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The European Parliament has confirmed draft EU-level rules aimed at helping businesses to obtain legal redress against the theft or misuse of their trade secrets.

The draft rules, approved by the legal affairs committee by 19 votes to 2, with 3 abstentions, aim to better protect EU businesses against the theft or misuse of trade secrets, such as specific technology, recipes or manufacturing processes.

The proposed rules would introduce an EU-wide definition of trade secrets and oblige member states to adopt a range of tools to ensure that victims of trade secret misuse will be able to defend their rights in court and seek compensation.

To ensure that the legislation does not restrict the work of journalists, in particular with regard to investigation, protecting their sources and the public right to be informed, legal affairs MEPs clarified and reinforced the provisions ensuring respect for freedom of expression and information and adequate protection for whistle-blowers.

To ensure the transparency of the EU institutions and national public authorities, the committee inserted a clause providing that the rules do not affect the disclosure of business-related information by the EU institutions and national public authorities.

The committee also amended the rules to ensure that they do not affect the use of information, knowledge, experience and skills honestly acquired by employees in the normal course of their previous employment.

HMRC has issued draft technical guidance on how Scottish taxpayer status should be decided for the purposes of income tax.

The Scottish rate of income tax (SRIT) was introduced by the Scotland Act 2012. It will be charged on the non-savings and non-dividend income of those defined as Scottish taxpayers, and will start from April 2016.

The definition of a Scottish taxpayer is focused on where an individual lives or resides in the course of a tax year. Scottish taxpayer status applies for a whole tax year. It is not possible to be a Scottish taxpayer for part of a tax year.

For most individuals, the question of whether they are a Scottish taxpayer is simple: they either live in Scotland and are a Scottish taxpayer, or live elsewhere in the UK and are not a Scottish taxpayer. The draft guidance addresses instances where this question is not simple. It provides initial detail on the way in which HMRC will interpret some of the terms used in the sections of the
Scotland Act 2012 which set out the definition of a Scottish taxpayer.

HMRC, Scottish Rate of Income Tax – Technical Guidance on Scottish Taxpayer Status, 12 June 2015

The Supreme Court has ruled that a scheme reducing VAT liability for car sales is abusive under EU law.

The respondent car sales group employed a VAT liability reduction scheme, so that it would only account for VAT on the difference between the wholesale purchase price and the retail sale price of its demonstrator cars. The scheme satisfied the conditions for VAT exemption and the application of the margin scheme. HMRC argued that the scheme was abusive under EU law and that the respondent should pay back the VAT avoided. The FTT dismissed the appeal decision, which was overturned by the UT on appeal. The Court of Appeal agreed with the FTT and ruled that the scheme was not abusive.

The Supreme Court held that the scheme was abusive, as follows:

• For the scheme to be abusive the transactions had to confer a tax advantage contrary to the purpose of the relevant EU Directive (the Sixth Directive). Here, the direct purpose of the margin scheme was to grant relief to traders who had purchased goods from a supplier who had no right to deduct input tax in respect of its own acquisition of them. The indirect purpose of the margin scheme was therefore to avoid double taxation. However, in the present case, a system designed to prevent double taxation had been exploited so as to prevent any taxation at all.
• Secondly, it had to be objectively apparent that the essential aim of the transaction was to obtain a tax advantage. Even if a transaction had a legitimate commercial purpose, it could be challenged if its main aim was the accrual of a tax advantage. It was not in itself objectionable that the respondent chose to enter into a transaction with an offshore bank. However, it was essential to the scheme that one of the captive leasing companies should acquire the cars as part of a business as a going concern, and for that to be possible, it was essential that the transferor of the business should have acquired the cars by assignment. These steps were included for the sole purpose of reducing VAT liability.

Commissioners for Her Majesty’s Revenue and Customs (Appellant) v Pendragon plc and others (Respondents) [2015] UKSC 37, 10 June 2015

The OECD has published a discussion draft which deals with work in relation to Action 8 of the Action Plan on Base Erosion and Profit Shifting (BEPS).

Action 8 of the BEPS Action Plan (“Assure that transfer pricing outcomes are in line with value creation: Intangibles”) identifies the requirement for development of “transfer pricing rules or special measures for transfer of hard-to-value intangibles”. The discussion draft sets out an approach to hard-to-value intangibles and proposes revisions to the guidance in the 2014 BEPS Report, “Guidance on Transfer Pricing Aspects of Intangibles”.

The draft further proposes an approach based on the determination of the arm’s length pricing arrangements (including any contingent pricing arrangements) that would have been made between independent enterprises at the time of the transaction. This approach is applied when specific conditions are met and is intended to protect tax administrations against the negative effects of information asymmetry.

Comments on the draft are invited by 18 June 2015.

OECD press release

OECD discussion draft

The European Commission has announced that it will ask 15 Member States to provide a substantial number of individual tax rulings.

The request forms part of the Commission’s investigation into whether the tax rulings of Member States may constitute state aid. Tax rulings are comfort letters issued by tax authorities to an individual company on a specific tax matter. They are not generally problematic from a state aid perspective. However, if a tax ruling results in a Member State providing selective advantages to specific companies or groups of companies, this distorts competition in the single market in breach of EU state aid rules.

All EU countries except Estonia and Poland have cooperated and provided the required information in full. The European Commission has therefore issued two injunctions ordering Estonia and Poland to deliver within one month requested information on their tax rulings practice. Should either country fail to deliver the missing information by the deadline, the Commission may refer that country to the Court of Justice.

The ECJ has ruled that the UK’s reduced rate of VAT applicable to energy-saving materials breaches EU law, namely the VAT Directive.

Under the Directive reduced VAT rates lower than the stipulated minimum “must have been adopted for clearly defined social reasons and for the benefit of the final consumer”. In the context of the provision, construction, renovation and alteration of housing, the reduced rates must have been adopted as part of a social policy. In the context of renovation and repair of private dwellings, such rates must exclude materials which account for a significant part of the value of the service supplied.

The ECJ held as follows:

• By providing for the application of the reduced rate to all supplies of services of installing energy-saving materials and to supplies of such materials, irrespective of the housing concerned and with no differentiation among people living in that housing, the UK rules could not be regarded as adopted for reasons of social interest within the meaning of EU law.
• Further, the UK rules provided that supplies of services of installing energy-saving materials in residential accommodation and supplies of such materials may qualify for a reduced rate of VAT, without excluding materials which accounted for a significant part of the value of the service supplied.
• Overall, therefore, the UK rules breached the aforementioned provisions of the VAT Directive.

Case C-161/14 Commission v United Kingdom

The Convention between the UK and the Republic of Kosovo for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital was signed on 4 June 2015.

The agreement is not yet in force. This will happen when both countries have completed their Parliamentary procedures and exchanged diplomatic notes.

2015 Kosovo – UK Double Taxation Convention

The ECJ has ruled that the new German excise duty on nuclear fuel is permissible under EU law.

The law in question introduced a duty on the use of nuclear fuel for the commercial production of electricity for the period from 1 January 2011 to 31 December 2016. Kernkraftwerke Lippe-Ems challenged the compatibility of the duty with EU law before the Finanzgericht Hamburg, who referred the question to the ECJ.

The ECJ held as follows:

• Nuclear fuel was not exempt from taxation under the Directive on taxation of energy products and electricity (Council Directive 2003/96/EC), as it was not on the list of exemptions in that Directive nor could it be exempted analogously. Under EU law both electricity sources and the consumption of electricity itself could be taxed.
• The Directive on the general arrangements for excise duty (Council Directive 2008/118/EC) did not preclude the German duty on nuclear fuel, which was levied on the use of such fuel for the commercial production of electricity. As it was not levied (directly or indirectly) on the consumption of electricity or that of any other product subject to excise duty, the German duty did not constitute excise duty or “other indirect taxes” on that product within the meaning of the Directive.
• The German duty did not amount to state aid as it was not selective. Methods of producing electricity (except that based on nuclear fuel) were not affected by the duty.
• The Treaty establishing the European Atomic Energy Community did not preclude the duty. The duty was not a charge with equivalent effect to a customs duty. It was levied not because nuclear fuel had crossed a frontier, but because it was used for the commercial production of electricity, irrespective of the source of that fuel.

Case C-5/14 Kernkraftwerke Lippe-Ems GmbH v Hauptzollamt Osnabrück

The Administrative Court has held that HMRC’s decision to repay VAT would unjustly enrich a supplier in administration where the claimant was an unsecured creditor.

The claimant had erroneously paid VAT to the supplier, who then accounted for the VAT to HMRC. Under section 80(1) of the Value Added Tax Act 1994 (VATA) only the supplier could be repaid by HMRC, and would then pass the repayment on to the claimant. As the supplier was in administration, the repayment would be distributed to its creditors, of which the claimant was an unsecured one.

Supperstone J held as follows:

• Customs and Excise Commissioners v McMaster Stores (Scotland) Ltd (in receivership) [1995] STC 846 (a Scottish case) should no longer be regarded as good law. The legal landscape had changed. The decision of the ECJ in Reemtsma Cigarettenfabriken GmbH v Ministero delle Finanze [2008] STC 3448 had established that the customer who ultimately bore the burden of the VAT had a right under EU law to recover the full amount of the mistakenly paid VAT directly from HMRC.
• In Investment Trust Companies (In Liquidation) v The Commissioners for Her Majesty’s Revenue and Customs [2015] EWCA Civ 82 the Court of Appeal endorsed the application of Reemtsma in domestic courts.
• Under section 80(3) VATA the UK had provided the machinery to ensure fiscal neutrality and the mechanism to enable the monies to be paid directly to the claimant. Repayment to the supplier would amount to unjust enrichment under section 80(3) VATA.

R (Premier Foods (Holdings) Ltd) v HMRC [2015] EWHC 1483 (Admin), 21 May 2015

HMRC have decided to temporarily suspend the published list of Recognised Overseas Pension Schemes (“ROPS”). They will publish an updated list on 1 July 2015. They state that they are now aware that there are pension schemes that have appeared on previous lists that do not meet the Pension Age Test, one of the requirements to be a ROPS. Pension schemes established in countries that can be required to make payments before age 55 in circumstances other than ill health will not be able to meet the Pension Age Test if the scheme allows the member to receive transfers before age 55.

Schemes that do not meet the requirements to be a ROPS cannot be a Qualifying Recognised Overseas Pension Scheme (“QROPS)”. HMRC state that if a scheme has ceased to be a QROPS, individuals who transferred their pension savings to that pension scheme before it ceased to be a QROPS will be subject to UK tax on the same basis as if the scheme had remained a QROPS. They will be able to remain as members and receive a pension paid from the sums transferred without automatically incurring additional UK charges.

HMRC do not, however, state what will happen in cases where individuals who transferred their pension savings to a scheme that has ceased to be a QROPS did so prior after such a scheme ceased to be a QROPS but before it was removed from the published list of ROPS. HMRC may therefore seek to raise assessments of 55% of the pension savings transferred in such cases.

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

1. ECJ Judgment in Case C-686/13 X AB v Skatteverket by Alessia Riposi
2. Revenue and Customs Brief 9 (2015): HMRC position following Court of Appeal judgment in Littlewoods (compound interest on overpaid VAT) by Katy Howard