With immediate effect from 26 October 2015 the Government introduced a new special 45% corporation tax charge. No public announcement was made and the new charge was introduced at the very last stage of the Finance Bill’s progress through the Commons. The charge is now embodied in section 38 of Finance (No.2) Act 2015. The new tax bites only on compensation payable by HMRC calculated by reference to a non-statutory interest rate. This ear-marks any compensation arising from the current High Court claims seeking restitution for breaches of EU law in the FII and CFC and Dividend GLOs, the claim for compound interest in Littlewoods and the cases following it. It impacts both the interest component and any “time value” principal (i.e. for utilised/repaid ACT, CT or VAT) which represent the vast majority of the value of these claims. No other claims seem capable of being affected.
The new special tax is also ring-fenced from the application of reliefs so that it must be paid in cash. The tax will be withheld from any payment after 26 October whether as a settlement, judgment, summary judgment or interim payment.
Cunningly, the tax is designed not to exist until the very end of all appeal stages in the case concerned (even though withheld at source) but will then take effect in the accounting period in which the receipt was recognized in P&L in accordance with GAAP. The absence of a tax charge to challenge until each case ultimately concludes could have the co-incidental effect of prolonging the litigation yet further. It will be recalled that in July provisions reduced the interest rate on unpaid judgment debts owed by HMRC to a rate below the government’s cost of borrowing. That reduced rate would appear designed to apply to the withheld tax.
In some circumstances (where IAS 12 has been applied for payments received before the enactment of this tax) the effect will be that a tax which does not yet exist may be created in the future to apply to accounting periods already in the past.
This represents the 6th bout of retrospective legislation impeding these EU claims. Earlier attempts to cancel claims or retrospectively render them out of time on 8 September and 20 November 2003 (s320 FA 03) and 6 December 2007 (s107 FA 07) have already considerably extended the litigation although ultimately found to be unlawful. The lawfulness and impact of the fourth attempt (the removal of interim payments) on 26 June 2013 (s234 FA 13) is current being considered by the Court.
Challenging the new 45% tax
JHA has issued one Judicial Review already challenging the lawfulness of the new measures under EU and ECHR law. Another is planned to be issued shortly. Expedition has been sought. The first step is for the Court to determine whether these applications should be granted permission to proceed. We expect a decision on this during December. In addition a variety of applications have been issued in the FII GLO seeking the payment of judgments (including potential judgments) without deduction of withholding tax on the grounds that it is unlawful. We will report on developments.
This article appears in the JHA November 2015 Tax Newsletter, which also features:
