On 8 December 2021, judgment in the Post Prudential Group Litigation was handed down by the First-tier Tribunal (Tax Chamber) (“FTT”). These were appeals and applications for closure by approximately 200 taxpayers, who had made a variety of claims seeking repayment of unlawful DV tax imposed on dividends received from foreign portfolio holdings. The FTT considered the validity of these various statutory claims following decisions in test cases in the CFC & Dividend GLO, namely Claimants in Class 8 of the CFC and Dividend Group Litigation v Revenue and Customs Commissioners [2019] EWHC 338 (Ch), [2019] 1 WLR 5097 (“Class 8”) and Prudential Assurance Co Ltd v HMRC [2018] UKSC 39; [2019] AC 929 (“Prudential SC”).
The taxpayers succeeded in all the major issues raised. Some points were decided in HMRC’s favour but, as these were only argued in the alternative to the taxpayers’ main case, the ultimate result of the decision was that all of their claims succeeded. It is of course now open for HMRC to apply for permission to appeal the decision.
In the meantime, following the Tribunal’s decision, it is now possible to make DTR claims under the extended time limit provided under s806(2), with the starting date in most circumstances being the Prudential SC decision in July 2018. Taxpayers should note that where management expenses or other forms of losses or group relief were applied against DV income the DTR is not lost but carries forward automatically and applies against the next payment of CT on any income. Steps should be taken to ensure that the carried forward DTR is applied where it can be. In addition, the FTT has held that EUFT can be claimed at the foreign nominal rate where s806(2) is engaged.
The full judgment in The Applicants in the Post Prudential Closure Notice Applications Group Litigation and Another vs The Commissioners for HM Revenue and Customs [2021] UKFTT 0459 (TC) (“Post-Prudential”) can be found here.
On 26 November 2021, the High Court of Justice issued its judgment in S&S Consulting Services (UK) Ltd, R (On the Application Of) v HM Revenue and Customs [2021] EWHC 3174. The case concerned the issue of availability of injunctive relief in the context of VAT deregistration appeals in the First-tier Tribunal (“FTT"). S&S also made an application for judicial review of HMRC’s decision to deregister it for VAT, which at the time of the hearing, had not yet been considered on the papers.
HMRC cancelled S&S’s VAT registration because it concluded that the company had been principally or solely registered to abuse the VAT system by facilitating VAT fraud. S&S denied any wrongdoing and claimed that it might become insolvent before the hearing of its appeal as a result of the deregistration.
It was also common ground that although S&S had lodged an appeal to the FTT, the FTT had no power to require HMRC to re-register S&S by way of interim relief pending the outcome of the appeal. S&S made an application to the High Court for relief.
Held: Application rejected.
Key points:
HMRC has recently published a policy paper on its approach to tax fraud, as well as new guidance on joint and several liability notices for tax avoidance, tax evasion and repeated insolvency.
On 18 November 2021, the Court of Justice of the European Union (the “CJEU”) delivered its judgment in Case C-385/20 (Promexor Trade SRL v Directia Generala a Finantelor Publice Cluj – Administratia Judeteana a Finantelor Publice Bihor). Promexor is a Romanian company whose VAT number was revoked by the local tax authorities following a period of six months in which its VAT returns did not record any transactions subject to VAT. Under Romanian legislation, a company whose VAT number has been revoked could re-register and retroactively deduct input VAT for the period when it was not registered. However, in this case, Promexor was prevented from doing so because its director was also a shareholder of a company that was going through insolvency proceedings.
The key reasons for the CJEU finding for the taxpayer were:
CJEU Judgements after Brexit
Following the European Union (Withdrawal) Act 2018 (the “WA”), UK courts are no longer bound by principles laid down by the CJEU and 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, only obligations related to fraud. The WA, however, does allow UK courts to consider CJEU decisions post-Brexit if they are relevant to any matter before a UK court.
Schedule 13 of the Finance Act 2020 (the “FA 2020”) introduced measures that allow HMRC to give joint and several liability notices (“JSLN”) to company directors, shadow directors and members of LLPs in certain circumstances. Although the FA 2020 came into force on 22 July 2020, HMRC only recently published a guidance note about these new powers.
JSLNs provide HMRC with a power to recover from individuals taxes that might otherwise not be paid by a corporate taxpayer.
When does it apply?
There are three cases in which these provisions apply.
(1) Tax avoidance and tax evasion cases
The first case is when a company has entered into tax avoidance arrangements or has engaged in tax evasive conduct. Paragraph 6 establishes what comprises that type of arrangement, e.g. one for which a notice of final decision has been given under the GAAR legislation.
The conditions are: (1) that the company is subject or likely to be subject to an insolvency procedure; (2) that the individual was responsible for the company’s conduct or benefited from it; (3) that there is, or is likely to be, a tax liability related to the conduct, and (4) that there is a serious risk that the tax liability, or part of it, will not be paid.
(2) Repeated insolvency and non-payment cases
The second case is related to repeated insolvency and non-payment. It is aimed at those who set up companies that do not pay their tax liabilities – becoming insolvent after some time – and “replace” them by setting up a new company that carries on the same business.
The conditions are: (1) that during the last five years there have been two or more old companies connected to an individual, each of which became insolvent and had a tax liability; (2) that a new company connected to the individual has been carrying on a similar business to the old ones, and (3) that the old companies have a tax liability of both more than (a) £10,000 and (b) 50% of the total amount of those companies’ liabilities to their unsecured creditors.
(3) Penalties for facilitating tax avoidance or evasion
The third case is where a penalty for facilitating tax avoidance or evasion has been issued.
The conditions are: (1) that the company is subject or likely to be subject to an insolvency procedure; (2) that the individual was a director or shadow director of the company or a participator in it at the relevant time, and (3) that there is a serious risk that the penalty, or part of it, will not be paid.
Time limits
For tax avoidance and evasion cases, and for repeated insolvency and non-payment cases, Schedule 13 of the FA 2020 only applies to liabilities relating to any period that terminates on or after 22 July 2020. If the period started before that date, the legislation applies to the entire period. For penalties for facilitating tax avoidance or evasion, it applies only to defaults and events occurring on or after the same date.
Are there any safeguards?
Yes, Schedule 13 of the FA 2020 does contain safeguards:
This article is an update from a previous article published on 20 August 2021.
On 8 October 2021, the OECD/G20 Inclusive Framework published a statement where 136 jurisdictions[1] agreed to a global minimum tax on corporations (“GMCT”). The previous article noted that much will depend on the outcome of future political negotiations. After some negotiations, the new statement represents an improvement from the previous one, incorporating more countries.
Background
Changes from the previous statement
Key points for the future
[1] 137 now with the inclusion of Mauritania on 4 November 2021.
[2] OECD, ‘International community strikes a ground-breaking tax deal for the digital age’ (8 October 2021).
[3] Politico, ‘Global tax deal risks having US half in, half out’ (22 October 2021).
[4] As of 7 December 2021, it has not been published.
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 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:
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
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:
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:
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.
[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.
