European Union: UK Tax Round Up - March 2019

EU developments

European Court rules that withholding tax exemptions under EU Directives can be denied by abuse of rights principle

At the end of February, the Court of Justice of the European Union (CJEU) issued two judgments addressing the circumstances in which withholding tax exemptions under the EU's Interest and Royalties Directive (IRD) and Parent/Subsidiary Directive (PSD) can be denied on grounds of the recipient not being the "beneficial owner" of the payment (in relation to the IRD) and of abuse of rights (in relation to both Directives). The judgments related to cases referred by the Danish national court. The cases involved payments of interest and dividends by Danish companies to Luxembourg companies that were owned by private equity funds.

For private equity funds, the question of holding company eligibility for double tax treaty benefits in relation to withholding taxes has been brought into sharper focus in recent years with the OECD's work on BEPS and the consequent introduction of a principal purpose test (PPT) in covered double tax treaties. These cases are a reminder that a holding company's eligibility for reliefs under these EU Directives can be restricted and the CJEU stated that the application of the Directives is restricted by the EU's general principle of abuse of rights in all cases. More surprisingly, the Court decided not to follow the Advocate General's opinion published in March last year on who was the "beneficial owner" of the interest is the IRD case and suggested a test based on actual ability to determine how the interest is used rather than a more formative test of who is entitled to sue for the interest.

In addition, the cases provide a useful indicator of how EU jurisdictions might seek to apply the PPT, since the basis conditions for there to be an abuse of rights under EU law are very similar to the conditions for the PPT to apply.

According to the CJEU, a number of indicators could suggest such an abuse of rights. Although not a bright line test, the following factors are among those which might point to abuse: arrangements which do not reflect economic reality, the structure of which is purely one of form and the principal objective or one of its principal objectives of which is to obtain a tax advantage running counter to the aim or purpose of the applicable tax law; a company the sole activity of which is the receipt of the payments and their transmission to the beneficial owner or to other conduit companies; situations where the evidence of the management of the company, its balance sheet, the structure of its costs and expenditure actually incurred, the staff that it employs and the premises and equipment that it has point to an absence of economic reality; legal arrangements being such that the company does not have the right to use and enjoy the payment in question; the simultaneity or closeness in time of, on the one hand, the entry into force of major new tax legislation creating withholding tax leakage and, on the other hand, the setting up of complex financial transactions and the grant of intragroup loans.

In addition, the Court provided guidance on the meaning of "beneficial owner", a requirement for the IRD withholding tax exemption to apply. This was stated to be the entity which actually benefits from the interest economically and has the power freely to determine the use to which it is put.

The CJEU also suggested that when determining if there has been an abuse of rights it is not determinative that some investors in the recipient are resident in jurisdictions which have a double tax treaty with the jurisdiction of the payer. The Court stressed that a tax authority only has to show that the recipient of the payment is not its beneficial owner, without needing to identify who the beneficial owners are and whether they are themselves eligible for any relief. In the context of private equity holding structures, these are potentially concerning developments as funds might have wanted to place weight on the treaty eligible status of investors to get tax authorities to accept that – looked at in the round from a tax perspective – the holding company is primarily an administrative convenience and not part of an abusive arrangement.

European court considers whether CFC rules constitute a justifiable restriction on free movement of capital

On 26 February, the CJEU handed down its judgment in the case of X GmbH (C-135/17), which considered, amongst other things, the German controlled foreign company (CFC) rules and their compatibility with EU fundamental freedoms. The taxpayer, a German company, held a 30 per cent shareholding in a Swiss subsidiary company. The subsidiary qualified as a CFC under the German rules and, as such, the German tax authority sought to tax the taxpayer on a proportion of the subsidiary's undistributed profits. The German company challenged this assessment on the basis that the German CFC rules are contrary to the principle of free movement of capital. The UK's CFC rules were considered by the Court in the Cadbury Schweppes case in the context of the freedom of establishment and the UK's rules were changed as a result of that decision.

The CJEU confirmed in its judgment that the German CFC rules do constitute a restriction on free movement of capital, as the rules only apply in a cross-border situation and not in a purely domestic arrangement. However, the restriction may be justified on the basis of public interest, namely the requirement to prevent "wholly artificial arrangements" the purpose of which is the avoidance or evasion of tax in a Member State. Whilst the CJEU did not make a determination on this issue, it did offer guidance that legislation would be justifiable where it prevented schemes which had as a primary objective the artificial transfer of profits generated by activities carried out in a Member State to a non-EU country with a low tax rate. This has been regarded as a substantial broadening of the CJEU's previous comments on this issue. The Court further stated that, as the German CFC rules apply automatically to income of a passive company established in a non-EU country with a low tax rate, the rules may not be justifiable as these features may indicate that the arrangements involve tax avoidance or evasion, but may not be indicative in all circumstances. The court also said that the tax information sharing agreements between Germany and Switzerland would be relevant, as this would allow the German tax authority the opportunity to verify the activities of the Swiss subsidiary and whether this amounted to tax avoidance or evasion (the implication being that, if no such arrangements exist, the automatic application of the CFC rules may be justifiable). This is a similar conclusion to that in the Cadbury Schweppes case.

Following this judgment, this case will now return to the German courts for a final decision to be made. It is an interesting reminder that anti-avoidance regimes may be challenged under the EU's fundamental freedoms, particularly when they are not appropriately targeted, and the relevance that the development of international tax information sharing regimes have in this regard.

Jersey, Guernsey and Isle of Man moved to EU "white list"

On 12 March, the EU published an updated black list of non-cooperative jurisdictions in tax matters. It has added 10 new jurisdictions. Most notably, however, Jersey, Guernsey and the Isle of Man have been moved from the grey list to the white list. For further details please see our report on this update here.

UK developments

HMRC preferred creditor consultation launched

A consultation has been launched on making HMRC a preferred creditor in respect of certain tax liabilities in insolvency, a proposal that was originally announced in the Budget 2018. The measure is proposed to apply to insolvent businesses in respect of taxes paid by it in respect of employees or by customers only, such as VAT, PAYE (income tax, employee NICs and student loan repayments) and deductions under the Construction Industry Scheme. In respect of these tax liabilities only, HMRC would rank ahead of floating charge holders and unsecured creditors. In respect of all other forms of tax, HMRC will remain a non-preferential unsecured creditor.

The proposed new rules are intended to come into for after 6 April 2020. The closing date for responses is 27 May 2019 and the full consultation document can be found here.

Further consultation on off-payroll working in the private sector consultation

On 5 March, HMRC published a consultation on extending the off-payroll working rules to the private sector from 6 April 2020. This is further to last year's initial consultation on how best to address non-compliance with off-payroll working rules in the private sector which we reported on in our June 2018 UK Tax Round Up, [see here]. In essence, these rules will supersede the so-called IR35 "deemed employee" tax rules.

The proposed rules essentially require the client (i.e. the contracting recipient of the services of the worker and not the worker's personal service company) to determine whether or not that worker is a deemed employee. If that worker is deemed to be an employee, the client must account for income tax, national insurance contributions and the apprenticeship levy as though that worker were an employee. There will be an exclusion from these rules for small companies (based on the existing corporation tax definition) and small non-corporate entities will also be excluded. The consultation also considers the process which the client should adopt to make a determination and how this may be challenged by the worker, and how the determination should be shared with other parties.

If implemented, these rules will push the employment tax liabilities back from a worker's personal service company (where it currently sits) onto the actual recipient of the worker's services.

The consultation document can be viewed here. The closing date for responses is 28 May 2019 and draft legislation is expected to be published later this year.

Corporate criminal offences on the facilitation of tax evasion – self-reporting and compliance survey

In 2017, a number of new criminal offences were introduced relating to the facilitation of tax evasion (known as the "corporate criminal offences" or "CCO") under the Criminal Finances Act 2017. At the end of February, HMRC published new guidance on the process for organisations to self-report failures to prevent the facilitation of tax evasion. Although self-reporting is voluntary, HMRC state that self-reporting may be taken into account when assessing whether an organisation has reasonable procedures in place to prevent its employees' facilitation of tax evasion (which provides a defence against the criminal corporate offences), and may be taken into account in decisions on prosecutions and/or penalties imposed, although the self-report will not guarantee that no prosecution will be made. The new guidance can be viewed here.

Following the Spring Statement, an independent research report was published evaluating corporate behaviour change in response to the new corporate criminal offences. Generally the report concludes that awareness of the new offences is relatively low (only around one quarter of businesses were aware of the new offences) with around a third of businesses saying that the offences had some relevance to their business. It seems that larger businesses, international businesses and businesses in the financial and insurance sectors were (unsurprisingly) more likely to be aware and to have carried out a risk assessment and implemented prevention procedures. Given the low awareness and implementation, whether the introduction of the new offences will be effective in encouraging behavioural change in business remains to be seen. For those who are interested, the full report can be found here.

Court of Appeal finds that only VAT group representative member can make claims for repayment of VAT

In the case of Lloyds Banking Group and others v. HMRC [2019] EWCA Civ 485, the Court of Appeal considered a number of cases relating to the reclaim of overpaid VAT. The reclaims all related to VAT overpaid in relation to supplies made by a company which was the member of a VAT group and as such the VAT payments in question had been accounted for by the representative member of that VAT group rather than the supplier company itself (referred to in the judgment as the "real world supplier"). The key issue for consideration was whether the real world supplier could reclaim the overpaid VAT or whether such reclaim could only be made by the representative member of the VAT group. This was a pertinent question as the real world suppliers attempting to make the reclaims had since ceased to be a member of the VAT group in question.

The Court of Appeal rejected the appeals by real world suppliers to reclaim overpaid VAT, holding that only the representative member of the VAT group could reclaim overpaid VAT from HMRC and that this result was not inconsistent with EU VAT rules. This confirms that the UK's approach to VAT groups, which in effect deems the representative member to be the only taxable person for VAT purposes, still holds true. This case serves as a useful reminder to ensure that, where transactions involve companies leaving a VAT group, appropriate contractual measures are put in place to ensure that the VAT affairs of those companies can still be enforced through the representative member in the future. The full judgment can be viewed here.

First Tier Tribunal holds that the intermediaries legislation does not apply where a brand was supplied

In Albatel Limited v. HMRC [2019] TC07045, the First Tier Tribunal (the FTT) considered an appeal by Albatel Limited (Lorraine Kelly's personal service company) that the employment intermediary rules (also known as IR35) did not apply to contracts it entered into for Lorraine Kelly to present shows for ITV. IR35 would only apply to the company if, were the arrangements made between Lorraine Kelly and ITV directly, Lorraine Kelly would have been an employee of ITV rather than self-employed. If IR35 applied, the company would have been liable to operate PAYE and her agency fees would not have been deductible expenses.

The FTT held that IR35 did not apply to the company and that the contract between the company and ITV was a contract for services, not a contract of service. They added that ITV was purchasing the brand and personality of Lorraine Kelly under the contract which meant she was a self-employed entertainer rather than a de facto employee of ITV. The FTT found that ITV did not have the requisite level of control over Lorraine Kelly or any other persuasive factors that indicated an employment-like relationship.

This case demonstrates the difficulty in making a determination on employee status, which is particularly pertinent given the consultation discussed above where a determination on status must be made by the engaging business. The full judgment can be viewed here.

Changes to time limits for stamp duty land tax filings effective from 1 March

All relevant and transactions effective or notifiable after 1 March will now be subject to a shorter time period for making filings and payments in respect of stamp duty land tax ("SDLT") (14 days rather than 30 days). However, it should be noted that there are a limited number of transactions that will continue to be subject to the 30 day time limit.

BEPS update

HMRC has published one more in its series of "synthesised" texts of double tax agreements to incorporate the effects of the changes made by the adoption of the Multilateral Instrument (MLI). The latest in this series is the agreement with Australia. The revised treaty will not be backdated and instead will come into force in April 2020, apart from in respect of tax withheld at source which will be effective from 1 January 2019 and taxes levied by Australia other than corporation tax, income tax and capital gains tax which will apply from 1 July 2019.

UK Tax Round Up - March 2019

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
Proskauer Rose LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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