UK: UK Tax Round Up: September 2018

UK Case Law Developments

Entrepreneurs' relief – voting rights not imputed for equitable reasons

In George v HMRC, the First Tier Tribunal (FTT) decided that they could not apply the equitable principle that "equity looks on that as done which ought to be done" to impute voting rights to shares for the purpose of a shareholder being able to claim entrepreneurs' relief (ER). One of the conditions to claim ER is that the individual is able to exercise at least 5% of the votes in the relevant company "by virtue of" his or her shareholding in the company.

In the case in question, Mr George had been appointed as an executive director in a family-owned company (TLR) which was managed by one of the family members (Mr Thornton). A few years after joining the company, Mr George was allowed to acquire shares in the company. This was the first time that a non-family member had held any shares in TLR. The shares acquired by Mr George represented 6.9% by nominal value of the company's ordinary share capital but did not carry any voting rights. Following a failed attempt to sell TLR, at which time Mr George was advised that he did not qualify for ER because his shares did not carry any voting rights, Mr George and Mr Thornton agreed that Mr George's shares would be given voting rights. This agreement was not documented. In addition, Mr Thornton was concerned that giving voting rights to Mr George would result in a 'value shift' tax charge falling on the other shareholders. As a result of this, the rights were not formally granted to the shares held by Mr George.

On the subsequent sale of the company, Mr George claimed ER on the basis that the High Court would grant specific performance of his voting rights as an equitable matter, notwithstanding that the shares had not been formally enfranchised to give him any voting rights. The FTT held against Mr George and decided that it could not impute the voting rights into the shares because the equitable principle could not be used to take rights away from the other shareholders who had not personally agreed to the granting of the voting rights to Mr George and, in any event, even if a court did impute voting rights to Mr George his voting rights would not exist 'by virtue of' the holding of his shares. Rather, the voting rights would have existed by reason of equity requiring them to be imputed to Mr George.

This case shows how important it is that parties to agreements relating to share rights (or other rights) fully document the arrangements that they have agreed to enter into and ensure that the rights are embedded in the correct instrument to ensure that the relevant benefit, tax or otherwise, is obtained.

Lower league referees not employees

In Professional Game Match Officials v HMRC, the FTT has determined that individuals who are not contracted with the Professional Game Match Officials (PGMO) through its general list of individuals available to act as referees or match officials for a wide range of football games were not employees of the PGMO. Under the arrangements with the PGMO, a large number of individuals are contracted to act as referees in lower league football games. They are then allocated to particular games on an as need basis, but there is no requirement either for the PGMO to find games for them to officiate at or for them to agree to officiate at any particular game.

The FTT rejected the PGMO's argument that there was no contractual relationship between themselves and the individuals or that it was relevant to the employment relationship that the PGMO did not actually make payment to the individuals but that these were made directly by the clubs playing in the relevant matches.

The FTT then considered the general employment criteria as set out in Ready Mixed Concrete to determine whether the rights and obligations between the PGMO and the individuals created an employment relationship. They decided that they did not because the relevant arrangements did not create a legal obligation to provide work or accept work on either side. In addition, they decided that the PGMO did not have any control over how the individuals performed their duties during matches since 'the referee's decision is final'.

The fact that the referees officiated wholly or substantially for a single engager (the PGMO) was, in this case, outweighed by the other factors pointing to self-employment.

Other UK Developments

Clarification on the definition of ordinary share capital

The CIOT has, with HMRC's permission, published a document setting out HMRC's initial view on whether particular rights attached to shares mean that the shares would or would not be 'ordinary share capital' for the purposes of ER (among other things).

One of the conditions for ER to be claimed is that the relevant individual holds not less than 5% of the company's 'ordinary share capital'. Ordinary shares are all shares other than shares which, broadly, carry a right only to a dividend at a fixed rate and no other right to share in the profits of the company. The question of whether shares are or are not ordinary share capital for ER purposes has been considered twice by the courts in recent years in relation to shares with no right to receive a dividend. In those two cases, the FTT decided in one case that the shares were ordinary share capital and in another that they were not. This discrepancy has since been clarified by the Upper Tribunal, which decided that shares with no dividend rights are ordinary share capital on the basis that a right to no dividend is not a right to a dividend at a 'fixed rate' of zero.

The list made available by the CIOT sets out HMRC's current view on whether shares carrying particular rights are or are not ordinary share capital. Since this distinction can be critical for numerous tax purposes, people should think very carefully about the rights attaching to shares when it is important whether they are or are not ordinary share capital. For instance, according to HMRC, a share with a right to a dividend at a fixed rate that is cumulative is not ordinary share capital but a share with a right to a dividend at a fixed rate that is not cumulative is.

Particular care should be taken in this regard where share rights are to be changed or new shares are to be issued with the intention that they are, or are not, ordinary share capital.

HMRC's success using its CEST tool for establishing employment status

HMRC has published a list of recent cases relating to employment or self-employed status where the decision of the FTT was tested against the conclusion of its Check Employment Status for Tax (CEST) digital service. They state that in 22 of the 24 test cases tested, the CEST outcome concurred with the FTT's decision. In the two cases in which the CEST returned a different conclusion to the FTT, it was acknowledged that one case was finally balanced and commentators expressed surprise at the result of the other.

Given this success rate, taxpayers considering whether certain individuals should be treated as employees or self-employed might consider using the CEST tool to assist them in that decision.

Government announces that it will not abolish Class 2 NICs

On 6 September, the Government announced that it will not proceed with the abolition of self-employed Class 2 NICs during the current Parliament, in contrast to its previously stated intention in this regard.

This change in approach results from representation indicating that a significant number of low-earning self-employed individuals would become subject to higher voluntary contributions in order to maintain access to the State Pension. The Government states that having listened to those likely to be affected by the change they have concluded that it would not be right to proceed at the moment. The Government also states that it remains committed to simplifying the tax system for the self-employed, so that the issue will be kept under review and this might result in changes in the future.

Developments Outside the UK

Attorney General opinion on VAT recovery on aborted sale of shares

In C&D Foods Acquisition ApS v Skatteministeriet, the Attorney General (AG) has opined that VAT incurred on fees for assistance with preparing a share sale agreement for the (aborted) sale of the shares in the taxpayer's subsidiary was not recoverable.

In the case, the taxpayer holding company provided financial, management and IT services to its group trading companies and charged a fee plus VAT to them. It incurred fees on the preparation of a SPA for an expected disposal of two companies in a group, but no purchaser was found and the disposal was abandoned. The Danish tax authorities refused to allow recovery of the VAT on the fees because, among other things, there was no direct and immediate link between the fees incurred and the holding company's VATable activities of providing (or ceasing to provide) services to its subsidiaries. While the AG recognised that ceasing to provide VATable services could itself constitute an economic activity for VAT purposes and the fact that the sale had not completed was not relevant to the ability to recover VAT, the AG also stated that the VAT input costs would not be recoverable to the extent that there was a direct and immediate link between incurring the legal fees and the disposal of shares, since the disposal of the shares itself was an exempt activity. The AG sent the matter back to the Danish court to decide whether there was such a direct and immediate link between the fees and the sale of the shares in the subsidiaries.

While there have been a number of recent cases and developments that have made it more likely that VAT occurred on legal fees on the acquisition of companies to which the acquirer intends to provide management will be recoverable, this is the first decision in a while considering the recoverability of VAT related to the disposal of shares in a subsidiary. It shows that it is more likely that VAT recovery will be denied on the fees incurred in selling a company than on those incurred in buying it, since it is more likely that the fees incurred will be directly related to the disposal of the shares rather than to ceasing the whole or part of the holding company's business of providing management services.

European Commission decides McDonald's not given illegal State Aid

The European Commission (EC) has decided that McDonald's' Luxembourg operating company was not given illegal State Aid by the Luxembourg tax authorities when they agreed in 2009 that the Luxembourg company was not subject to tax in Luxembourg because its profits were attributable to the company's US permanent establishment and so only subject to US tax under the Luxembourg-US double tax treaty, notwithstanding that the profits were also not taxable in the US under the US's domestic treatment of the arrangements.

State Aid arises where, among other things, a person is given a 'selective' advantage not available to others in similar circumstances. The EC concluded that this was not the case and that, rather, the tax ruling given to McDonald's would be available to any Luxembourg taxpayer in similar circumstances and the tax advantage arose because of the different general application of tax law in Luxembourg and the US.

As a result of this case, the Luxembourg government has now put forward proposed changes to its determination of when a non-Luxembourg permanent establishment will be recognised to avoid this sort of non taxation in the future. Among other things, the Luxembourg authorities will require proof that the permanent establishment is subject to tax on its profits outside Luxembourg.

This is the first of a number of high profile State Aid infringement cases brought by the EC to be decided, and it will be interesting to see what approach is taken in those other cases.

Ireland publishes corporation tax roadmap

The Irish government has published a roadmap setting out expected future changes to its corporation tax regime in order to comply with the EU's Anti-Tax Avoidance Directive (ATAD) and the OECD's BEPS initiative. In order to do this, the government says that it will bring forward legislation in 2019 to strengthen Ireland's transfer pricing regime to bring it into line with the OECD's best practice and latest transfer pricing guidelines and to introduce anti-hybrid mismatch rules, although it states that its new rules will adopt the relevant measures in line with ATAD and the BEPS recommendations but not go beyond those requirements.

In addition, the government has confirmed its intention to retain Ireland's 12.5% corporation tax rate to maintain its competitiveness.

UK Tax Round Up: September 2018

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions