Our Insights

KEY POINTS

What is the issue?
On 6 October 2021, the Court of Appeal handed down its hotly anticipated judgment in HMRC v Fisher and others [2021] EWCA Civ 1438. The case considers various aspects of the application of the complex transfer of assets abroad legislation, and how the rules applied to the transfer of a UK telebetting business to a company in Gibraltar.

What does it mean to me?
The Court of Appeal decided that the transfer of assets abroad rules may be invoked where the transfer is procured by a minority shareholder voting in favour of a course of action. It is also clear from the judgment that the motive defence is lost if any commercial rationale is too closely linked to a tax mitigation objective.

What can I take away?
If practitioners are actively pursuing any of the arguments which were the subject of discussion in the Court of Appeal in Fisher, they might be well advised to pause and await an almost inevitable appeal to the Supreme Court. This might offer some much needed finality and clear limits to the scope of the potentially very far reaching transfer of assets abroad code.

The transfer of assets abroad provisions exist to counteract tax avoidance achieved by means of
a relevant transaction which results in income becoming payable to a person abroad by virtue of a transfer of assets. Where the transfer of assets abroad code applies, it operates to treat income arising to the person abroad as belonging for UK tax purposes to any UK resident individual responsible for the original transfer of assets to a non-UK person.

In the case of HMRC v Fisher and others [2021] EWCA Civ 1438, the Court of Appeal allowed HMRC’s appeal and reversed the decision of the Upper Tribunal, ruling (subject to a convincing dissenting judgment from Philips LJ) that:

• the transfer of assets abroad anti‑avoidance legislation was indeed triggered;
• the motive defence was not available;
  and
• EU law did not offer any respite for the taxpayers.

The story so far
The facts of the case have been rehearsed previously in the Tax Adviser article ‘All Bets Are Off’ (June 2020). To briefly set the scene, the case concerned the Fisher family, who consisted of four members – Stephen, Anne, Peter and Dianne. From the late 1980s until 1999, the family ran a telebetting business (SA) in the UK through a UK company.

The patriarch Stephen dealt with the shops and administration, and had overall responsibility for the company. He and his son Peter were responsible for the day to day running of the business, future planning and strategy, and they made the majority of the decisions. Dianne worked on accounts administration, while the matriarch, Anne, had virtually nothing to do with the business from 1996 onwards and played no active part in the company’s decision making processes. No assessments were raised on Dianne as she had not been UK resident at the relevant time.

In 1999, a major competitor in the betting industry moved its entire betting operation to Gibraltar, which charged a much lower rate of betting duty. The entire industry quickly followed and by July 1999, it had become clear that the only way in which to save the business would be to move it to Gibraltar.

On 29 February 2000, the majority of the SJA business was sold to a Gibraltar company which was also owned by the family (SJG). On the date of the transfer, Stephen and Anne held approximately 38% of the shares of SJA and Peter and Dianne each held approximately 12%. Following the transfer, Stephen and Anne each held 26% of the issued share capital of SJG and Peter and Dianne each held 24%.

Stephen, Anne and Peter were assessed by HMRC under the transfer of assets abroad code to a proportion of the profits of SJG in line with their shareholding from 2000/01 to 2007/08.

The First‑tier Tribunal held that the assessments had been validly raised and that the transfer of assets abroad code was invoked. The FTT also held that the code infringed Anne’s EU law rights as an Irish citizen.

The Upper Tribunal quashed HMRC’s assessments in their entirety, holding that the transfer of assets abroad code did not apply; and that even if it had applied, the taxpayers were entitled to claim the motive defence contained in Income and Corporation Taxes Act 1988 s 741.

The Court of Appeal
Before the Court of Appeal, the following issues were considered:

1. Given that the transfer of the business had been effected by the company SJA, rather than by Stephen, Anne and Peter personally, was the transfer of assets abroad code engaged at all?
   This is referred to as the quasitransferor issue.
2. For the code to apply, did there need to have been avoidance of income tax?
3. In the event that the transfer of assets abroad code applies, was the motive defence available?
4. Was the transfer of assets abroad code compatible with EU law? If not, was it open to Stephen and Peter, as well as Anne (as an Irish citizen), to rely on a breach of EU law to argue that the transfer of assets abroad provisions should be disapplied?
5. Was some of SJG’s income too remote from the transfer of the business to be the subject of the charge? This is not considered in detail in this article. The taxpayers were seeking to establish that the income being assessed did not arise from the transfer but was instead retained profits. Importantly, the Court of Appeal did not allow the taxpayers to challenge a finding of fact at this stage in the proceedings that they had not challenged at the appropriate time at first instance – a valuable learning point.
6. Were the assessments on Stephen and Anne for 2005/06 and 2006/07 defective, having regard to the requirements of the Taxes Management Act 1970 s 29? We do not consider the discovery issue in this article – suffice to say the assessments were not considered to be defective.

The tax years under appeal straddled the rewrite of the transfer of assets abroad code from the Income and Corporation Taxes Act (ICTA) 1988 to its current location at Income Tax Act (ITA) 2007 Part 13 Chapter 2. The parties agreed that the rewrite had not altered the law in any relevant way and the judgment refers to the ICTA 1988 provisions.

Who can be a quasi-transferor?
The concept of a quasi‑transferor was first alluded to in the case of Congreve v IRC (1948) 30 TC 163, where the idea emerged that the transfer of assets abroad code could apply even if an individual didn’t actually effect the transfer but instead procured it.

In Vestey v IRC [1980] AC 1148, the concept of a quasi-transferor was narrowed by the House of Lords and considered more akin to individual associated with the transfer. Walton J, who
coined the actual phrase ‘quasi‑transferor’ in IRC v Pratt [1982] STC 756, contributed to the evolution of the concept further and considered (albeit in a different context) whether there could be multiple transferors and a corresponding apportionment of income between taxpayers.

With this backdrop of jurisprudence, the Fisher judgment considers the question as to whether the taxpayers had procured the transfer at length. It was decided that this is a broad spectrum anti‑avoidance provision intended to apply to any number of transferors (or quasi‑transferors) who
could be said to have procured the transfer by virtue of doing something positive to bring about the transfer.

Note that taking no active part in the decision making, merely passively allowing someone else to do something (as Anne had done here), was not enough to bring her within the scope of the provisions – Anne had not procured the transfer and so could not be a quasi-transferor.

In addition, a director who is not also a shareholder could not be a quasitransferor, as he would be acting solely in his capacity as an officer of the company and not on his own behalf. However, directors/shareholders having control jointly (but not individually) of a company may be regarded as together procuring a transfer, thus invoking the transfer of assets abroad provisions.

Lord Justice Phillips, dissenting, considered it wrong in principle and illogical to regard a minority shareholder as procuring an act by the company of which the shareholder was a member simply by voting in favour or otherwise supporting that act. Unless there was a voting pact with other shareholders, a minority shareholder had no power in his own person to procure any outcome. Phillips LJ would therefore have dismissed the appeals in their entirety. Of course, the trouble with arguing that minority shareholders are not able to procure – even if they vote in favour – is that some careful fragmentation takes the taxpayers outside the scope altogether, because no single shareholder’s vote would be decisive. The context here is a company controlled by two parents and their two children.

Was it necessary to have avoidance of actual income tax?
The taxpayers contended that for the transfer of assets abroad code to apply, there needs to have been avoidance of income tax as a result of the transfer – and here the Fisher family were seeking to mitigate betting duty payable by the company.
 

The House of Lords had previously considered this question in the case of IRC v McGuckian [1997] 1 WLR 991 and had held the contrary – that no actual avoidance of income tax was required. The Court of Appeal saw no reason to disapply the rationale of McGuckian and seemed to state that although s 739 refers to income tax, the underlying objective of the legislation would be undermined if the section could only be in point if there had been income tax avoidance.

The motive defence
Given how potentially far reaching the transfer of assets abroad code is, the motive defence is intended as a means of taxpayer protection to provide some limits to its application; however, it is notoriously difficult to invoke and prove in practice. It was accepted that the transfer was a genuine commercial transaction – the taxpayers were trying to keep up with their competitors. The Upper Tribunal had said that the avoidance of betting duty had simply been the means of achieving the
main purpose, which had been saving the business. Regardless, the Court of Appeal opined that the tax saving or avoidance here was too pivotal and intertwined with the commercial rationale – it was impossible to separate the avoidance of betting duty and saving of the business – and thus it simply could not be said that the avoidance was not one of the purposes of the transaction.

Having a commercial driver is seemingly not sufficient to secure the motive defence where there is also a tax saving on the agenda. Any decision on this subject will be very fact specific and the decision is certainly vulnerable to an appeal.

The EU law defence
The court considered the previous CJEU case law on direct tax infringements, including a reasoned order of the CJEU dated 12 October 2017 in response to a reference from the Upper Tribunal in this case. The CJEU held that Gibraltar is, for the purposes of EU law, a part of the UK and not a separate member state or a third country. It also held that the fundamental freedoms of establishment and free movement of capital do not apply to a situation happening wholly internally within a member state; to say otherwise would compromise the fiscal autonomy afforded to each member state.

Conclusion
No doubt HMRC will be buoyed by the victory and potentially seek to apply the transfer of assets abroad provisions to more circumstances whereby individuals, holding shares in a company which transfers assets outside of the UK, could be said to have procured the relevant transfer.

The transfer of assets abroad code is intricately drafted and the court seems to seek to apply it in a way so as to ensure a fair outcome. It will be interesting to see if the Supreme Court comes to a different conclusion as to what would be fair in this context – one assumes an appeal will be forthcoming.

KEY POINTS

What is the issue?

Her Majesty’s Revenue and Customs has recently closed down the special unit tasked with the investigation of family investment companies (FICs) and broadly given them a clean bill of health.

What does it mean for me?

Those who have been anxious about utilising FICs can now cautiously proceed with an exploration of their usefulness in achieving the objectives of the family.

What can I take away?

FICs are a useful vehicle in any succession planning strategy; however, the tax issues involved are complex so detailed advice should be sought.

Her Majesty’s Revenue and Customs (HMRC) has recently released a report from a dedicated compliance team tasked with looking at the strategy and mechanics of family investment companies (FICs). HMRC has said that it now has a better understanding of who uses FICs and found no evidence of a correlation with non‑compliant behaviour.

Given taxpayers effectively have the green light to proceed, business as usual, in utilising these structures where appropriate, this article considers the practical set‑up and relevant tax considerations for FICs. There is inevitably a tax cost to profit extraction, so it is more common to use the structure for investment roll‑up purposes. It is also worth making reference to the continued use of the trust as a family tax and succession planning vehicle.

There are considerable tax advantages to sheltering the profits of a family enterprise inside the savings box of a corporate vehicle. The relatively low corporation tax rate allows profits to accumulate for the ultimate benefit of future generations.

Set‑up

An FIC can be established with the desired proportions of shareholdings allocated among the family ab initio or, alternatively, by later injecting cash or assets into a company and creating different types of shares for different family members that carry different rights to dividends, entitlement to vote and entitlement to capital on winding up (commonly referred to as alphabet shares). In most cases, ordinary shares are used, but it is possible to issue preference shares that carry priority rights to dividends.

The matriarch or patriarch will want to retain control and will therefore be named directors and possibly preferential shareholders, perhaps retaining voting rights (caution is recommended), but will likely limit their rights to underlying capital for succession planning reasons. Other shares may be gifted to family members when the company is set up with little or low value or, if gifted later, the value of the money or property transferred (as long as no beneficial interest is retained) will fall outside of the parent’s estate for inheritance tax (IHT) purposes after seven years.

In the event family members are aged under 18 and have no legal capacity to hold shares, a simple nominee declaration or bare trust can be used to hold the legal title without affecting the underlying beneficial interests.

Profit extraction

Profits are commonly extracted as dividends and taxable at the normal dividend rate of the recipient. The directors are entirely at liberty to pay or legally waive declared dividends in accordance with how all members of the family (i.e., the shareholders) wish to direct.

IHT

During a dividend waiver, which must be done by deed and before entitlement arises (i.e., before payment in the case of an interim dividend or resolution and declaration for a final dividend), a person waiving a dividend could, prima facie, be making a transfer of value by the omission to exercise a right under s.3(3) of the Inheritance Tax Act 1984 (the Act). However, s.15 of the Act explicitly states that a person who waives any dividend on shares within 12 months of a declaration does not, per se, make a transfer of value.

Income tax

When looking at income tax on profit extraction via dividends, one needs to be wary of s.620 of the Income Tax (Trading and Other Income) Act 2005 (the settlements legislation), which is intended to prevent a settlor from gaining an income tax advantage by making arrangements that divert income to a person who is liable to income tax at a lower rate. Where the settlements legislation applies to a dividend waiver, all the income waived is treated as that of the settlor. This legislation applies in certain circumstances for gifts between spouses or to a minor child as the settlor is treated as retaining an interest in an asset or income deriving from it.

These rules (now commonly referred to as ‘income shifting’) were debated in the House of Lords in the case of Jones v Garnett (Arctic Systems) [2007] UKHL 35. In this case, Mr and Mrs Jones owned equal shares in the family company. Mr Jones was the fee‑earner and Mrs Jones did the administration. They both took a small salary and a significant dividend. HMRC argued that the anti‑avoidance rules relating to settlements applied to the dividends paid to Mrs Jones to treat the dividends as income of Mr Jones.

Lord Hoffman commented that this arrangement was no normal commercial transaction between adults at arm’s length, but instead it was ‘natural love and affection’ that provided the consideration for the benefit he intended to confer upon his wife.

The House of Lords ultimately dismissed the HMRC appeal on a technical argument that the rules did not apply on the basis that, in this case, the ordinary shares were not substantially a right to income. This was an important distinction and, following this case, most shareholdings issued in this context involve shares that also carry full voting and capital rights.

In the context of a family company, although there might be a s.620 settlement, the legislation at s.624 would not operate to tax the settlor on income paid out to either a child who is no longer a minor or to a grandchild or any family member who it could not be said would result in the settlor retaining an interest in the income.

The mechanics of how a dividend is declared is of paramount importance in navigating the settlements legislation and ensuring that there is no income diversion. If it makes no difference to the amount received by the recipient shareholder that the other party waived their right to take a dividend, then it cannot be said that there has been any diversion of income. If, however, a global dividend sum is declared and then divided among the family member shareholders, and certain members waive their rights and the result is that some members consequently benefit from an increased dividend, then this is a different story. There need to be sufficient distributable reserves to cover the dividend payment as well as the waiver in this latter scenario, so it can truly be said that there has been no diversion of income, as it would not make any difference to anyone if the shareholder forgoes their right to a dividend or not.

Capital gains tax

If the market value of shares gifted exceeds the original cost, there will, prima facie, be a gain chargeable to capital gains tax (CGT). In the context of a family company, it may be possible to utilise exemptions or reliefs to mitigate this charge. Any gift between spouses will be exempt as the transfer is deemed to take place at no gain, no loss; the spouse simply inherits the base cost of the donor. Gifts into a trust can usually benefit from holdover relief from CGT on the basis that a lifetime IHT arises; however, this exemption will not work for transfers into a company.

Transferring immovable property into a company makes matters more complicated as this could potentially result in CGT and stamp duty land tax.

A trust as an alternative

There has been a large decline in the use of trusts in the context of family tax planning, following the enactment of the Finance Act 2006 and the introduction of the 20 per cent lifetime IHT charge on any amount transferred into a trust (absent any relief and if in excess of the GBP325,000 nil‑rate band). In addition, periodic charges (every ten years, tax is levied on the value of the trust property at circa 6 per cent) and exit charges (when property leaves a trust) apply to relevant property.

Notwithstanding these tax charges, a discretionary trust might still be appropriate if the aim is to hold shares in order to benefit beneficiaries at some future time and possibly on a discretionary basis; to prevent beneficiaries becoming entitled upon reaching majority; or to protect the shares from errant spouses.

Conclusion

Often, parents are reluctant to bestow substantial benefits on their children, but look more favourably on funds extracted to educate grandchildren, so the flexibility of using alphabet shares to direct profits where desired is attractive. Nevertheless, it is a tricky area to navigate, riddled with tax traps, so proper advice should be taken at all times.

On 10 November 2021, the Supreme Court delivered its judgment in Lloyd v Google LLC [2021] UKSC 50, finding unanimously in favour of Google and rejecting the claim brought by Mr Lloyd on behalf of himself and over 4 million other iPhone users in respect of alleged breaches of data protection law.

The judgment will come as a significant relief to data controllers of all sizes who, following the Court of Appeal’s decision, faced the prospect of large-scale data claims. The Supreme Court’s discussion of the representative claim procedure will also be of interest to anyone involved in multi-party litigation.

Key points

1. The Court rejected Mr Lloyd’s argument that data subjects are entitled to compensation for the mere “loss of control” of their data, without proof of financial loss or distress. In any event, the claim could not proceed as a representative claim, as facts relating to each represented person were needed to prove any entitlement to damages.
    
2. The case was decided under the data protection laws applicable at the time, which have since been superseded. Whilst it is possible that a different result might be reached on the “loss of control” issue under the new regime (based on potentially broader statutory wording), the need for individual facts would likely still cause issues for a representative claim.
    
3. Despite rejecting Mr Lloyd’s claim, the Court emphasised the representative procedure as “a flexible tool of convenience in the administration of justice”, particularly at a time when digital technologies have greatly increased the potential for mass harm and, therefore, the need for collective redress. It nevertheless considered that a detailed legislative framework would be preferable, although it remains to be seen whether Parliament will take any action.
    
4. As the legal test for a representative claim was not met, the Court did not have to consider whether to exercise its discretion to prevent the claim proceeding on that basis. It therefore did not need to engage with the desirability of this type of action, in particular whether it was “officious litigation” as the High Court had held (with which the Court of Appeal disagreed).

The facts

Mr Lloyd alleged that for several months in 2011-2012, Google had used a cookie to secretly track the internet activity of millions of iPhone users without their consent and sold that information to advertisers. This allegation was not new and had already given rise to substantial settlements in the US.

Mr Lloyd, with the backing of a commercial litigation funder, sought to bring his claim on behalf of everyone in England and Wales who had been affected, with an estimated value of £3bn.

The law

Data Protection Act 1998

The data protection law applicable at the relevant time was contained in the Data Protection Act 1998 (“DPA 1998”).

Section 4(4) DPA 1998 required ‘data controllers’ (such as Google) to comply with various data protection principles, which Mr Lloyd claimed had been breached.

Section 13 DPA 1998 gave individuals a right to compensation where they suffered “damage” due to a breach.

Representative claims (CPR 19.6)

The UK, unlike some other countries, does not have a general mechanism for bringing ‘class actions’. Instead, there exist a variety of procedures by which collective redress can be sought.

Mr Lloyd attempted to use the representative procedure in CPR 19.6, which allows a claim to be brought by (or against) one or more persons as representatives of others who have the “same interest” in the claim.

A key feature of this procedure is that it is ‘opt-out’ and, as such, represented persons do not need to take any positive step, or even be aware of the existence of the action, in order to take advantage of the outcome.

The Supreme Court’s judgment

It had previously been held in another case that “damage”, for the purposes of section 13 DPA 1998, includes (i) material damage (essentially financial loss) and (ii) distress. In either case, an individual assessment of the harm is needed, precluding use of the representative procedure (as the represented persons would not have the “same interest”).

Mr Lloyd, however, sought to “break new legal ground” by arguing that claims under section 13 DPA 1998 could also be made for the “loss of control” over personal data which, he said, inevitably results from a breach of the Act and which all members of the class had suffered. In other words, that damages were available for the breach itself, without the need to prove material damage/distress.

The Court rejected this argument on the basis that:

1. Such a reading of section 13 DPA 1998 was “untenable” as a matter of domestic law and was not required by EU law.
    
2. The fact that the tort of misuse of private information, for which damages can be awarded for the loss of autonomy itself, and the data protection legislation both sought to protect a person’s right to privacy did not mean that they must do so by affording identical remedies. In fact, there were material differences between the two regimes which made the analogy “positively inappropriate”.

The Court went on to hold that, even if “loss of control” did constitute “damage” for the purpose of section 13 DPA 1998, the claim could still not have proceeded as a representative claim, as it would have been necessary to establish, in each case, the extent of any unlawful processing by Google in order to determine the amount of damages (if any) to be awarded. Relevant factors would include the quantity and nature of the data, the period of time over which it was taken and the use to which it was put. This would inevitably differ from one individual member of the class to another.

Mr Lloyd had sought to overcome this issue by disavowing reliance on any facts relating to individual class members and instead claiming an “irreducible minimum harm” suffered by each of them for which a uniform sum of damages could be awarded. This, however, failed because the limited common facts on which Mr Lloyd sought to rely (only that each person had a cookie unlawfully placed on their device) were insufficient to establish anything more than trivial or de minimis harm and, therefore, any entitlement to damages.

The Court similarly rejected Mr Lloyd’s alternative method of assessment based on ‘user damages’ (a hypothetical sum which data subjects could have charged Google for releasing it from its duties), as, even if such damages were available (which was not the case), the sum which Google would pay to place a cookie on a user’s device, but not to collect or use any of their data, would be zero.

The future of representative claims

Whilst the judgment highlights a significant constraint on the ability to use the representative procedure to claim damages, the Court nevertheless held that this would be possible where the damages could be calculated on a basis common to all the persons represented (e.g. where they were each wrongly charged a fixed fee) or where the loss suffered by the class as a whole could be calculated without reference to individual claims.

The Court also considered that, where damages would require individual assessments, a bifurcated (two-stage) process might be used, whereby a declaration of liability is sought through a representative claim, followed by individual (or presumably group) claims for damages. This approach could have been adopted by Mr Lloyd but wasn’t, “doubtless”, the Court held, because pursuing the individual claims would not have been cost-effective.

Also, whilst the Court held that the representative procedure was not available in this case, it nevertheless endorsed a liberal approach to it and, in particular, the “same interest” requirement, which will no doubt influence lower courts for years to come. In particular, it held:

1. Contrary to the approach taken in some other cases, the “same interest” requirement does not impose a tripartite test (namely a common interest, common grievance and remedy beneficial to all). Instead, it should be interpreted purposively in light of its rationale and the overriding objective of the CPR.
    
2. The purpose of the requirement is to ensure that the representative can be relied on to promote and protect the interests of all represented persons. Whilst this would not be possible where there was a genuine conflict of interest between them, there was no issue with class members having “merely divergent interests”, in that an issue arises in respect of some of the claims but not others. Such concerns as may have once existed about whether representatives could be relied on to pursue vigorously lines of argument not directly applicable to their case are misplaced in the modern context, where proceedings are typically driven by lawyers/litigation funders, with the representative claimant merely acting as a figurehead.

The full text of the Supreme Court’s judgment is available here.

On 27 October 2021, the Rt Hon Rishi Sunak MP, the Chancellor of the Exchequer, unveiled the contents of the Autumn Budget 2021. This comes after the International Monetary Fund (IMF) published its world economic forecast on 12 October 2021. The IMF expects the British economy to grow 6.8% in 2021 and 5.0% in 2022.¹ During 2021, the UK GDP is expected to grow more strongly than that of France (6.3%), the US (6.0%), Italy (5.8%), Spain (5.7%), and Germany (3.1%). In this context, the UK government is in a good position to strengthen the protection of the public revenue whilst tackling the growing inequalities intensified by the pandemic.

The present article focuses on those specific measures that might have an effect on tax disputes.

Promoters of tax avoidance

First, the government said that FB 2022 will include provisions aimed at promoters of tax avoidance arrangements. Under the new legislation, the Revenue will be able to (1) seek freezing orders to prevent promoters from hiding their assets before paying penalties;² (2) publish details of suspected tax avoidance schemes and those connected to them; (3) impose an additional penalty of up to 100% of the total fee earned by the scheme, to UK entities that facilitate the promotion of tax avoidance by promoters overseas, and (4) file winding-up petitions to the court for companies and partnerships if this is convenient for the public interest and protects the public revenue. It is up to the court to decide whether this is beneficial for the public interest. The new legislation is expected to be published on or around 4 November 2021.

Diverted Profits Tax (DPT) and Mutual Agreement Procedures (MAPs)

A MAP is a mechanism – promoted by the OECD – by which tax authorities seek to reach a solution regarding cross-border taxation of certain transactions. Under s 124 of the Taxation (International and Other Provisions) Act 2010, HMRC has to give effect to solutions reached under a MAP. Nevertheless, it has been uncertain whether DPT is covered. In Glencore Energy Ltd v HMRC [2019] UKFTT 438 (TC), the Revenue argued that this depended on the MAP discussions. In this context, the government announced that it will amend current legislation to enable MAP decisions on DPT to be implemented by the Revenue, terminating uncertainty on the matter.

DPT and its interaction with corporation tax closure notices

On 27 September 2021, the First-tier Tax Tribunal (FTT) issued a decision in the case of Vitol Aviation v HMRC [2021] UKFTT 353 (TC), which referred to an international corporate group. Before the case, HMRC had opened an enquiry into their returns and issued DPT charging notices. The companies applied to the tribunal for the issue of closure notices, which the Revenue claimed would mean deciding the tax that should apply to the transfer pricing adjustment – something beyond the FTT’s jurisdiction. At the end, the tribunal rejected HMRC’s argument.

The government said that it will add a new section 101C to Finance Act 2015, precluding the issue of a final or partial closure notice regarding any matter potentially relevant to the DPT charging notice. It also leaves without effect any future decision such as the one taken in Vitol Aviation. These modifications will apply to DPT review periods that are open on 27 October 2021.

Research & Development reliefs

In 2019, the UK only spent 1.8% of GDP in R&D, i.e. lower than France (2.2%), the US (3.1%) and Germany (3.2%). The OECD average is 2.5%.³ R&D is defined in s 1138 of the Corporation Tax Act 2010 as “activities that fall to be treated as research and development in accordance with generally accepted accounting practice”. After consultation, the Rt Hon Rishi Sunak MP announced the extension of the scope of qualifying expenditure for R&D tax credits. This would include data and cloud computing. However, it has also revealed plans to tackle abuse of R&D tax reliefs, which could produce a higher number of related tax disputes, where the judiciary would decide whether or not a tax relief should be granted.

Uncertain tax treatment

In order to “reduce the legal interpretation portion of the tax gap”, Finance Bill 2022 (FB 2022) will establish a requirement for big companies and partnerships (those with a turnover of more than £200m per year or balance sheet total over £2bn) to notify the Revenue when they take an uncertain tax position in their returns for corporation tax, income tax or VAT. Although only two notification triggers have been included, the government is expected to add a third one, which will be particularly important for tax litigation, i.e. where there is a substantial possibility that the judiciary would find the position of the taxpayer to be wrong in material aspects.

Discovery assessments

On 30 June 2021, the Upper Tribunal (UT) decided in HMRC v Jason Wilkes [2021] UKUT 150 (TCC) that HMRC could not issue discovery assessments in relation to a higher income child benefit charge (HICBC). Taxpayers welcomed this ruling, especially after the Supreme Court’s dismissal of the concept of “staleness” in HMRC v Tooth [2021] UKSC 17. The UT chose not to apply a purposive statutory interpretation, as the outcome did not constitute absurdity or injustice.

The government has announced that FB 2022 will include provisions that would reverse the effect of the Wilkes decision. These provisions will extend the scope of the tax charges able to be recovered utilising discovery assessments, including HICBC, charges relating to gift aid and certain pension provisions. The legislation will have retrospective effect because, according to the Revenue, this was the position widely accepted before Wilkes.

Additional points to note

The budget also announced a number of changes which, although of more general interest, might be potential areas of dispute in the future.

• Basis period reform – Basis periods will be abolished effective in 2024/25. Instead unincorporated businesses (and non-resident companies charged income tax) will be taxed on their profits arising in the tax year irrespective of the businesses accounting period end date. This will end double taxation of profits early in a business’s life and the need for overlap relief on cessation. 
• CGT Payment Extension on disposals of UK land and property – The deadline for Capital Gains Tax payment on property disposal will be extended from 30 days after completion to 60 days.
• Dividend income tax increase – As previously announced, the dividend income tax rates will be increased by 1.25% from 6 April 2022, to 8.25%/33.75%/39.35% for a basic/higher/additional rate taxpayer. The dividend rate for trusts is also increasing to 39.35%.
• Residential property developer tax – A new tax is to be introduced on residential property developers. The tax will be 4% of profits over £25m. The government has introduced the tax to help fund the removal of cladding from high-rise buildings around the country. It will be interesting to see whether the surcharge continues once the cladding scandal is resolved.

[1] International Monetary Fund, “World Economic Outlook Database”, accessed 28 October 2021.

[2] The new legislation would apply to all relevant anti-avoidance penalties under the Promoters of Tax Avoidance Scheme (POTAS).

[3] Organisation for Economic Co-operation and Development, “Gross domestic spending on R&D”, accessed 28 October 2021. 

On 23 July 2021, the Supreme Court (“UKSC”) delivered its decision in Test Claimants in the Franked Investment Income Group Litigation v HMRC [2021] 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.  

Shareholders’ credits

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.

This article briefly discusses the key points arising out of the decision of the UK Supreme Court in HMRC v Tooth [2021] UKSC 17.  The case considered (1) whether a discovery assessment could become “stale” and (2) the meaning of the phrase “deliberate inaccuracy”.

The facts

Mr Tooth entered into a tax scheme designed to create an employment-related loss. Although the arrangement ended up being ineffective, this was not certain at the time, so Mr Tooth incorporated the loss into his 2007/08 tax return. However, as the software used to complete his tax return was not working correctly, he had to use a box meant for partnerships instead of employment, explaining that in the corresponding “white space”.

In August 2009, HMRC attempted to open an enquiry using their powers under Schedule 1A TMA1970 to examine Mr Tooth’s “claim outside a return” (as HMRC saw it), however following the Court’s decision in Cotter v HMRC [2013] UKSC 6 the correct mechanism was under s9A TMA1970 and HMRC were left without a validly open enquiry. Therefore, in October 2014, HMRC gave notice to Mr Tooth of a discovery assessment. HMRC argued that they had discovered an insufficiency in Mr Tooth’s return and that the return contained a deliberate inaccuracy.

“Deliberate inaccuracy”

The standard time limit for a discovery assessment is four years, but it is extended to 20 years if the insufficiency is brought about deliberately. HMRC argued that (1) this included cases where the statement containing the inaccuracy was deliberately made and (2) that to determine whether there was an inaccuracy, the statement containing the inaccuracy should be read independently and without regard to the rest of the tax return.

The Court rejected both arguments and held that the natural meaning of “deliberate inaccuracy” was a statement which, when made, was deliberately inaccurate and which intended to mislead HMRC. The Court also considered a point that has concerned many practitioners since the Court of Appeal judgment: that on HMRC’s interpretation, taxpayers could be exposed to the 20-year time limit to raise a discovery assessment “by making an honest but in fact inaccurate statement” and would be exposed to greater financial penalties for any loss of tax. This was another factor in the Court concluding HMRC’s interpretation was incorrect.  A slight note of caution is found in paragraph 47 of the judgment, in which the Court said that “for there to be a deliberate inaccuracy”, HMRC would have to prove “an intention to mislead” by the taxpayer, or “perhaps (…) recklessness as to whether it [the inaccuracy] would do so”, potentially widening the scope of a “deliberate inaccuracy”.

Secondly, the Court held that there were no inaccuracies in Mr Tooth’s tax return. Although he used the “wrong” partnership box to include his employment loss, he explained why he did so in the “white space” of the tax return which is part of the document. HMRC had argued that their computers would read each box individually without considering other parts of the return. The Supreme Court rejected this argument as “very unattractive” and held that whether there was an inaccuracy in the document depended upon reading each section in the context of the whole return. When read as a whole there was no inaccuracy in Mr Tooth’s tax return due to his full and frank white space disclosure.

”Staleness”

This decision also finally concludes the question which has consumed the lower courts for much of the past decade: can a discovery become “stale”. In 2012, in Charlton v HMRC [2013] STC 866, the Upper Tribunal held that if an HMRC officer concluded that a discovery assessment should be issued, an assessment might become stale if not made within a reasonable period. HMRC has never accepted the concept of “staleness” and there have been a significant number of (sometimes conflicting) judgments on this topic.

The Court rejected the concept of “staleness” entirely, holding that it was incompatible with the statutory scheme and that the only time limits were those set out in statute. This means that even if an HMRC officer found an error, went on holiday, and forgot to issue an assessment, another officer could issue an assessment years later (assuming, of course, that they were still within the statutory time limits).

HMRC can sometimes be quick to assert that a taxpayer has been careless and thus opening the possibility of the application of the longer six-year time limit for the issuing of a discovery assessment in place of the standard four years. The Court has reasserted that the threshold for conduct to be considered deliberate is a very high bar for HMRC to reach.  This should therefore reserve the 20-year assessment time limit for only the most serious cases.

On 12 July 2021, the First-tier Tribunal (Tax Chamber) (“FTT”) released its decision in Scanwell Logistics (UK) Limited v HMRC [2021] UKFTT 261 (TC), rejecting the taxpayer’s claim for onward supply relief (“OSR”).

Whilst OSR is now limited, post-Brexit, to goods imported into Northern Ireland for onward supply to the EU, the FTT’s discussion of agency under section 47 of the Value Added Tax Act 1994 (“VATA”) is of broader interest.

The case serves as a reminder of the significant financial consequences that can result from errors in tax planning, as Scanwell was ultimately held liable for £5.7 million in unpaid import VAT despite the fact that the imported goods almost immediately left the UK (which, if properly planned, could have meant Scanwell was relieved from liability to import VAT).

The Facts

Scanwell acted as an ‘import agent’ in relation to the import of goods from China into the UK (which at the time was still an EU member state) and their onward transport to end customers in other EU countries.

On importing the goods into the UK, Scanwell claimed exemption from import VAT under the OSR provisions. HMRC, however, considered that the relief was not available to Scanwell and subsequently assessed Scanwell to import VAT. Scanwell appealed the assessment to the FTT.

The Law

Where goods are imported into the UK, import VAT is typically charged under section 1 of VATA.

At the relevant time, OSR provided a relief from import VAT where the goods imported into the UK were subsequently re-despatched to a VAT-registered entity in another EU country, generally within one month of importation.

Scanwell accepted that it had never acquired title to the goods from the Chinese suppliers. Instead, it argued that, since it acted as agent for the end customers in the EU, it fell to be treated as part of the supply chain under section 47 VATA, so as to meet the requirements for OSR.

The FTT’s decision

After careful consideration of the legislative provisions, the FTT (Judge Hellier) concluded:

1. In order to qualify for OSR Scanwell had to make, or be deemed to make, supplies of goods;
2. A supply of goods required the transfer of title in goods. Scanwell did not make any actual supply of goods;
3. Scanwell could potentially be deemed to make a supply by section 47;
4. Scanwell’s activities did not fall within section 47(1), therefore they could potentially fall within section 47(2A);
5. Scanwell’s activities did not fall within section 47(2A) because it did not bring about the supply of goods and did not act in its own name in relation to any supply;
6. As a result Scanwell was not entitled to OSR.

Section 47(2A) VATA

Whilst the FTT considered various provisions within section 47 VATA, its main focus was on section 47(2A), notably rejecting HMRC’s contention that it was limited to purely domestic transactions.

Section 47(2A) provides that “where… goods are supplied through an agent who acts in his own name, the supply shall be treated both as a supply to the agent and as a supply by the agent”.

The FTT decided that this did not apply on the facts, as Scanwell was neither (i) an agent through which goods were supplied nor (ii) did it act in its own name for the purposes of the provision. Specifically, it held:

1. A person is an agent through which goods are supplied “only if he has authority to give rise to a transfer of title to goods to his principal or to cause title to his principal’s goods to be transferred to another”. It was not sufficient that Scanwell be an agent in the sense of having authority to receive and take custody of the goods as they arrived in the UK.
   
   Whilst the agreements with the end customers appointing Scanwell as an ‘import agent’ clearly envisaged and intended that Scanwell would be able to claim OSR (and might therefore be construed as granting it the necessary authority), there was nothing in the tasks assumed by Scanwell under those agreements which involved it actually making, or using its authority to give rise to, a transfer of title;
    
2. For an agent to be acting in its own name, its actions “must create a legal relationship between [it] and the third party” (i.e. give rise to rights and obligations), specifically in relation to the transfer of ownership in the goods. The condition is not met where the agent’s actions in its own name are limited to collateral matters, such as haulage, customs clearance and inspection.
   
   Scanwell had no contact with the third-party Chinese suppliers and there was no evidence of any agreement with them under which Scanwell had acted. Whilst Scanwell did receive invoices from the Chinese suppliers (albeit addressed to it as agent), the terms of the agency agreements with the end customers made it clear that Scanwell was not required to pay these, making any obligation under them nugatory.

The FTT dismissed Scanwell’s concern that the denial of OSR would lead to double taxation on the supply to the end customers: import tax in the UK and tax again in the destination member state. This was because there existed an alternative procedure by which the goods could have been transported which would have avoided double taxation, but which had not been used. There was therefore no need to construe the legislation in the appeal any differently. 

The full text of the FTT’s decision is available here.

What is the background to the draft Finance Bill 2022 clauses on tax avoidance published on 20 July 2021?

In the wake of Sir Amyas Morse’s Independent Review of the Loan Charge back in December 2019 the government committed to implementing further measures to tackle promoters of tax avoidance schemes (POTAS) and reduce the scope for marketing of such schemes.

In March 2020 HMRC published its Promoter Strategy which looked at ways of disrupting the business model of those still marketing such schemes.

The July 2020 consultation Tackling Promoters of Tax Avoidance introduced some new measures which were included in Finance Bill 2021 that strengthened the existing anti-avoidance regimes and these were complemented by the November 2020 paper which called for evidence on raising standards in the tax advice market.

Despite all of this, HMRC is still concerned that promoters (and others in the tax avoidance supply chain) continue to fail to comply with their voluntary obligations and are still managing to sidestep HMRC compliance activity and sell their schemes.

What further provisions does FB 2022 contain to target POTAS?

The draft FB 2022 clauses include four new provisions to further address promoters of tax avoidance:

• giving HMRC the protective mechanism to freeze a promoter’s assets to prevent dissipation before payment of potential penalties. There were talks of giving HMRC powers to apply to the court for security payments in addition to these new asset freezing orders, but this is on the backburner for now

• tackling offshore promoters by charging additional penalties (of up to the total amount earned by the scheme) against UK entities that facilitate tax avoidance via these offshore promoters

• allowing HMRC to present winding-up petitions to close down companies that promote avoidance schemes and thus operate against the public interest, and

• enabling HMRC to publish details of promoters and their schemes to raise public awareness and give taxpayers the opportunity to identify and exit any arrangements—the policy objective is to protect the taxpayer while also getting the tax in

When will the FB 2022 changes take effect?

The FB 2022 (which implements proposed measures announced in the March 2021 Budget) draft legislation was published on 20 July 2021. The consultation on the Finance Bill measures will run until 14 September 2021 and Royal Assent is expected to be forthcoming in time for the new tax year in Spring 2022.

The new clauses will generally have effect in relation to all penalties assessed or determined or arrangements enabled on or after the date of Royal Assent but note that any information or non-compliant behaviour ongoing prior to this time could form part of HMRC’s case.

What guidance has been published?

The new clauses each include a helpful explanatory note published on the government website. The results of the consultation (that ended on 20 July 2021) regarding the implementation of the proposed legislation are also available to read on the government website.

Why does HMRC continue to try to strengthen these regimes?

HMRC is committed to disrupting the business of any promoters still operating and are determined to impose harsh sanctions. The concern is that as new measures are introduced, companies and promoters find new loopholes to bypass these measures, making it necessary to incorporate further regulations. These individuals are only able to operate because of the naivety of the taxpayer so the plan is to also do more to support the taxpayer and ensure that they can steer clear of and exit any tax avoidance arrangements.

What evidence is there of the disclosure of tax avoidance schemes (DOTAS), POTAS or enablers regimes having been effective so far?

When the General Anti-Abuse Rule (GAAR) Report was published in 2011, it found that the existing tools, including DOTAS (which requires promoters of avoidance schemes to give HMRC information about the schemes they are promoting and who their clients are) had been incapable of dealing with some abusive tax avoidance schemes.

Subsequently, the POTAS regime, accelerated payments and follower notices were introduced by the Finance Act 2014. The POTAS rules are aimed at changing the behaviour of promoters and deterring the development and use of avoidance schemes by monitoring the activities of those who repeatedly sell schemes which fail.

Since 2014, the number of Scheme Reference Numbers allocated by HMRC under the DOTAS rules appears to have decreased significantly. HMRC has also said that thanks to anti-avoidance measures, about 25 significant promoters have ceased all activity. The very fact that new sanctions continue to be introduced suggest that there is still a problem to tackle, although this is now considered to be very localised and indeed by 2018/19 the tax avoidance gap had shrunk to 0.3% of the total theoretical liabilities for that year—this is a small problem in the scheme of things but may still be a big problem from a policy perspective.

What further measures or changes to the draft legislation do you expect to be announced at the next Budget or fiscal statement?

There may be yet further measures mooted if the existing ones prove to be insufficient, but it is unclear at this stage what these might look like.

There is a real concern about whether the constant ebb of new rules is really addressing the problem. It seems clear that there is a stubborn disconnect between the language spoken by HMRC and the policy advisers and some so-called tax advisers. If schemes still exist it is because there is still a market for them and a desire for taxpayers to pay as little tax as possible, albeit sticking within the confines of a particular interpretation of the tax rules.

HMRC considers that the policy objectives should override any contrary interpretation of the legislation and the intention is that many of these new rules are principles-based in a bid to overcome this ‘policy vs interpretation’ disconnect.

We may see yet more targeted attempts to stamp out those that attempt to sail too close to the wind. Another option might be for the GAAR to become a point of first, and not last, resort going forward.

There must also be consideration of whether resource is better directed at enforcement, such as more large scale investigations of aggressive tax avoiders, rather than new anti-avoidance measures.

On 1 July 2021, US Treasury Secretary Janet Yellen announced that countries representing over 90% of global GDP had agreed to a global minimum tax on corporations (“GMCT”). The GMCT seeks to put a floor on tax competition on corporate income through the introduction of a minimum corporate tax of at least 15%. Whilst certain elements give rise to positive expectations, some caveats should be noted.  Much will depend on (1) the outcome of future political negotiations and (2) the detail of the drafting at international and national levels.

The key advantages of the agreement so far

• 133 countries have joined a new two-pillar plan approach to reform international taxation rules. This is not only the largest agreement ever signed on this matter, but it also includes low-tax jurisdictions, such as Bermuda and the BVI.
• US Secretary Yellen has declared that not all countries need to sign up, as Pillar Two of the agreement establishes a top-up tax on parent companies in respect of the low taxed income of subsidiaries, which would decrease the leverage of tax havens.  This is a key detail to watch in relation to the agreement and its local implementation.
• The agreement is supported by international organisations such as the G20, the G7 and the OECD. This support is not surprising, as studies have found that “phantom FDI” - investments that pass through empty corporate shells, having no real business activities - increased from 31% of global FDI in 2010 to 38% in 2017.¹
• In-scope multinational enterprises (“MNEs”) are those that meet the €750m threshold as determined under BEPS Action 13 (country by country reporting).
• The GMCT is expected to raise c.$150bn in additional global tax revenues².
• Additionally, Pillar One allocates profits to market jurisdictions whose customers contribute to the success of large MNEs, without raising fiscal revenue in return. This would benefit several countries. For example, one estimate is that between €6 -15bn would be raised in France, Germany, and the US,³ thus explaining the political popularity of the agreement, particularly in the wake of the Covid-19 pandemic.
• Pillar One also includes dispute prevention and resolution mechanisms to avoid double taxation for in-scope MNEs.  As yet there is little detail on these provisions.

The key caveats so far

• The Biden administration supports a GMCT, but the GMCT is a part of a two-pillar package deal. Republican opposition is concerned that Pillar One will relocate 30% of the targeted MNEs’ global profits from the US to “market jurisdictions”. Without Republican support, it would take one Democratic senator to vote against the proposal for it to fail in the US.
• In the last few years, several countries have introduced Digital Services Taxes (“DSTs”), which are considered discriminatory by some US politicians. The GMCT’s success may, therefore, also depend on the abolition of these DSTs. The European Commission has announced that it will postpone its DST proposal, prioritising the GMCT agreement instead.
• Some countries are opposed to the GMCT, including EU members Ireland, Hungary and Estonia. For example, the Irish Minister for Finance recently said that Ireland could not be part of the GMCT agreement with a 15% global tax rate. This is expected, as almost two-thirds of Ireland’s inward FDI is “phantom”.⁴ Reluctant signatories may seek to establish ways to incentivise investment, despite the GMCT.

¹ IMF, ‘The Rise of Phantom Investments’ (September 2019).

² OECD, ‘130 countries and jurisdictions join bold new framework for international tax reform” (1 July 2021).

³ Conseil d’analyse économique, ‘Taxation of Multinationals: Design and Quantification’ (29 June 2021).

⁴ IMF, ‘What Is Real and What Is Not in the Global FDI Network?’ (11 December 2019) IMF Working Paper No 19/274.

On 17 June 2021, the European Court decided the joint cases K (C-58/20) and DBKAG (C-59/20) regarding whether the supply of certain services constituted the “management of special investment funds”, benefiting from the VAT exemption enshrined in Article 135(1)(g) of Council Directive 2006/112/EC.

The cases

In the first case, K computed the taxable income of unit holders in the funds. In the second one, DBKAG acquired the right to use software used for risk management and performance measurement. The Austrian tax authorities argued that the exemption could not cover these services since: (a) they were not specific to and essential for the management of special investment funds; and (b) they were not sufficiently autonomous to come within the scope.

The European Court decided that the exemption did apply to these services. First, it clarified that VAT could not be said to apply only because the services are not outsourced in their entirety. Secondly, the Court emphasised that the list of Annex II to the UCITS Directive is not exhaustive, so whether certain services are included or not in that list is not conclusive.

The impact for the UK post-Brexit

Following the European Union (Withdrawal) Act 2018 (the “WA”), UK courts are no longer bound by principles laid down by the European Court, whilst general principles of EU law are not part of UK domestic law if they were not recognised as such in a case decided before Brexit. In addition, Chapter 5 of the Trade and Cooperation Agreement between the UK and the EU, which governs tax issues, does not establish any exceptions regarding VAT legislation but only obligations related to fraud.

However, the WA does allow UK courts to consider European Court decisions post-Brexit if they are relevant to any matter before a UK court. UK VAT rules remain the same after Brexit, including the investment management exemption (Group 5, Schedule 9 of the VAT Act 1994), so UK courts could take the DBKAG & K decision into account if they considered it relevant.

What does this mean for UK taxpayers?

The European Court decision widens the scope of services that benefit from the exemption, although it is unclear how far it goes, particularly considering that the Annex II list is not exhaustive.

Certain services which had not previously been considered to be within the scope of the exemption could arguably now be included. Where input VAT has not been deducted by customers, suppliers of the relevant services could potentially seek to recover the VAT charged on those services from HMRC and then reimburse it to the customers under HMRC’s reimbursement arrangements.