UK: Dorsey London Tax Update

Last Updated: 12 February 2008

This update was originally published in November 2007.

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Upcoming and Anticipated Dates

Upcoming Seminars and Presentations

Discounts to these IIR and Lexis Nexis conferences are available for Dorsey clients (please contact us for the "VIP" number).

Paul Farmer Joins Dorsey

We are very pleased to announce that Paul Farmer has now joined the London office of Dorsey from the European Commission where he was head of Analysis and Co-ordination of Tax Policies. Before working with the Commission Paul worked as a lawyer at the eCJ for many years and subsequently became a leading Barrister well known to all our clients for his important contributions to our cases in that capacity. Paul brings a wealth of experience in EU corporation tax matters, as well as an extensive VAT background, including his representation of the tax payers in the successful Kretztechnik case. In 2006 he was named UK Tax Lawyer of the Year by Lexis Nexis.

Unhappily, Liesl Fichardt leaves the team at the end of this month to take up a position at the Berwin Leighton Paisner law firm. Liesl's contribution to these cases has been enormous since joining Dorsey in 2005. We wish Liesl all the best in her career.

Compound Interest: Developments

We reported in July that the House of Lords' decision in Sempra Metals opened the way to claim compound interest calculated at HMRC's rate of borrowing upon the repayment of taxes paid by mistake (typically in circumstances where the tax was discovered after payment to be contrary to community law). This raised the residual question among others – what interest rate applies? Previously in cases for restitution of tax paid HMRC had agreed an interest rate of bank base plus 1%pa but only on a simple interest basis. The Lords' decision suggested that a lesser interest rate would now apply questioning whether the reduction in interest rate and the improvement from simple to compound interest might perhaps cancel each other out.

When valuing compound interest claims, HMRC have ("without admission") now applied a rate of bank base plus 0.75%pa as the interest rate in some cases. Although the relevant rests to applying (e.g. whether the compounding is daily, monthly, quarterly etc) remains undecided, the rate suggested seems an encouraging development.

Dorsey have also represented claimants seeking compound interest following successful VAT repayment claims.

Recent Hearings

In Marks and Spencer v Comm. of Customs and Excise the ECJ concluded that the UK could not reduce the time period for making tax claims (in that case VAT) without providing a transitional period for claimants to make claims under the old period before the reduction took effect.

The Fleming and Condé Nast cases ask how such incompatible legislation should be viewed. Is the absence of a transitional period fatal so that the reduction in time period has no effect upon community law claims or can a transitional period be "read in" so that claims beyond what would have been the transitional period (if one had existed) fail? If a transitional period can be read in, do claimants whose claims were issued beyond it need to show that had there been a transitional period they would have complied with it?

The answer to these issues in Fleming and Condé Nast may well have implications for determining issues of causation (particularly in ACT class 2), to the time periods available to make claims (e.g. for cross border group relief) and to similar retrospective changes in s320 FA 04 and s107 FA 07.

The taxpayers were successful in both cases before the Court of Appeal. The House of Lords hearing concluded on 14th November. In the normal course we would expect the judgment before the end of the year.

C-379/05: Amurta

The ECJ's judgment was delivered on 8th November in this case concerning the different tax treatment applicable on dividends received by companies established in the Netherlands or having a permanent establishment in the Netherlands (if the shares form part of the PE's assets) and companies established in another Member State. The Court found in favour of the taxpayer.

The situation of resident and non-resident shareholders is comparable when a Member State unilaterally or by way of a convention levies income tax on both resident and non-resident shareholders with respect to dividends received from a resident company (Denkavit and ACT IV). In such circumstances, the source State, in which the distributing company is resident, must ensure that under its domestic procedures to prevent or mitigate a series of liabilities to tax, non-resident and resident corporate shareholders are treated equally. Therefore, if the source state chooses to relieve economic double taxation domestically for its own residents by way of an exemption, this measure must be extended to non-residents.

The Court regarded that the availability of a tax credit in the recipient state did not justify the difference in treatment in the source state but left it for the national Court to decide if the effects of the restriction to the EC treaty were neutralized by credits for the source state tax under a double tax treaty.

This decision builds on the approach in ACT Class IV and would seem to support the claims in that litigation where the parent was in receipt of a partial credit. It may also add support to the claims regarding dividend taxation in the FII and CFC/Dividend GLOs.

Advocate General opinion (8 Nov 07): C-293/06 Deutsche Shell

The AG concluded that a regime under which there is no possibility of taking into account a currency loss in either the Member State of origin of the company (Germany), or the Member State in which a branch is established (Italy), constitutes a restriction on freedom of establishment.

As in Italy the currency losses have no effect on the branch's profits since the losses only crystallized on conversion of funds transferred into the German currency, it is for Germany to relieve such losses, despite the existence of a double tax convention between both Member States whereby such losses may be excluded from the basis of assessment for German tax.

Under its DTC with Italy Germany did not tax Italian branch profits and accordingly argued that it should not be obliged to take branch losses into account. This opinion would therefore seem to follow Marks and Spencer v Halsey in the context of branch losses.

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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