UK: Dorsey London Tax Update

Marks & Spencer (Group Relief): Judgment Awaited

The hearing before the Special Commissioners concluded on 27th February. Although the case has limited remaining impact for other similar claims, the trial did tease out HMRC's current reading of the ECJ's decision of Dec '05.

According to HMRC the ECJ intended the availability of cross border group relief only to apply to losses incurred in jurisdictions which lacked any form of loss carry forward, contrary to the views of the Court of Appeal. If they are wrong on that point, HMRC then contend that, where unlimited carry forward is available, the "no possibilities" test could only be met upon dissolution of the loss making company.

This may be of no help for periods prior to April 2006 (the introduction of the new rules) as a dissolved company does not exists and therefore, subject to local rules governing the powers of a liquidator after dissolution, may not be able to consent to the surrender of the losses. So on HMRC's reading claims made prior to dissolution are too early, claims on dissolution or after it are too late. No additional insight was obtained into HMRC's views on the computation of the losses for surrender.

The Special Commissioners' judgment is expected shortly.

C-282/07 Truck Center SA (ECJ Judgment): withholding tax on interest upheld

This case stands out from the crowd of withholding taxes seemingly summarily struck down by the ECJ recently. As a decision of the 4th Chamber (with judges who were on the bench for Denkavit and Amurta) it would be unlikely that the Court had intended to change tack though.

Belgium is permitted to maintain a regime where an interest payment to a 48% parent company resident in Luxembourg is subject to withholding tax whereas no withholding tax would be levied had it been Belgian resident. The distinction from the previous withholding tax cases appears to be that Luxembourg gave credit for Belgian withholding tax against the liability to tax upon the interest receipt in Luxembourg. The system was not comparable to the taxation of interest payments to residents as some different system was required to reflect the fact that in the cross border context the right to tax had been split between the two states. There was also no cashflow difference as Belgium imposed advance corporation tax on the payment of interest to resident lenders.

In the very simplest of cases, ignoring different tax rates, perhaps it might be said that there was no difference between provisions which imposed one level of corporation tax domestically while imposing the same aggregate charge cross border, just split between the two states concerned. However as soon as you introduce common commercial realities the differences become obvious. If the lender itself borrowed the funds from a third party, the net interest income would be reduced by the interest expense decreasing the domestic lender's tax liability but the cross border lender would still incur withholding tax on the gross amount of interest. No further information is known of the circumstances of the case which may only have been presented to the court on the simplest example.

Withholding tax on French dividends to non resident pension funds found unlawful

The French Supreme Administrative Court on 13 February 2009 held that the withholding tax due by EU pension funds levied on French dividend payments is contrary to the free movement of capital guaranteed by the EC Treaty.

Under French law, domestic pension funds are considered as non-profit organisations for tax purposes and are exempt from tax on dividends received from French companies. Foreign funds are subject to withholding tax on the same income. The Supreme Court stated that the restriction could not be justified either by the assertion that only domestic pension funds are serving the French general interest or by the need for fiscal coherence.

This should have implications for other EU pension funds, where they are able to show that they are in a position akin to French caisses de retraite (pension funds).

VAT:
HMRC drops Unjust Enrichment Defence for periods prior to May '05 (BB 05/09)

Following the recent decision of the House of Lords in Marks & Spencer, HMRC has released a Business Brief announcing that it will not use the defence of unjust enrichment against VAT claims by businesses for periods before 26 May 2005.

In certain circumstances the defence of unjust enrichment enabled the Revenue to refuse to pay claims on the basis that the majority of the overpaid tax had been passed down the VAT chain. This defence was only available in situations in which the Claimant was a "payment" rather than a "repayment" trader.
M&S challenged this disparity. The ECJ ruled that the distinction offended the principles of equal treatment and fiscal neutrality and could not be objectively justified. When the case returned to the Lords, HMRC was ordered to repay the excess VAT which had been incurred over a period of some 20 years.

The law changed on 26 May 2005 ostensibly to repair the discrepancy between payment and repayment traders. Until now the Revenue have continued to plead unjust enrichment as a defence to pre-May '05 claims. Finally, however they have abandoned this position and are settling claims made before this date (subject to verification). Please contact us if you have any queries on how this decision may impact upon your business.

For claimants who have been put off making claims by HMRC's position on unjust enrichment, the announcement confirms that the defence will not apply to claims for periods pre May '05 made within unspecified "relevant deadlines". It is generally thought that that deadline is 31 March 2009, the end of the "Fleming" window (see next item) but it remains questionable whether if such a deadline is observed it might itself also fall foul of the requirement for a reasonable transitional period.

VAT:
"Fleming" Window closes – 31 March 2009

Further to the House of Lords decision in Fleming and Condé Nast, HMRC's '3 year cap' for the recovery of underclaimed input tax will take effect from the beginning of next month ie upon the expiration of an appropriate transitional period.

In practice, the current position is that any taxpayers with outstanding input tax claims for the period 1973 (ie the introduction of VAT in the UK) to 1 May 1997 can submit claims for repayment (without the requirement for copy invoices due to the timescale involved) until 31 March 2009 (inclusive). However, with effect from 1 April 2009, all such input tax claims will be restricted to the preceding 3 year period.

C-29/08 AB SKF (AG's Opinion): VAT reclaims for disposals of subsidiaries

The taxpayer had attempted to demonstrate that costs incurred by the parent in disposing of a subsidiary by a sale of shares, including valuation, negotiation and legal fees, represented part of the general overheads of its broader business. Accordingly, SKF had attempted to recover the input tax paid on those supplies.

The Advocate General has concluded that share dealing can be an 'economic activity' (within the scope of VAT) where a shareholder's involvement in the affairs of its holding go beyond that of a "mere shareholder". However, the sale of those shares is still caught by Art 13B(d)(5) and should be considered an exempt supply for VAT purposes.

The AG, following the decision in BLP, found that the "direct and immediate" link between the services and the exempt supply broke the VAT chain and were non-recoverable. This is distinct from the situation in Kretztechnick where input tax paid on similar fees was found to be deductible because the issue of share capital was found to be outside the scope of VAT and the transactions only referable to business overheads.

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.