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The Supreme Court has today granted permission to appeal the Court of Appeal judgment in Investment Trust Companies (in liquidation) v Commissioners for HMRC. As discussed in our March 2015 newsletter, the Court of Appeal had previously found that investment trust companies could recover some unlawfully paid VAT from HMRC. A hearing of the ITC case in the Supreme Court should be expected in late 2016 with judgment in early 2017.

This article appears in the JHA July 2015 Tax Newsletter, which also features:

1. Summer Budget 2015 by Katy Howard
2. Supreme Court judgment in Rank: VAT on Gaming Machines by Katy Howard
3. Anson v HMRC – Double Taxation Relief by Christopher Boughton

The Supreme Court has handed down its judgment in Commissioners for Her Majesty’s Revenue and Customs (Respondent) v The Rank Group Plc (Appellant) [2015] UKSC 48. This case has a long and complex procedural history. The remaining question was whether, during the period 1 October 2002 to 5 December 2005, the takings on a particular category of gaming machines operated by Rank were subject to VAT or exempt. Rank had argued that the difference in treatment between takings from the disputed machines, assuming they were exempt, and other similar machines which were taxable infringed the EU law principle of fiscal neutrality.

With effect from 6 December 2005 the legislation is said to leave no doubt that takings from the disputed machines are taxable from that date. However, prior to that, one of the conditions that rendered the takings from a gaming taxable was that “the element of chance in the game is provided by means of the machine”. In the case of Rank’s machines the element of chance in the disputed machines was provided by a detached random number generator (“RNG”) that was used by several machines.

The Court has dismissed Rank’s appeal. The relevant phrase was “the element of chance in the game is provided by means of the machine”. The element of chance was provided by the player’s action in pressing the button or pulling the lever which interrupted the RNG’s pre-programmed sequence of numbers at a particular moment. The RNG, while a necessary part of the process, responded in an entirely automatic way. It was therefore a fair use of language and consistent with the apparent policy of the legislation to describe the element of chance as provided “by means of” the terminal and not the RNG.

This article appears in the JHA July 2015 Tax Newsletter, which also features:

1. Summer Budget 2015 by Katy Howard
2. ITC v HMRC: Decision on Permission to Appeal
3. Anson v HMRC – Double Taxation Relief by Christopher Boughton

The Chancellor’s Budget delivered to Parliament on 8 July 2015 contained a number of announcements relevant to EU claims and cross border transactions, including:

Retrospective Protection for HMRC from Interest on Unpaid Judgment Debts

Effective on and after 8 July 2015, the normal rate of interest paid by judgment debtors on unpaid judgments (8% p.a.) will no longer apply to HMRC. Instead HMRC will only be required to pay the Bank of England base rate plus 2% p.a. simple when it does not pay a judgment when due. This will apply even to pre-existing debts. HMRC’s special rate is set at below the rate established in the FII and Littlewoods litigation as commensurate with the minimum remedy required by EU law for interest upon repaid VAT and other taxes levied in breach of EU law.

Permanent Non-Dom Status Abolished

Permanent “non-dom” status will be abolished from April 2017. From that date, anyone who has been resident in the UK for 15 of the past 20 years will be deemed UK domiciled for tax purposes. In addition, those who had a domicile in the UK at the date of their birth will revert to having a UK domicile for tax purposes whenever they are resident in the UK, even if under general law they have acquired a domicile in another country. A detailed consultation document on the proposals will be published after the summer recess and a further consultation will follow on the draft legislation which is intended to form part of the 2016 Finance Bill.

Twinned with this is the announcement that the government intends to bring all UK residential property held directly or indirectly by foreign domiciled persons into charge for inheritance tax purposes, even when the property is owned through an indirect structure such as an offshore company or partnership.

Some Other Provisions
(2) losses and surplus expenses of the current year, and
(3) losses and surplus expenses arising in other group companies (group relief).
According to HMRC’s Tax Information and Impact Note, the measure will also amend the rules restricting the use of carried forward losses in Part 14B of CTA 2010 (“tax avoidance involving carried-forward losses”) to “put beyond doubt” that they apply to arrangements involving CFCs.
(2) HMRC will open a time-limited disclosure facility in early 2016, but on tougher terms than the previous offshore disclosure facilities HMRC have operated.
(3) If non-compliant taxpayers continue to conceal their tax affairs, HMRC will enforce tough penalties for offshore evasion through the existing offshore penalty regime, new civil penalties for tax evaders and the new simple criminal offence for failing to declare taxable offshore income and gains.
HMRC will informally consult the professionals affected to develop communications including the points above. Regulations will be made after Royal Assent and after the informal consultation has concluded and are expected to have effect from early 2016.
The Summer Finance Bill 2015 will be published on 15 July 2015.

• Legislation will be introduced to stop losses and other surplus expenses from being set off against the CFC charge on the profits of controlled foreign companies. The measure is intended to prevent the use of the following types of expenses against a CFC charge: (1) losses and surplus expense brought forward from previous years;
• In the 2014 Autumn Statement the Chancellor announced the abolition of the residence rule in consortium relief (which took account of the decision of the CJEU in Case C-80 Felixstowe Dock and Railway Co Ltd), but the changes to the legislation were dropped from the Finance Act 2015. The legislation will be introduced in the Summer Finance Bill 2015 and will have effect for consortium relief claims to group relief for accounting periods beginning on and after 10 December 2014.
• The government will consult on new measures to increase compliance and “tax transparency” in relation to large business tax strategies. These will include the introduction of a “special measures” regime to tackle businesses that persistently adopt “highly aggressive” behaviours including around tax planning, and a voluntary Code of Practice defining the standards HMRC expects large businesses to meet in their relationship with HMRC.
• A package of measures has been announced to tackle offshore tax evasion. The government will take a power in legislation, to have effect on and after the date of Royal Assent to the Summer Finance Bill 2015, under which financial intermediaries, tax advisers and other professionals will be required to notify their customers or clients that: (1) The UK will begin to receive information on offshore accounts in 2017 and will begin to share information with other tax authorities on accounts held in the UK.
• The government will also launch a consultation on the detail of a new General Anti-Abuse Rule penalty.

This article appears in the JHA July 2015 Tax Newsletter, which also features:

1. ITC v HMRC: Decision on Permission to Appeal
2. Supreme Court judgment in Rank: VAT on Gaming Machines by Katy Howard
3. Anson v HMRC – Double Taxation Relief by Christopher Boughton

The High Court has refused to grant interim mandatory injunctive relief in the form of restored access to banking services, where there was a risk that the funds would become available to a Syrian national subject to EU sanctions.

The applicant’s husband was a Syrian national subject to financial sanctions. He paid large sums of money into her Barclays accounts. The bank froze both their accounts. The bank argued that the funds in the applicant’s accounts belonged to, were owned by or controlled by her husband, and were it to unfreeze the accounts, the funds would directly or indirectly become available to her husband or for his benefit.

Picken J held as follows:

• The case was not an unusually sharp and clear one, where it would be right to grant interim mandatory injunctive relief. The court could not have a “high degree of assurance” that at trial Barclays would be unable to show that it had “reasonable cause to suspect” that it was dealing with funds belonging to, or owned or held or controlled by, a designated person. The sizeable payments into the applicant’s account from her husband’s account (as well as into an account held by the applicant with another bank) caused suspicion arising not merely because of the spousal relationship.
• Transferring money out of an account which he must have known would be frozen raised questions as to the husband’s willingness to evade sanctions. The court could not have a “high degree of assurance” that, were Barclays to unfreeze the applicant’s accounts, it would not thereby be making the funds available, directly or indirectly to her husband, or for his benefit.
• The balance of convenience rested firmly on Barclays’ side. The difficulties faced by the applicant due to the freezing of her accounts were outweighed by the risk that, were the injunction granted, Barclays would be committing a criminal offence.

Hmicho v Barclays Bank Plc [2015] EWHC 1757 (QB), 19 June 2015

A number of procedural updates have been published in the Official Journal in respect of the EU General Court.

Method of designation of the Judge replacing a Judge prevented from acting (2015/C 213/02)

On 13 May 2015, the General Court, considering the forthcoming entry into force on 1 July 2015 of the Rules of Procedure of 4 March 2015, decided that, with effect from 1 July 2015, where a Judge is prevented from acting in the circumstances referred to in Article 17(2) and Article 24(2) respectively of the Rules of Procedure, the President of the General Court is to designate the Judge replacing the Judge prevented from acting following the order laid down in Article 8 of the Rules of Procedure, with the exception of the Vice-President and the Presidents of Chambers. However, in order to ensure an even spread of the workload, the President of the General Court may derogate from that order.

Having regard to any urgency and to special circumstances, the President of the General Court may designate himself to replace the Judge who is prevented from acting.

Composition of the Grand Chamber (2015/C 213/03)

On 13 May 2015, the General Court, considering the forthcoming entry into force on 1 July 2015 of the Rules of Procedure of 4 March 2015, decided that, for the period from 1 July 2015 to 31 August 2016, in accordance with Article 15(2) of the Rules of Procedure, the fifteen Judges of which the Grand Chamber is composed are to be the President of the General Court, the Vice-President, the eight Presidents of Chambers, the two Judges sitting in the formation of three Judges initially seised of the case, the two Judges who would additionally have had to sit in the case in question if it had been assigned to a Chamber of five Judges, and another Judge. The latter is to be designated according to the order laid down in Article 8 of the Rules of Procedure.

Revocation of the decision of 23 September 2013 designating the Judge replacing the President of the General Court as the Judge hearing applications for interim measures (2015/C 213/04)

On 13 May 2015, the General Court, considering the forthcoming entry into force on 1 July 2015 of the Rules of Procedure of 4 March 2015, decided, in the light of Article 157(4) of those Rules, to revoke with effect from 1 July 2015 the decision of 23 September 2013 designating Judge Forwood to replace the President of the General Court for the purpose of deciding applications for interim measures where the latter is absent or prevented from dealing with them, for the period from 23 September 2013 to 31 August 2016 (OJ 2013 C 313, p. 5).

General Court, OJ C 213/2, 29 June 2015

The High Court has interpreted genuinely ambiguous contractual terms in accordance with business common sense, in an interesting comparison with the recent Supreme Court decision in Arnold v Britton (covered hereon the blog).

The case concerned the proper construction of a contractual provision purporting to re-assign a claim in respect of a debt.

The court held as follows:

• It was not necessary to look beyond the words used if those words were only capable of one meaning. The court should not impose its own view of “business common sense”. This issue only came into play where the words used were capable of more than one meaning. In such a case, the court was entitled to prefer the construction more consistent with business common sense.
• The ambiguous provision should therefore be interpreted as applying to claims either arising under or incidental to the contract, rather than to any claims against any third party. This was a case where the parties could not have intended the words used to have their ordinary meaning.

Ace Paper Limited v Fry and others [2015] EWHC 1647 (Ch), 18 June 2015(currently only available from PLC – requires subscription)

The Supreme Court has provided important guidance on the application of the principle of commercial common sense when interpreting written contracts.

The case involved the disputed interpretation of a clause dealing with service charges in the leases of chalets in a caravan park.

The Supreme Court held as follows:

• The natural meaning of the words used was clear. The first half of the clause stipulated that the lessee was to pay an annual charge to reimburse the lessor for the costs of providing the services which he covenanted to provide, and the second half of the clause identified how that service charge was to be calculated.
• The fact that the service charge was a fixed sum which increased at a compound rate of 10% per annum, meaning that by 2072 each tenant would be paying in excess of £550,000 per annum, did not justify departing from the natural meaning of the clause.
• While commercial common sense was an important factor to take into account when interpreting a contract, a court should be slow to reject the natural meaning of a provision as correct simply because it appeared to be a very imprudent term for one of the parties to have agreed. The mere fact that a contractual arrangement, if interpreted according to its natural language, had worked out unfavourably for one of the parties was not a reason for departing from the natural language. Commercial common sense was only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made.

Arnold v Britton and others [2015] UKSC 36, 10 June 2015

According to a European Parliament press release, a draft law to improve and broaden the use of a simplified procedure for low-value cross-border claims to recover money from abroad has been informally agreed by MEPs and the Latvian Presidency of the Council.

New rules, which still need to be approved by Parliament and the Council, would raise the threshold for claims covered by the procedure from EUR 2,000 to EUR 5,000.

The European Small Claims Procedure, in use since 2009, is a simplified procedure based on standard forms for recovering money owed by someone in another EU country. The proposed changes would make the procedure available for more cases, cut court fees and encourage the use of electronic communications, such as videoconferencing, and means of distance payment.

To broaden the use of the procedure while safeguarding the procedural rights of citizens, MEPs and the Latvian Presidency agreed to extend the procedure to cross-border claims worth up to EUR 5,000. Currently, the procedure is available only for cases with a value of up to EUR 2,000. The possibility of raising the threshold even further will be examined during the first five years of the application of the new rules.

The EU Commission has published an action plan entitled “A fair and efficient corporate tax system in the European Union: 5 key areas for action”.

This plan sets out core areas of work for the immediate, medium and long-term future. The 5 areas are:
The harmonisation of tax rates is not one of the core areas.

• Re-launching the Common Consolidated Corporate Tax Base
• Ensuring fair taxation where profits are generated
• Creating a better business environment
• Increasing transparency; and
• Improving EU coordination.

The area of work which will attract the most interest is likely to be the revival of the proposal to create a common consolidated corporate tax base (“CCCTB”). This proposal was not universally welcomed by Member States when it was last discussed. Nevertheless the Commission believes that the proposal could be highly effective in tackling profit shifting and corporate tax abuse in the EU and that the time is right for the proposal to be raised again. The possibility of manipulating transfer pricing would be removed as intra group transactions would be ignored and the consolidated group profit figure shared by a formula. The Commission, perhaps recognising the political difficulties, describes the proposal as an “ambitious initiative” and is advocating a step by step approach to agreeing different elements of the proposal. In particular, the element of consolidation is recognised as the most difficult aspect of the proposal and the Commission proposes that work on consolidation is postponed until the common base has been agreed and implemented.

The Commission will also propose that until full CCCTB consolidation is introduced, group entities should be able to offset profits and losses they make in different Member States. However there would also be a mechanism to recapture losses once the group becomes profit making again. The Commission plans to include this initiative as one of the stages in its revised proposals on the CCCTB.

This Commission proposal has clear overlaps with the work being done in the OECD BEPS project. It will be interesting to see how these proposals develop in the future.

A Fair and Efficient Corporate Tax System in the European Union: 5 Key Areas for Action, COM(2015) 302 final

Post-script: According to the Guardian, David Gauke, financial secretary to the Treasury, has told EU Parliament representatives that the UK would not adopt the Commission’s proposals for a consolidated tax base. It seems that the UK favours tax competition.

HMRC invites comments on options to replace the Extra-Statutory Concession (ESC) allowing relief from excise duty on recovered petrol vapour.

HMRC is considering the future of the Extra-Statutory Concession (ESC) on recovered petrol vapour. This consultation is seeking views on two options:

• legislation to place the existing “vapour recovery scheme” on a legal footing
• an alternative option to address the issue within existing warehousing approval terms and conditions.

Vapour recovery scheme: consultation on the options for replacing the Extra-Statutory Concession (ESC)