Our Insights

Share Loss Relief

There has been some good news for those companies wishing to offset losses from previous years to reduce their tax liability. This follows the European Commission’s challenge against the UK’s conditions to qualifying for the share loss relief scheme for income and corporation tax. Under this scheme, certain taxpayers could set a capital loss on a disposal of unquoted shares in a trading company against its income. The Commission took exception to one of those conditions, namely that the unquoted trading company had to carry on its business wholly or mainly in the UK.

A reasoned opinion was issued by the Commission in January 2019 which found such a condition to be incompatible with EU law. The Finance Bill 2020, which was debated at second reading on 27 April 2020, repeals this condition. However, this will only effect disposals that take place on or after 24 January 2019. This said, as the illegality of this condition has been confirmed by the Commission and impliedly accepted by the Government, it is possible that taxpayers could make claims for share loss relief where disposals occurred before 24 January 2019.

Should you be interested in the broader applicability share loss relief, please contact any member of our team who will be able to advise further.

Corporate Capital Loss Restriction

Unfortunately, the Finance Bill 2020 does not bring entirely good news for those seeking loss relief. This is because it also implements the corporate capital loss restrictions (CCLR) originally announced in Budget 2018.

This will bring carried-forward capital losses into the same regime as the corporate income losses restrictions (CILR) regime. Once enacted, this will mean that a deductions allowance of £5 million, which originally only applied to CILR, will be shared across the two restrictions. As such, where carried-forward capital losses exceed this allowance, the amount of chargeable gains that can be relieved will be restricted to 50%.

The CCLR will not, however, apply to the following:

1. The offset of Basic Life Assurance and General Annuity Businesses (BLAGAB) losses against BLAGAB gains;
2. Ring fenced allowable capital losses arising in certain UK extraction activities of oil and gas companies;
3. Real estate investment trusts where the capital losses are attributable to property income distributions.

Although the Bill has only just debated at second reading at the end of last month, and the Public Bill Committee are not scheduled to report until 25 June 202, these provisions will apply to accounting periods beginning on or after 1 April 2020. Accounting periods that begin before this date but end after it will be split into two notional periods and will generally be treated as if they were two separate accounting periods.

For some years now, the OECD have been working towards an international approach to the taxation of digital businesses. Most recently, it announced that it is aiming towards a consensus-based long-term solution by the end of this year. Be that as it may, with a number of diverging opinions on how this aim may best be achieved, delay in the international implementation of this tax has resulted in many countries now enacting their own tax laws on digital services. The United Kingdom is one such country. Accordingly, the Finance Bill 2020 introduces a Digital Services Tax (“DST”) of 2% on “UK digital services revenues arising to a person in an accounting period.”

Digital Services Revenues

All of the following will normally be classed as digital services revenues:

1. A social media platform which promotes interactions between users and allows content to be shared, for example social network sites, online dating websites and user review websites; or
2. An internet search engine; or
3. An online marketplace which facilitates the sale by users of services, goods or other property; or
4. A business which operates on an online platform, facilitates the placing of online advertising, and derives a significant benefit from its connection with the social media platform, search engine or online marketplace.

This broad definition seems to encapsulate a wide range of businesses. The draft legislation does not elaborate further, but the draft guidance issued with the Bill does confirm that HMRC will only impose this tax on businesses whose activities listed above form a independent purpose  of their service. HMRC have confirmed that they will not consider those digital services which are simply incidental or ancillary to a broader function or service. The extent to which a service can be deemed ancillary remains to be seen.

UK Digital Services Revenues

Another requirement which must be met before the DST will be imposed, is that the digital services revenues must be arise in connection with “UK users”. Therefore, the revenues acquired will only qualify if:

1. In the case of an individual using the digital service, it is reasonable to assume that they are normally in the United Kingdom (“UK Individual”); or
2. In the case of a business using the digital service, it is reasonable to assume that they are established in the United Kingdom (“UK Business”); or
3. In the case of online advertising, it is intended to be viewed by either of the above; or
4. In the case of a transaction on an online marketplace, either the consumer or provider is a UK Individual or UK Business.

DST Threshold

The DST will only be imposed if the total annual revenues for the group as a whole exceed:

1. £500m in digital services revenues; and
2. £25m specifically in UK digital services revenues.

Other Points to Note

1. For those upon whom DST will be charged, a return must be filed and DST will become payable on the day following the end of nine months from the end of the accounting period. As with other obligations to file tax returns, penalties will be levied for failing to file the return by the filing date.
2. To prevent a disproportionately high tax on businesses with low profit margins or losses, the Bill includes an alternative charge provision which allows a calculation of DST based on operating margins.
3. In an attempt to prevent double-taxation, there is provision for relief to be claimed for certain cross-border transactions which, if claimed, would deem the UK digital services revenues reduced by 50%.

Previously the FTT held that if a limited liability partnership (LLP) is found to not be trading with a view to a profit, it is in effect a corporate entity and therefore should have filed a company tax return. Therefore, it found that an enquiry into the partnership return filed by such an LLP was void and the accounting period was closed without an enquiry. HMRC appealed this finding.

The Government subsequently introduced Clause 101 of the Finance Bill 2020 to retrospectively reverse this decision.

In a decision issued on 27 May 2020, the Upper Tribunal has now also upheld HMRC’s appeal. In that decision, it confirmed that such enquiries would not rendered a nullity by a finding during that enquiry that the incorrect return had been filed.

The tribunal therefore re-made the decision, holding that the closure notices were validly issued and that there is no basis in law for striking out the appeals. The tribunal’s decision in Inverclyde has therefore now been both negated y legislation and overturned on appeal.

HMRC have confirmed that if a taxpayer is unable to meet an obligation (such as a payment or filing deadline) due to COVID19 that will be accepted as a reasonable excuse provided the taxpayer is able to remedy the failure as soon as possible.  Taxpayers will need to explain how they have been affected by COVID-19 in making their appeal. 

Taxpayers affected by COVID-19 will also be given further time to seek a review of, or appeal against, an HMRC decision. HMRC will give an extra three months (in addition to the usual 30 days) to appeal any decision that is dated February 2020 or later. 

The European Commission released a communication on 27 May 2020, setting its plan for recovery in Europe. This includes:

1. Proposing a new €750 billion recovery instrument, Next Generation EU. This would be initially funded through unprecedented borrowing on the part of the Commission. To repay this debt between 2028 and 2058, the Commission has suggested new taxes may be levied on:
   • Carbon emissions
   • The operation of large companies
   • Digital economy
   • Non-recycled plastics
2. A review by the Commission of the EU competition framework. Notably, in the communication, the Commission emphasises the importance placed by its recently announced Digital Services Act on a ‘fair marketplace’ for the provision of digital services.
3. Increased efforts in the tackling tax fraud. As part of this, the Commission suggests that a common consolidated corporation tax base would assist by providing a single rulebook in computing corporation tax across the EU.

The Statutory Residence Test provides that an individual is considered to have spent a day in the UK if they are in the UK at the end of the day (midnight) subject to several exceptions, one of which is exceptional circumstances. The exception applies for 60 days only in any given tax year.

During the COVID-19 pandemic HMRC have confirmed that the following circumstances are considered exceptional:

• an individual is quarantined or advised, by a health professional or public health guidance, to self-isolate in the UK as a result of COVID-19;
• an individual is advised by official government advice not to travel from the UK as a result of COVID-19;
• an individual is unable to leave the UK as a result of the closure of international borders; or
• an individual is asked by their employer to return to the UK temporarily as a result of COVID-19.

Exceptional days up to a maximum of 60 days per tax year will be disregarded for the purposes of:

• The first automatic UK test (where the taxpayer spends more than 183 days in the UK)
• The first automatic overseas test (where the taxpayer spends fewer than 16 days in the UK)
• The 90 day tie in the case of the sufficient ties test (where the taxpayer spends fewer than 91 midnights in the UK). This will be relevant in determining how many ties the taxpayer has in the next two years.

But importantly the concession will not apply for the counting of days in relation to:

• the family tie (if an individual spends more than 60 days with a minor child in the UK)
• the accommodation tie (whether the individual has a place available here for a continuous period of at least 91 days)
• the work tie (the individual must not work in the UK more than 39 days for more than 3 hours or more even on exceptional days)
• the country tie (if more midnights are spent here than in the other country and the individual is a “leaver”)
• Full Time Working Abroad (if the individual is working for more than 30 days in the UK or spends insufficient time working abroad)

Currently there is no definitive date after which all days are regarded as exceptional for 2019/2020.  HMRC are still considering this point.  23 March 2020 (lock down announced) would seem to be a reasonable point.

As announced in July of last year, the 2020 Budget introduces a new deferred payment plan option for Corporation Tax charged on profits or gains arising from certain transactions between UK companies and EEA companies of the same group of companies. The new rules will allow the deferral of CT over a period of up to 5 years, and has effect from 11 July 2019 for transactions occurring in accounting periods ending on or after 10 October 2018.  The new measures follow the FTT decision in Gallaher to the effect that the absence of a deferral option was in breach of EU law and the option could not be read into the legislation.

The 2020 Budget announced provisions to reverse last year’s FTT decision in Inverclyde. In that case, HMRC denied the appellant LLPs’ claims for Business Property Renovation Allowance on the basis that the LLPs did not carry on a business with a view to a profit.  The LLPs argued that, if that were the case, HMRC were wrong to open enquiries into their members’ returns as the LLPs would be opaque for tax purposes, and thus the amendments removing the allowance were invalid. HMRC argued that, because the LLPs filed a partnership return, they were entitled to open an enquiry.  The FTT agreed with the taxpayers.

Although the draft legislation has not yet been released, documents released alongside the budget indicate that the new provisions will reverse the Inverclyde decision retrospectively. From the date of Royal Assent of the Finance Bill 2020, HMRC will be allowed to amend LLP members’ returns to reflect its conclusion that an LLP is not trading with a view to profit. All amendments already made on this basis will also be valid.

HMRC continues to fight the good fight in its quest to cut down on tax avoidance and have recently been issuing further “nudge” letters to taxpayers who may have an income source or assets producing gains overseas and consequently an undisclosed outstanding UK tax liability. The letter reminds the taxpayer that HMRC have visibility on overseas income or gains via their network of global information exchange and the onus is on the taxpayer to regularise their tax affairs. Unforced disclosure will result in reduced penalties for non-compliance. 

Batches of these letters are being sent out weekly by HMRC and ultimately thousands are expected to be issued.  Some letters are accompanied by a certificate whereby the taxpayer can state that his tax position is up to date and all in order or that he needs to make a disclosure. Taxpayers need to ensure that they fully understand the statement they are making and the repercussions of making an inaccurate or incomplete statement before they return the form.

Changes have been made to the original wording of the letter but it still directs those who need to make a disclosure to the Worldwide Disclosure Facility which may not be appropriate in all cases, particularly as it does not offer protection or assurances against criminal investigation.

The First-Tier Tribunal (“FTT”) decision in Esso Exploration and Production UK Limited and others v HMRC, which relates to pre-2006 claims for Cross Border Group Relief, has now been released.

In its decision, the FTT did ultimately reject the claims but, whilst doing so it concluded that nothing in the case law of the CJEU challenges the Supreme Court ruling in Marks & Spencer Plc v Revenue and Customs Commissioners [2013] UKSC 30 that the “no possibilities” test should be applied as at the date of the claim.

The claim concerned an application for group relief of a UK company from an EU sister company joined by a common US parent. The claimants sought to rely on the non-discrimination article of the USA-UK Double Tax Convention on the grounds that group relief would have been available if the common parent was UK resident. The Tribunal, however, found that group relief provisions did not engage the NDA in DTCs.

Finally, in applying the “no possibilities” test, the Tribunal adopted a very strict test which does not appear to accord with the far more practical and liberal approach taken in recent EU cases (see for example C-607/17 Skatteverket v Memira Holding AB and C-608/17 Skatteverket v Holmen AB).

Should you be interested in the application of this decision to your claims for Cross Border Relief, please contact any member of our team who will be able to advise further.