the VATA, where a Government department has to pay VAT on certain goods or services supplied to it, the department can recover the amount from HMRC. For this purpose, the definition of a "Government department" includes a NHS Trust or NHS Foundation Trust (see Section 41 (6) and (7). Rules are published by the Treasury known as the Contracted Out Services provisions (COS) which specify services to which this provision applies. Such services include "laboratory services".

As the services supplied would be "laboratory services", it was envisaged that the NHS Trust customers would be able to recover from HMRC the tax which they had to pay on services purchased from the LLP.

HMRC had previously provided rulings in 2008 on the VAT treatment such that the services should be standard rated and with VAT recovery by the NHS Trust. However after it reviewed the position in 2010 in connection with the proposed provision of the same services by GSTS LLP to Kings Hospital, HMRC commented in 2013:

"In HMRC's view it would seem to be clear that pathology services play a vital role in 'the protection, maintenance or restoration of the health', meaning that they would qualify for exempt medical care. HMRC recognises that you have been correctly applied the standard rate of liability as per the HMRC ruling given on 29/04/10. We have listened to your argument that HMRC should allow you sufficient time to make suitable provisions and arrangements, and therefore we will not be giving the date of this letter as the date from which this exempt ruling must be applied. Instead, we are willing to state that this exempt ruling should be adopted from 01.05.13. This should give you time to examine all of your suppliers' contracts in the light of this exempt ruling."

5.4 VAT on investment advisory services to pension funds

The CJEU has issued its decision in the case of PPG Holdings. Fiscale eenheid PPG Holdings BV ("PPG") (Case C-26/12, referred from the Netherlands) sought to clarify whether in establishing a pension fund for employees, an employer can recover input tax incurred by it on investment management services for that fund. The particular questions considered were:

  • Can a taxable person who, pursuant to national pensions legislation, has established a separate pension fund for the purpose of safeguarding the pension rights of his employees and former employees, as participants in the fund, deduct the tax which he [has paid] on the basis of services supplied to him in respect of the implementation of the pension provision and the operation of the pension fund, pursuant to Article 17 of [the Sixth Directive]?
  • Can a pension fund, established with the objective of providing a pension for the participants in the pension fund at the lowest possible cost, where assets are brought to and invested in the pension fund by or on behalf of the participants, and where the resulting proceeds are shared, be classified as a "special investment fund" within the terms of Article 13B[(d)](6) of [the Sixth Directive]?'

The Court concluded only in respect of the first question, as the positive answer negated the need to consider the second question, and this had been considered in the Wheels case in any event:

"...a taxable person who has set up a pension fund in the form of a legally and fiscally separate entity, such as that at issue in the main proceedings, in order to safeguard the pension rights of his employees and former employees, is entitled to deduct the value added tax he has paid on services relating to the management and operation of that fund, provided that the existence of a direct and immediate link is apparent from all the circumstances of the transactions in question."

It is worth adding that this decision means no change for the UK: the Court did not follow the AG's opinion, which would have put the established UK/HMRC treatment of such charges under threat.∂=1&cid=1947576

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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