HMRC has updated VAT Notice 701/14 to clarify whether Scottish snowballs are liable for VAT.
The notice provides that most “food of a kind used for human consumption” is zero-rated, but that there are some exceptions. In 2014, HMRC challenged the zero-rate on Scottish snowballs relying on a previous decision which had considered Swedish snowballs to be liable for VAT. However, the first tier tax tribunal in Edinburgh dismissed HMRC’s challenge. It found that, although not everyone would consider a snowball to be a cake, it looks like a cake and would not look out of place on a plate of cakes. Moreover, the snowball shared other characteristics with a cake, namely the ‘mouth feel’ and the difficulty of consuming it whilst walking or in the street.
HMRC has therefore confirmed in the notice that Scottish snowballs, defined as “a dome of marshmallow coated with chocolate or coconut, aerated and boiled (not baked), they have a short shelf life and harden rapidly when removed from the packet”, are not liable for VAT.
This article appears in the JHA December 2015 Tax Newsletter, which also features:
Income tax payable on contributions to employee benefit trusts
This appeal to the Scottish Court of Session concerned the income tax treatment of sums paid by the Appellants into an employee benefit trust where sub-trusts were set up for the benefit of each employee and/or his family. The EBT arrangements in question pre-dated the introduction of the disguised remuneration legislation (ITEPA, Pt 7A). No income tax at source (PAYE) was applied by the Appellants in making the payment into the trusts. The employee was entitled to apply for a loan from the relevant sub-trust. The sums settled on the sub-trust would be almost invariably applied in accordance with the wishes of the employee.
From a tax perspective, the key issue was whether the scheme represented a mere redirection of earnings (as defined in ITEPA, s. 62) such that the employees’ liability to income tax subsisted. The court found that the critical feature of an emolument and of earnings is that they represent the product of the employee’s work. As such, the sums transferred to the EBT did constitute “earnings”. That they were paid to a third party was irrelevant. Neither the existence of contractual obligation upon the employer to pay the sum nor an absolute transfer of funds to the employee were considered essential for earnings to be taxable under the general charge to tax under ITEPA (s. 6).
In light of the introduction of follower and accelerated payment notices in Finance Act 2014, taxpayers with similar (unresolved) EBT arrangements will be interested to see whether the remaining Respondent (the other four being in liquidation) will seek to appeal this decision to the Supreme Court.
This article appears in the JHA December 2015 Tax Newsletter, which also features:
VAT – Special Investment Funds
The ECJ has given a preliminary ruling as to whether the exemption from VAT for the ‘management of special investment funds’ within Article 13B(d)(6) Sixth Council Directive 77/388/EEC extends to the management of the underlying properties of a real estate fund. Case C-595/13 Fiscale Eenheid X N.V. concerned a fiscal group (FEX), of which one of the members, A Beheer BV, provided management services to several pension funds for the purchase, sale and exploitation of real estate. The Dutch courts referred two questions to the ECJ.
The first was whether a special investment fund can include a real estate fund. The ECJ held that there was nothing in the definition of ‘special investment funds’ that limited investments by ‘type’. In principle, a real estate fund is therefore capable of qualifying for the exemption. The ECJ did, however, hold that the fund must be subject to State supervision and must demonstrate the characteristics necessary to place it in direct competition with other forms of investment.
The second was whether the term management included the actual management of the company’s real estate, which the company has entrusted to a third party. The ECJ held that the term management only covers transactions ‘specific’ to the business of the special investment fund. This would include the purchase and sale of the immovable property, but not the actual management of the properties because that is not ‘specific’ to the business of the fund.
This article appears in the JHA December 2015 Tax Newsletter, which also features:
In this appeal to the First-Tier Tribunal (FTT), the taxpayer argued that VAT repayments (and related interest) due to it were not subject to corporation tax. The taxpayer, which operated full-service food and drink vending machines, had wrongly treated both hot and cold drinks as subject to VAT at the standard rate and accounted such VAT to HMRC. The taxpayer’s argument was that it could freely choose to claim repayment of tax under any one of three mechanisms – (i) statutory claim under the VAT Act (ii) a claim for restitution of tax wrongly-collected (Woolwich claim), or (iii) a mistake-based restitution claim (a DMG claim). The taxpayer argued that it had wished to make its claim to repayment of VAT in reliance on the mistake-based route. Flowing from this argument was the assertion that HMRC should disgorge itself fully of the benefit of the wrongly collected tax and that subjecting the repayment of VAT and interest to corporation tax runs contrary to the basic foundations of the restitutionary remedies available for wrongful enrichment.
The FTT disagreed with this argument however. The FTT noted that in relation to the interest to be paid to the taxpayer, it (FTT) had no jurisdiction to determine whether it represented an “adequate indemnity”. If the statutory rate of interest did provide an adequate indemnity for the lost time value of the VAT wrongly-paid to HMC, then there could hardly be any question of the taxpayer invoking a wrongful enrichment argument as the statutory regime would apply. Moreover, the Tribunal found that, firstly, the common law remedy of disgorging all the benefits of an unjust enrichment could not result in the disapplication of corporation tax. Further, the VAT repayment and interest earned on it would have been taxable in the hands of the taxpayer had it not been paid mistakenly to HMRC. Therefore, the principle of effectiveness was satisfied where the taxpayer was repaid interest that was equally taxable.
Many would have been following this case with enthusiasm not only because of the legal points in question, namely, the income tax implications surrounding employee benefit trusts (EBTs) but also because one of the Appellants was the owner of Scottish Championship team, Rangers FC.
This appeal to the Scottish Court of Session concerned the income tax treatment of sums paid by the Appellants into an employee benefit trust following which sub-trusts were set up for the benefit of each employee and/or his family. The EBT arrangements in question pre-dated the introduction of the disguised remuneration legislation (ITEPA, Pt 7A). No income tax at source (PAYE) was applied by the Appellants in making the payment into the trusts. The employee would be entitled to apply for a loan from the relevant sub-trust. The sums settled on the sub-trust would be almost invariably applied in accordance with the wishes of the employee.
Before the Court of Session, several interesting legal points were raised. From a tax perspective, a key issue was whether the scheme represented a mere redirection of earnings (as defined in ITEPA, s. 62) such that the employees’ liability to income tax subsisted.
The court found that the critical feature of an emolument and of earnings is that they represent the product of the employee’s work – his personal exertion in the course of his employment. As such, the sums transferred to the EBT did constitute “earnings”. The fact that such product of the employee’s work was paid to a third party was irrelevant. Likewise, the court viewed that neither the existence of contractual obligation upon the employer to pay the sum nor an absolute transfer of funds to the employee as being essential for earnings to be taxable under the general charge to tax under ITEPA (s. 6).
In light of the introduction of follower and accelerated payment notices in Finance Act 2014, taxpayers with similar (unresolved) EBT arrangements will be interested to see whether the remaining Respondent (the other four being in liquidation) will seek to appeal this decision to the Supreme Court.
The most recent version of the Finance Bill 2015 making its way through Parliament (published on 21 October 2015) introduces a new special rate of corporation tax for restitution interest paid by HMRC to companies. Where certain conditions are satisfied and, notably, where the rate of interest is greater than the statutory rate, interest payable by HMRC to companies will be treated as restitution interest subject to a ringfenced 45% corporation tax charge. HMRC will collect this tax at source when making payments to the companies. The new measures are not the first time the UK has sought to introduce legislation limiting claims made by taxpayers, particularly claims based on EU law. It remains to be seen whether they would survive the scrutiny of domestic or European courts.
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On 6 October 2015, the Economic and Financial Affairs Council of the EU (ECOFIN) reached a political agreement on a directive to increase transparency and, ultimately, to combat corporate tax avoidance. This transparency initiative follows from the leaked tax rulings in 2014 in which it was revealed that a number of multinationals have benefited from favourable advance pricing arrangements (APAs) and tax rulings agreed to by some EU Members. Such rulings may give companies a degree of certainty as to their tax liability and may therefore attract them to set up operations in the Member State. The Commission is considering whether such rulings constitute unlawful State Aid which distorts the operation of the single market.
Currently, EU tax authorities have limited ability to obtain information on their residents’ activities in other Member States. Although the Directive on Administrative Co-operation in the field of Taxation (Council Directive 2011/16/EU of 15 February 2011) makes provision for mandatory EU-wide automatic exchange (Article 8), this pertains primarily to individuals. EU Member States will, from 1 January 2017, be required to exchange with each other relevant tax rulings (namely agreements concluded between multinational taxpayers and a Member State in relation to their tax liability in that State) and APAs issued or amended, within three months following the end of each calendar half year. The directive will be adopted at a forthcoming Council meeting (anticipated to be held in December 2015) after the European Parliament has given its opinion and the text has been finalised in all official languages.
Member States may opt to exclude rulings and APAs issued to companies with annual net turnover of less than EUR40m at a group level if they were issued, amended or renewed before 1 April 2016.
This article appears in the JHA November 2015 Tax Newsletter, which also features:
Possibly because of the retrospective introduction already of the reduced interest rate on HMRC judgment debts (8 July 2015) and the new 45% super tax on EU claims (21 October 2015) today’s PBR press notices contained no further announcements impacting claims enforcing EU rights or cross border transactions other than those already announced.
The announcements that the Chancellor did make this afternoon appear to be largely uncontroversial in tax terms. He has announced:
This article appears in the JHA November 2015 Tax Newsletter, which also features:
C-66/14 Finanzamt Linz v Bundesfinanzgericht, Aubenstelle Linz
On 6 October 2015 the CJEU held that Austrian legislation on the amortisation of goodwill which differentiated between participation in resident and non-resident companies was incompatible with Article 49 TFEU. According to the provisions in question, in the context of group taxation a parent company acquiring a holding in a resident company was allowed to depreciate the goodwill up to a maximum of 50% of the purchase price. However, such depreciation was prohibited in the case of the acquisition of a holding in a non-resident company.
The Court held that the legislation disadvantaged parent companies which acquire a holding in a non-resident company and it was thus liable to deter those companies from acquiring or setting up subsidiaries in other Member States. There was no overriding reason in the general interest which justified the difference in treatment in this case. Therefore, the legislation was precluded by the freedom of establishment provisions in Art 49 TFEU. In reaching this conclusion, the Court dismissed the Austrian government’s argument that the differential treatment of resident and non-resident companies for the purpose of goodwill depreciation could be justified by reference to the difference in the tax attribution to the parent company of the profits and losses of resident subsidiaries, on the one hand, and non-resident subsidiaries, on the other.
This article appears in the JHA November 2015 Tax Newsletter, which also features:
In June 2014, the European Commission, the EU regulator on Competition Law, launched in-depth investigations into the system of tax rulings in various Member States including Luxembourg and the Netherlands. The European Commission, having heard arguments from all relevant parties, has found that Fiat and Starbucks have each benefited from illegal state aid arising out of tax rulings granted to them by Luxembourg and the Netherlands respectively. It has been estimated that the sums granted in illegal state aid (and interest) could total between EUR20-30m in each case.
Following these investigations, the Commission has concluded that, in each case, the Member States have granted to the company in question a fiscal advantage which was not compliant with EU Law. Under the Competition Law provisions of the TFEU, Members States are forbidden from granting “any aid…through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.” (Article 107(1)). The European Commission has reasoned that the methods of computing their respective domestic tax liabilities, as permitted in the tax rulings, differed significantly from the standard regime of corporation tax and granted Fiat and Starbucks an advantage in that they were able to significantly lower their tax burden. This, the Commission asserts, serves to distort the operation of the single market.
This article appears in the JHA November 2015 Tax Newsletter, which also features:
