In this case the Advocate General considered the application of the Halifax principle to property transactions. Mr Cussens, together with associates, built holiday homes in Ireland granting initially a long lease of the properties to a related undertaking and then cancelled the lease shortly thereafter. The properties were subsequently sold to third parties. As a result of this arrangement, no VAT was payable on sale. The question was whether these transactions were abusive.
The AG reiterated that the abuse of rights principle required there to be a transaction resulting in a tax advantage that was contrary to the purpose of the relevant provisions and that the essential aim of the transactions was to obtain that tax advantage. In the AG’s view, the transactions in this case, which were designed to artificially create a first taxable supply of the properties, so that more valuable subsequent supplies to third party purchasers were exempt from VAT, did not meet the purpose of the relevant provisions of the Sixth Directive.
The AG also opined that the subjective test, which asks whether the essential aim was to obtain a tax advantage, must be applied restrictively and that the net should not be cast too widely. The test would not be fulfilled if the transactions are found to have some economic justification other than a tax advantage.
This article appears in the JHA September 2017 Tax Newsletter, which also features:
Until 1997 exempt taxpayers such as pension funds received a tax credit refundable in cash with the receipt of a dividend from a UK company which amounted to franked investment income (FII). However dividends received from a UK company which were from foreign sources of profits (and paid under the foreign income dividend or FID regime) did not carry any such credit. The CJEU, following the opinion of the Advocate General, has concluded that exempt shareholders should have received equivalent tax credits with FIDs. Being exempt taxpayers there was however no tax to repay. The Court has concluded that under EU law charges include any deducted amount which needs to be refunded to restore equal treatment, which for shareholders who received FIDs gives rise to an entitlement to the tax credit. It is for the UK courts to determine the procedural rules determining protection of EU rights, and those rights must not be less favourable than for similar domestic actions.
The court attached no significance to the fact that the shareholders were not subject to income tax on dividends, whether or not the breach of EU rights was significant enough to give rise to non-contractual liability on the UK, nor to the fact that the companies distributing FIDs may have increased their dividends to cover any “shortfall” caused by being unable to claim a tax credit. This did not give rise to “double recovery” on behalf of the shareholders.
This article appears in the JHA September 2017 Tax Newsletter, which also features:
Eqiom & Enka v Ministre des Finances C-6/16
France introduced legislation which provided that the withholding tax exemption in the Parent Subsidiary Directive (“PSD”) does not apply where the distributed dividends are received by a legal person controlled directly or indirectly by a resident outside the EU unless the purpose of the chain of interests is not to take advantage of the exemption. France therefore subjected dividends from Eqiom to withholding tax on the basis that Eqiom was directly or indirectly controlled by a Swiss company.
France attempted to justify the legislation under the fraud and abuse exception in the PSD. However, the CJEU held that the fraud and abuse exception had to be interpreted strictly. The specific objective of legislation must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, the purpose of which is unduly to obtain a tax advantage. The mere fact that a company residing in the EU is directly or indirectly controlled by residents of third States does not, in itself, indicate the existence of a purely artificial arrangement which does not reflect economic reality.
Further the French law was a restriction on freedom of establishment because the condition on the exemption to withholding tax only applied to non-resident parents. The Court considered that this difference in treatment is likely to dissuade a non-resident parent company from exercising an activity in France through a subsidiary and is therefore an impediment to freedom of establishment. This restriction could not be justified by the objective of combating fraud and tax evasion because this justification has the same scope as the fraud and abuse exception in the PSD.
This article appears in the JHA September 2017 Tax Newsletter, which also features:
Briggs v CEF Holdings Ltd (2017) Court of Appeal – Gross LJ & Asplin J
The Court of Appeal in Briggs held that it was important not to undermine the salutary purpose of Part 36 offers. Cases were fact-specific but the general rule under Part 36 was that if an offer was not accepted in time, the offeree will bear the costs of the offeror from the date of expiry of the relevant period and it was up to the offeree to demonstrate that it would be unjust. It was not enough to show that it had been difficult to form a view on the likely outcome of the case at the time the offer was made.
Two recent cases have outlined how the Court should approach incurred costs in budgeting.
In Harrison v University Hospitals Coventry & Warwickshire Hospital NHS Trust [2017] EWCA Civ 792, the Court of Appeal confirmed that incurred costs do not form part of the budgeting process; these are to be dealt with at detailed assessment. This reaffirmed the position of Carr J in Merrix and expressly disagreed with the dicta in SARPD Oil International Limited.
In Sir Cliff Richard OBE v The BBC & Chief Constable of South Yorkshire Police [2017] EWHC 1666(Ch), Chief Master Marsh indicated that the court should be wary of making any comment in relation to incurred costs at the budgeting stage.
Originally published in Tax Journal on 5 July 2017.
Peter Stewart, associate and Paul Farmer, barrister and partner at Joseph Hage Aaronson examine the decision that so-called agility hire purchase contracts are a supply of services and consider its practical implications.
On 31 May 2017, Advocate General Szpunar handed down his opinion in HMRC v Mercedes-Benz Financial Services UK Ltd (Case C-164/16). The issue is whether the so-called agility hire purchase contracts entered into by Mercedes-Benz Financial Services UK Ltd (‘Mercedes’) and its customers in relation to the supply of vehicles is to be treated for VAT purposes as a supply of services or as a supply of goods under article 14(2)(b) of the Principal VAT Directive. The AG’s opinion favours Mercedes’ argument, namely that it is a supply of services. If the CJEU agrees, its decision will have considerable practical implications for motor vehicle traders and asset leasing businesses.
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The Supreme Court dismissed HMRC’s Appeal against a debarring order in the First-tier Tribunal. The FTT had, in making the debarring order against HMRC for various procedural breaches, referred to the guidance in Mitchell v News Group Newspapers Ltd, which it had held to be applicable by analogy to the Tribunals.
HMRC argued before the Supreme Court that the FTT’s reliance on Mitchell was unsound. In particular, CPR applies only to the Courts of England and Wales, whereas the Tribunal has its own rules, the jurisdiction of which extends to the whole of the United Kingdom. The Supreme Court held, however, that it would be unrealistic and undesirable for Tribunals to develop their own procedural jurisprudence on any topic without paying close regard to the approach of the courts to that topic.
Therefore while the imposition of a debarring order was a tough sanction, it was not unreasonable or unjustifiable. The FTT had also not come to its decision on unsound reasoning or any errors of law.
This article appears in the JHA July 2017 Tax Newsletter, which also features:
B.A.T. Industries p.l.c. and Ors v HMRC
The First-tier Tribunal (FTT) dismissed the appeal brought by the British American Tobacco Group against the imposition of a withholding tax on restitution interest under Part 8C Corporation Tax Act 2010.
Part 8C Corporation Tax Act 2010 (introduced by Finance No.2 Act 2015) created a ring-fenced charge at a rate of 45% on interest, not limited to simple interest at a statutory rate, paid in respect of common law claims in restitution. The rationale for the charge, it was said, was that had the awards of interest been received and taxed year-by-year over the period of the claim, they would have been subject to tax at higher corporation tax rates than the current rate and the compounding effect would have been reduced by annual charges.
The FTT rejected BAT’s submission that the tax infringes a number of EU law principles, including the principle of effectiveness and the right to an adequate indemnity for losses arising from a breach of EU law. The Appellants argued unsuccessfully that it is for the courts to calculate taxpayers’ losses due to breaches of EU law based on their individual circumstances and not for the legislator to seek to claw back part of those awards via a one-size fits all tax. However, the FTT considered that a retrospective tax on a court award would only breach EU law if it was confiscatory in nature, which the 45% tax was not. BAT had also argued that, even if a ring-fenced tax on Court awards did not by its nature breach EU law, 45% was a disproportionate rate, since it was set by reference to the nominal rate of tax and that most if not all of the affected taxpayers would have reduced their tax liability through the availability of reliefs. The FTT rejected this argument, finding that BAT had not proven that they had not received a windfall and that it was rational and proportionate to set a tax by reference to the nominal rate. The FTT did not consider it appropriate to refer any questions to the CJEU since it found that the law was clear. The next stage is an appeal to the Upper Tribunal.
This article appears in the JHA July 2017 Tax Newsletter, which also features:
Reliance on HMRC guidance – Mansworth v Jelley
The taxpayer received employee share options from his employer and he exercised those options in 1999 and 2000. Following the decision in Mansworth v Jelley in which the grant of an option and its exercise were deemed to be a single transaction, HMRC issued its 2003 guidance, which stated that the income tax payable had to be added to the base cost and confirmed it would apply the same treatment to shares acquired under options before April 2003.
The taxpayer therefore sought to amend his returns to claim a capital tax loss to offset against subsequent capital gains. HMRC opened enquiries into the taxpayer’s self-assessment, warning him that they did not accept his additional losses and his claims remained open. Six years later, HMRC issued corrected guidance announcing that its 2003 guidance had been wrong in law and that the base cost would be treated as the market value of the shares at the date of acquisition unless the taxpayer could show real detrimental reliance on the previous guidance.
It was accepted by the parties that HMRC’s guidance had given rise to a legitimate expectation that HMRC would be bound by the guidance. However, the Court held that it is open to a public body to change a policy if it has acted under a mistake. HMRC’s decision could only be successfully challenged if it caused conspicuous unfairness, which in this case the Appellant was unable to show.
This article appears in the JHA July 2017 Tax Newsletter, which also features:
Joseph Hage Aaronson LLP has grown its commercial litigation practice with the addition of Michelle Duncan who joins the firm’s London office as a partner.
Michelle joined the firm from Paul Hastings (Europe) Limited in June 2017. Michelle’s practice is focused on commercial litigation and dispute resolution, both domestic and international, including extensive experience in Africa. Michelle has expertise in securities and insolvency litigation and on advising clients in relation to international fraud and corruption. She acts for financial institutions, corporates and private clients.
Joe Hage, Managing Partner, commented: “Michelle has joined the firm’s growing commercial litigation practice and brings a wealth of experience to the firm. Michelle has worked with several of the firm’s partners while they were at the Bar and has over 20 years’ experience as a litigator.”
