UK: A Summary Of Current Tax Issues For Companies

The European Court of Justice has released its judgment in the case of JPMorgan Fleming Claverhouse. The Court, following the Advocate General’s opinion, concluded that management services supplied to investment trust companies (ITC) in the UK should be exempt from VAT – and indeed, should always have been.

Current UK legislation restricts the VAT exemption to the management of authorised unit trusts and open-ended investment companies, but, with this ruling, it breaches the principle of fiscal neutrality. Taxpayers are now able to rely on the fact that the Sixth Directive has direct effect.

A number of businesses have already lodged protective claims and are eager to press HM Revenue & Customs (HMRC) for their refunds. However, some questions remain. If ITC management services should always have been exempt, then HMRC can claw back any input VAT recovered on such operations, and reject claims if they do not take account of the reduced input tax entitlement.

Some businesses will also want to claim for periods going beyond the three-year cap. Such applications in similar circumstances have been the subject of several cases, but are likely to be resisted.

This case only dealt with the management of an ITC, but the decision has made it clear that UK legislation in this area is deficient and needs to be reviewed urgently.

There is speculation that the ruling could apply to various other forms of collective investment, including pension funds. We expect HMRC to issue a consultation paper on these wider ramifications.

Smith & Williamson will be following these developments closely. If you would like more information on how they could affect your business, please contact us.

Code of Practice 10 (Information and Advice) (COP10) provides that where there is genuine uncertainty about a law’s meaning, HMRC will advise based on its interpretation of legislation passed in the previous four Finance Acts.

Under the Finance Act 2006, the COP10 facility was made unavailable for the purposes of the Substantial Shareholding Exemption (SSE). However, following the 2007 Budget announcement, it was reinstated on 1 June 2007. We expect further guidance to be issued on the meaning of ‘genuine uncertainty’ in the context of the SSE.

HMRC has decided to use this development to test a new structure aimed at improving consistency for businesses seeking clearances. COP10 applications relating to the SSE will be dealt with by client relationship managers in the relevant sector of the large business service. Companies whose tax affairs are not normally handled by the large business service should, in the first instance, send applications to the local inspector who normally deals with their tax affairs.

Bear in mind that HMRC’s rulings under COP10 relate only to its current understanding of the law. Consequently, companies are unable to rely on the advice if there is a change in the law before the company enters into a particular transaction, or if HMRC changes its view on the law before the transaction takes place. In addition, rulings are not binding if significant time has elapsed since the taxpayer obtained the advice.

Proposal for new treatment of foreign profits

The Government has published a consultation document on the treatment of foreign profits derived by multinationals. Its aim is to maintain the UK’s overall competitiveness by eliminating the burden of complicated double tax relief on overseas dividends, thereby making the UK an attractive location for multinationals.

The document sets out proposals for making dividends and capital gains (derived from trading companies) exempt from taxation; reforming the controlled foreign company regime; the restriction of interest relief; and the abolition of Treasury Consent.

Following the consultation period, it is anticipated that the tax reform will be introduced in the Finance Bill 2009.

The recent Special Commissioners case, Company A v HMRC, has once again brought into focus the question of selling employment-related shares at an over-value.

Under a shareholders’ agreement, a director of Company A enjoyed differential rights on the sale of the company, and received more than a pro-rated portion of the sale proceeds for his shares. The excess was held liable to income tax, Pay As You Earn and National Insurance Contributions. An appeal has been lodged, yet, in our opinion, the taxpayer has a case to answer.

There are other situations where employees may be caught by the rule that the sale of employment-related shares at an over-value is liable to income tax. Most notably, share plans can include provisions requiring the employee to sell his/her shares at fair value. ‘Fair value’ can have different meanings as it is not a technical term, but, by and large, it is interpreted as being in direct proportion to the overall value of the company.

For example, if the company is worth £1m and there are 100 shares, each share will have a fair value of £10,000. However, unless there is an offer for the company, this will be more than the share’s market value, which could be considerably less, perhaps only £3,000 for a single share. In such a situation, the sale of a share at fair value could give rise to an unexpected income tax charge on the £7,000 difference.

Therefore, companies that use ‘fair value’ for share transactions need to take market value into account for tax purposes. This will ensure that the correct amount of tax and National Insurance is paid.

Following advice by the European Commission (EC) that several aspects of the EC Invoicing Directive have not been fully adopted in the UK, HMRC has introduced new regulations which come into effect on 1 October 2007.

The most significant changes are the requirement for invoices to be sequentially numbered (rather than to just bear an identifying number) and for additional information to be recorded on invoices issued for cross-border European Union (EU) supplies.

In cases of cross-border EU supplies, exempt supplies or where the customer is liable for payment of VAT, the invoice must show a reference to the applicable provision of the EC directive that enables the supply to be zero rated or treated as a reverse charge. Alternatively, the relevant provision in UK legislation can be referenced instead of the directive.

The EC advises that certain exempt services, for which invoices are not currently required in the UK, will require invoices when supplied in the EU. However, HMRC has indicated that these changes may require further consultation and will not be introduced until after October.

Businesses in the UK need to ensure that their accounting systems are updated for these new requirements. If you have any concerns about how these changes affect your business, please discuss them with your Smith & Williamson VAT contact.

The Government included new legislation in the 2007 Finance Act which extends the rules for deciding whether the management expenses of investment companies have been incurred for allowable purposes.

The clause introduces an anti-avoidance rule which only allows relief when a company incurs general expenditure in the course of managing its investment business.

This new rule will apply where arrangements produce a contrived deduction or tax advantage, or where genuine expenses of managing the business are artificially increased.

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.