UK: Weekly Tax Update - June 15, 2015

Last Updated: 23 June 2015
Article by Tina Riches


1.1 Determining the Scottish rate of income tax

HMRC has issued draft technical guidance on how Scottish taxpayer status should be decided for the purpose of the Scottish Rate of Income Tax. Comments are requested by 31 July 2015. Some very brief extracts from the draft guidance are included below.

A taxpayer must be UK resident before considering whether they are Scottish taxpayer. The definition of a Scottish taxpayer is focused on where an individual lives, or resides, in the course of a tax year. Scottish taxpayer status applies for a whole tax year - it is not possible to be a Scottish taxpayer for part of a tax year.

Individuals who have more than one place of residence in the UK need to determine which of these has been their main place of residence for the longest period in a tax year – if this is in Scotland, they are a Scottish taxpayer. Where there is no close connection (ie no single or main residence in Scotland) a taxpayer may still be a Scottish taxpayer if on a day count basis they spend at least as many days in Scotland as elsewhere in the UK. There are separate rules which apply to MSPs, MPs representing a constituency in Scotland and MEPs representing Scotland. Such individuals will automatically be treated as Scottish taxpayers, irrespective of where their sole or main residence is located or of where they spend the most days in the UK.


2.1 Contractor loan settlement opportunity

HMRC has added a note to its webpage on ten items of interest concerning its contractor loan settlement opportunity. The first point is a reminder that anyone considering using the opportunity needs to contact HMRC on or before 30 June 2015 in order to get access to it.


3.1 OECD release on country by country reporting

The OECD has released a package of measures for the implementation of a new Country- by-Country (CbC) Reporting plan developed under the OECD/G20 BEPS Project. The paper contains model legislation to implement CbC reporting and a Multilateral Competent Authority Agreement on the Exchange of CbC Reports.

Under the OECD rules CbC reporting will be required from the ultimate parent entity of a multi-national enterprise (MNE) group that is resident for tax purposes in the relevant country, other than a group with consolidated turnover of less than €750m. Reporting will be for each annual accounting period of the ultimate parent entity with reports due within 12 months of the accounting year end. Reporting years will be those accounting years commencing on or after 1 January 2016.

The explanatory notes to Finance Bill 2015 included the comment that regulations implementing this in the UK would be prepared once the OECD had completed its work on implementation issues, so we can expect these shortly.

3.2 OECD discussion draft – hard-to-value intangibles

The OECD has issued a discussion draft for comment by 18 June 2015 on the approach to be taken by tax administrations in determining arm's length pricing for hard-to-value intangibles. Its aim is to ensure that price adjustments will only apply where the difference between expected and actual outcomes can only be explained by inappropriate pricing.

3.3 Government support for the North Sea oil & gas industry

Exchequer Secretary to the Treasury, Damian Hinds reemphasised the government's commitment to the long term plan the Chancellor set out in December 2014.

The package of support, which is expected to encourage over Ł4 billion of additional investment in the UK's oil and gas industry over the next five years, included a new investment allowance to drive investment in the North Sea, as well as a reduction to the headline rate of tax from 32% to 20%. It was confirmed that the government would deliver on the outstanding elements of the package over the coming months, including:

  • expanding the scope of the investment allowance to include additional investment, which will help maximise economic recovery; and
  • joint work between the Oil and Gas Authority (OGA), the Treasury and industry looking at the barriers to exploration and improving access to infrastructure.


4.1 Abuse of law and Pendragon plc

In overturning the Court of Appeal decision, the Supreme Court has concluded the arrangements put in place by Pendragon plc to recover input VAT on demonstrator cars and then sell them as margin cars, thus avoiding output VAT on the sale price, was an abuse of law. As a result, HMRC will be able to recover the avoided output VAT. The case is a useful summary of how to apply the CJEU Halifax abuse of law principles and is timely in view of the recently released Upper Tribunal (UT) decision in Ocean Finance (Newey (trading as Ocean Finance) v Revenue and Customs Commissioners [2015] UKUT 300 (TCC)). Both cases involved the use of offshore features. Before 1 December 1999 car dealers were blocked from recovering input VAT on the purchase of new cars used as demonstrators (stock in trade). However this meant that the car was sold as a margin car, with output VAT being due on any profit margin only. In addition, HMRC had incorrectly (per EU law) required car dealers to account for output VAT in full on manufacturers' bonuses received in respect of such cars. This therefore led to significant VAT reclaims and a change in the UK VAT treatment of demonstrator cars.

From 1 December 1999, the UK VAT treatment of car dealers' demonstrator cars was changed so that provided the intention is to sell the car within 12 months input VAT on the purchase price can be recovered in full. However the consequence of this is that output tax is due in full on the sale price.

Pendragon used a scheme that routed their demonstrator car stock through leasing entities, one of which was an offshore third party leasing company that involved the transfer of the cars and leasing business as a going concern back to a Pendragon group company. This meant that the cars were reacquired through a transaction that was outside the scope of VAT (so that no output VAT was due). When the cars were sold by the Pendragon company to a final customer, as it had not recovered input VAT on the purchase from the third party leasing company, the cars were sold as margin cars, with little if any output VAT being accounted for on the sale price.

The Supreme Court re-examined the Halifax abuse principle and the two tests that must be met for it to apply:

  • The subjective determination that the purpose of the arrangement, objectively determined on the basis of the absence of any other economic justification for the activity, is that of creating a tax advantage; and
  • The comparison of the purpose and intention of the EU VAT rules with the purpose and results achieved by the activity is that the outcome is contrary to EU law.

The Court rejected Pendragon's argument that because the relevant provisions were either specific UK law or arose from derogations permitted under EU law, the abuse principle did not apply. In particular, the Supreme Court concluded that National implementation of EU law was subject to EU law, whether it applied a derogation or not.

As regards the determination of the essential aim of the transactions, the Court agreed with the overall conclusion of the UT that the First-tier Tribunal (FTT) had erred and that the aim was to generate a tax advantage and that the use of the third party had no other commercial purpose. However, in contrast with the UT, the Supreme Court did not find the use of an offshore bank was in itself abusive. The Supreme Court concluded the FTT had considered the issues too generally, and had failed to consider whether Pendragon's commercial objectives explained the particular features of the transactions which produced the tax advantage.

4.2 VAT and postal supplies and the zero rating of printed matter

HMRC has updated VAT Notices 700/24 (postage and delivery charges for direct marketing) and 701/10 (zero rating of books and other forms of printed matter. There are further illustrative examples clarifying the distinction between a direct marketing supply (a standard rated supply) and the supply of delivered goods (for example zero rated printed matter).

In the latter case, a delivery charge by the supplier of the goods included in the contract for the supply of the goods, means the delivery supply takes the VAT treatment applicable to the goods, whether separately itemised or not. In the former case (the direct marketing supply), the whole supply is standard rated. This may be particularly relevant for charities where a concessionary treatment of zero rated direct marketing services ends on 31 July 2015.

Prior to July 2014 it was widely believed in the charity sector that arrangements for the print and distribution of mail-packs by specialist companies on behalf of charities (mainly for the purposes of fundraising) was a zero rated supply of goods. However, HMRC considered this was a standard rated direct marketing supply. An agreement was reached with the charity tax group that a transitional arrangement would apply until 31 July 2015 so that such direct marketing supplies on behalf of charities would be treated as before July 2014. From 1 August 2015, where there is a single contract for direct marketing supplies together with the provision of printed matter on behalf of a charity, that is a standard rated supply of direct marketing services.

VAT Notice 700/24 comments further:

'Direct marketing via mail (addressed or unaddressed, such as 'door drops') or inserts in newspapers or magazines typically involves the production or acquisition of printed matter for distribution and any or all of the following services:

  • posting or arranging the posting of customer mail such as publicity, advertising material or promotional goods to many recipients, including unaddressed mail (known as door drops);
  • analysis or manipulation of data (either provided by the customer or sourced directly) for strategic or marketing reasons - for example, to target direct mail at specific groups based on geography, socio-economic factors or gender of recipients;
  • purchase or rental of third party mailing lists, including for amalgamation with customer's own lists;
  • analysis of own and customer data to produce reports on campaign results and advice on strategy;
  • When any of the [above] services listed (or other marketing related services) are supplied with printed matter as a single supply, then that is taxable at the standard rate.......
  • Where the printed matter and any services are supplied separately then that may comprise multiple supplies and each component is taxed according to its VAT liability. An example of a single supply occurs where a supplier prints leaflets for a charity and, as part of the contract, amends the charity's customer data so that address and postcode details are correct. This is a single supply of zero-rated goods.
  • An example of multiple supplies occurs where a supplier provides marketing strategy advice to a charity and offers the option, under a separate contract, of printing leaflets. These are multiple supplies, one of standard rated marketing advice and one of zero-rated goods.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015

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Tina Riches
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