Test Claimants in the Franked Investment Income GLO v HMRC
On 23 July 2021, the Supreme Court (“UKSC”) delivered its decision in Test Claimants in the Franked Investment Income Group Litigation v HMRC  UKSC 31. This is the third judgment given by the UKSC in this long-running litigation concerning the tax treatment of dividends received by UK-resident companies from non-resident subsidiaries, compared with those paid and received within wholly UK-resident groups of companies.
This note discusses the three most significant issues – in financial terms – that were decided by the UKSC: (1) the remedy for claims in respect of unduly levied Advance Corporation Tax (“ACT”), which had been set off against lawful mainstream corporation tax (“MCT”); (2) the lawfulness of the UK statutory provisions which prevented double taxation relief (“DTR”) from being carried forward; and (3) whether HMRC could set off payments of tax credits which had been made to the claimants’ shareholders against the restitution due to the claimants for unlawful ACT.
Remedy for claims – Unlawful ACT which had been set off against lawful MCT
First, the UKSC established that the claimants’ remedy for claims related to the time value of the unlawful ACT, which had been set off against lawful MCT, was governed by section 85 of the Finance Act 2019 (the “FA 2019”). The UKSC decided that neither compound interest nor simple interest under section 35A of the Senior Courts Act were available.
The UKSC rejected the claimants’ contention that they should receive an award of compound interest for the time value of money in the so-called “period of prematurity”, i.e. the period between the date of payment of unlawful ACT and the date on which that ACT was set off against lawful MCT. The UKSC also rejected the claimants’ alternative petition for simple interest under section 35A of the Senior Courts Act. The distinction between an award of simple interest under the Senior Courts Act, and under section 85 of the FA 2019 was important because the latter imposes a 6-year limitation period, whilst section 35A claims to interest could, it was claimed, benefit from the extended limitation period available under section 32(1)(c) of the Limitation Act 1980.
The UKSC concluded that HMRC were not barred from contesting an award of compound interest due to action estoppel, issue estoppel, abuse of process, lack of jurisdiction, or by HMRC’s concession that compound interest was due following the judgment in Sempra Metals. The UKSC noted that, in Prudential, the company’s claim for compound interest would have been rejected if HMRC had not accepted the claim. The circumstances were different in this case because HMRC had sought, and been given permission to, resile from the concession that compound interest was due to the claimants.
The claimants’ alternative argument (that interest under section 35A of the Senior Courts Act was due) was also rejected, on the basis that section 35A only applied where proceedings for the recovery of a debt or damages had been instituted before the High Court. Since restitution of the unlawful ACT had been made without that type of proceedings being instituted, the UKSC concluded that section 35A did not apply.
Remedy in respect of unused DTR
UK statutory provisions which prevented DTR from being carried forward were held to be in breach of EU law. The UKSC concluded that any unused DTR (calculated on a Foreign Nominal Rate basis) must be available to be applied against other income in future years – notwithstanding any provisions to the contrary in UK law. Furthermore, the UKSC held that the claimants could seek restitution of taxes which had already been paid because of the inability under UK law to carry forward unused DTR, plus an award of interest.
Finally, the UKSC decided that HMRC was not entitled to set off payments of tax credits paid to the claimants’ ultimate shareholders against the restitution due to the claimants for unlawful ACT. The UKSC concluded that the levy of ACT had no bearing on the shareholder’s entitlement to a tax credit under section 231 of the Income and Corporation Taxes Act 1988. Therefore, it could not be considered in the calculation of the claimants’ compensation.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (firstname.lastname@example.org).
Preparing for the Possibility of a Domicile Enquiry
Helen McGhee, a director and chartered tax advisor at Joseph Hague Aaronson, explores who might be vulnerable to an HMRC enquiry on domicile and how best to deal with such enquiries.
The Kittel Principle - Sweet Sixteen
The following is an article written by David Bedenham about HMRC’s wide-ranging application of the ‘Kittel principle’. The current focus appears to very much be on the labour supply industry and the allegation of ‘Mini Umbrella Company Fraud’ (or ‘MUC Fraud’). This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision. If you have any queries about Kittel-related issues or similar denials of input VAT or assessments to VAT, please contact Iain MacWhannell (email@example.com).