This is a long-running dispute between HMRC and investors over tax liabilities related to film and game investment schemes promoted by the Ingenious group of LLPs. Having lost the appeal to the First-Tier Tribunal, the LLPs appealed to the Upper Tribunal on eight grounds. HMRC cross-appealed on two grounds.
The hearing at the Upper Tribunal centred on, among other points, whether the LLPs were trading with a view to a profit. If not, HMRC argued, they were not entitled to offset losses amounting to over £1.6bn against their other taxable income. By judgment released on 26 July 2019, the LLPs’ appeal was dismissed and HMRC’s cross-appeal was allowed.
The LLPs sought permission to appeal to the Court of Appeal on seven grounds. Permission has now been granted to appeal only on Grounds 1 and 3, namely, whether the partnerships were carrying on business “with a view to profit” and whether the tribunal was wrong to conclude that the partnerships were not trading.
Interestingly the Court has refused permission to appeal on the issue of whether the expenses were income or capital in nature. The refusal of this ground appears to render the hearing of Grounds 1 &3 pointless. If it remains that the expenditure incurred by the LLPs was of a capital rather than revenue nature then no deduction could be made whatever the outcome of the appeal
This, however, is not the end of the road as Ingenious can renew its application for permission on the rejected grounds at an oral hearing. If that oral hearing for permission occurs at the same time as the main appeal hearing (which is the usual practice) then the appeal will extend to consideration of the dismissed issues anyway.
Change your attitudes towards preventing tax evasion or suffer the consequences. That was the very strong message intended by the government when new Corporate Criminal Offences (CCO) Powers for HMRC were announced in the March 2015 Budget. As such, since 30th September 2017, it has been a crime for corporations to fail to put in place reasonable procedures to prevent associated persons (those acting for or on their behalf) from criminally facilitating tax evasion. With unlimited fines and the reputational damage entailed from a finding of guilt, this was a significant new power.
Nearly 2½ years later, HMRC have announced that it has 9 live CCO investigations with a further 21 “opportunities” under review across 10 different business sectors, including financial services, oils, construction, labour provision and software development. It has further confirmed that these sit across all HMRC customer groups from small business through to some of the UK’s largest organisations.
Going forward, HMRC intends to update this information biannually.
In a recent judgment for Köln-Aktienfonds Deka v Nederlandse Orde van Belastingadviseurs, the Court of Justice of the European Union (“CJEU”) clarified the rules surrounding free movement of capital in the context of tax refunds granted to collective investment funds and, importantly, the extent to which Member States can legitimately set conditions on granting such refunds.
Why was clarification sought?
Under Legislation introduced into the Netherlands, a regime relating to fiscal investment enterprise (“FIEs”) was established to enable natural persons, particularly small investors, to make collective investments in certain types of assets. Those qualifying from the regime were subject to a zero corporation tax rate and benefitted from a refund of dividend tax withheld on dividends received in the Netherlands.
To qualify for the refund, a number of conditions first had to be met. One of these conditions (the “distribution condition”) was that part of the profit had to be paid to shareholders and holders of certificates of participation within 8 months of the end of the financial year. When doing so, the undertaking needed to withhold Netherlands tax on the recipient’s dividends.
KA Deka was an investment fund established in Germany with share prices listed on the German Stock Exchange which made investments on behalf of individuals. It received dividends distributed by companies in the Netherlands but those dividends were subject to a tax of 15% which was withheld at source. The Netherlands tax authorities rejected its application for a refund, quoting the failure to meet the distribution condition as one of the grounds for the rejection. KA Deka therefore sought to challenge some of these conditions on the ground that they were contrary to free movement of capital.
Could the Netherlands refuse the refund on the ground of failing to distribute profits in time?
Under German law, individuals were deemed to receive an annual amount of dividends. Tax was imposed on half of the dividends actually received and on all dividends which were deemed to have been received to meet the minimum threshold. In challenging this condition, KA Deka argued that whilst it did not distribute profits within the specified timeframe, its situation was objectively comparable to a resident FIE because its proceeds were either deemed to have been distributed or were taken into account in the tax which was levied on its shareholders and participants.
The distribution condition did not expressly distinguish between resident and non-resident investment funds. However, the CJEU emphasised that there could be a de facto disadvantage to non-resident funds even if there was no express discrimination in the domestic rules. Importantly, the court held that making the possibility of obtaining a refund subject to strict compliance with the conditions “irrespective of the legal conditions to which non-resident funds are subject to in their State of establishment” would amount to reserving advantageous treatment to resident funds. As such, the Netherlands tax authorities should not have denied the refund on grounds of failing to meet the distribution requirement if KA Deka’s situation was comparable to a FIE qualifying fund.
To establish if their situation is objectively comparable, the CJEU confirmed that one must look at the aim pursued by the national provisions as well as their purpose and content. Therefore, if the aim of the distribution requirement was to ensure profits reached investors speedily, the deemed distribution was irrelevant and therefore not comparable. In contrast, if the objective lied in the taxation of profits, the court stated that this must be regarded as being a comparable situation meaning the refusal of the refund would amount to a restriction. Determining the true objective of the national provisions was for the national court to decide.
Finally, the CJEU acknowledged that such a restriction may be permitted if justified by overriding reasons of public interest but did not elaborate further as such justification had not been proffered by the Netherlands.
Why is important?
KA Deka opens a useful route of challenge to any refusal of a tax advantage which is founded on a failure to comply with specific requirements set out in national provisions. As such, establishments and individuals alike would be wise to reflect on similarities between the rules of their resident State and those of other Member States to ascertain if any additional tax advantages can be gained.
Finance Act 2019 includes enabling legislation for the implementation of Council Directive (EU) 2017/1852 (“Arbitration Directive”).
The Arbitration Directive provides for a mutual agreement procedure (“MAP”) with mandatory binding arbitration for disputes which remain unresolved after 2 years of the case having been presented for MAP. The mechanism largely renders the arbitration provisions in the OECD BEPS Multilateral Instrument redundant as between the EU Member States and builds on the existing intra-EU tax dispute resolution mechanisms under the European Arbitration Convention (90/436/EC).
There are at least two key takeaways of what the introduction of the Arbitration Directive translates into in practical terms:
Firstly, the Arbitration Directive applies to disputes arising from the interpretation and application of double tax treaties. This means that issues relating to, inter alia, withholding taxes or company residence, which were outside the scope of application of the European Arbitration Convention, can be presented for MAP under the Arbitration Directive.
Secondly, the Arbitration Directive addresses a number of shortcomings in the European Arbitration Convention, particularly in relation to the admissibility and effective handling and conclusion of cases presented for MAP. The increased supervision of national courts and of the Court of Justice of the EU is a distinct advantage. For example:
The Arbitration Directive will apply to disputes relating to income earned or capital gained in a tax period of 12 months commencing on or after 1st January 2018.
Case law concerning the availability of PPR relief continues to apply the legislation in a somewhat inconsistent and unpredictable manner, but some common themes can be identified: the taxpayer needs to be able to produce satisfactory evidence of an intention to reside in the property as a home, and the tribunals will look at both the length of time and the quality of occupation in considering such an intention. The availability of the relief is, however, being curtailed both by HMRC’s increasing eagerness to challenge taxpayer claims, as shown by recent case law and by further legislative changes in the draft Finance Bill 2019/20 provisions which are due to come into force in April. The lack of clarity provided by case law, coupled with a tinkering to the rules by Finance Acts, has led to an increasingly confused picture for taxpayers and consequently undermined their ability to properly plan their affairs.
To read the full article, access the following link from the Tax Journal subscription required).
In Inverclyde Property Renovation LLP and another v HMRC [2019] UKFTT 0408 (TCC), the First-tier Tribunal upheld an appeal against closure notices that were issued to two LLPs. The FTT found that HMRC should have enquired into the appellant LLPs’ partnership returns under paragraph 24 of Schedule 18 to FA 1998 regarding corporation tax self-assessment and not s12AC of TMA 1970 for partnerships.
The LLPs stated that they did not rely on any lacuna in the legislation, but it was a straightforward case of HMRC having followed the wrong procedural steps. Moreover, HMRC could still be able to remedy the situation through their powers to make discovery assessments, subject to statutory limits.
If HMRC wanted to challenge the relevant return of any LLP members, they should have opened an enquiry into those members’ own returns under s9A, TMA. The FTT reiterated that a taxpayer will not be prevented from challenging the procedural course adopted by HMRC only because they have accepted incorrectly issued notices of enquiry and the fact that HMRC has used a procedural course for a considerable period does not make it correct.
It is HMRC’s common practice not to open s9A TMA 1970 enquires into the returns of individual partners of LLPs in analogous scenarios. This decision may therefore have a wider impact on other similar enquires.
HMRC has appealed the FTT decision and the UT hearing is on 27 April 2020.
Many of our clients have made various historical claims for repayment of tax on dividend income. On Friday 24 January 2020 HMRC sent JHA a “business brief” outlining their approach to resolving these claims. In summary, HMRC say they will now accept as valid claims, in-time exemption filings with open enquiries, taxable filings with DTR claimed at the ULT rate and DTR claims outside the return within the s806(1) ICTA time limits. The above also follows for pay and file years where there is an assessment and an appeal.
Other claims are less certain. The brief suggests returns amended on an exemption basis will be dealt with on a case-by-case basis and is entirely silent on error or mistake claims. HMRC have indicated they will contest any claim failed outside the strict statutory time limits. Nevertheless, the brief is an encouraging development.
It was hard to miss the news last month of a new deal agreed between the UK and EU. This article explores the legal ramifications of adopting this deal as law. Before delving into the conundrum itself, it is probably best to give a background on the terminology frequently used when discussing Brexit. Specifically, there are three legal documents whose legal status will have an enormous impact on post-Brexit UK Law. The first is the European Union (Withdrawal) Act 2018 (EUWA). This Act of Parliament received royal assent in June 2018 and is currently the governing law on the UK's position post-Brexit. Second, is the new Withdrawal Agreement (New WA). This is the agreement reached on 17th October 2019 by Prime Minister Johnson and the EU. Finally, there is the European Union (Withdrawal Agreement) Bill, more commonly referred to as The Withdrawal Agreement Bill (WAB). This Bill was first presented to Parliament on 19th October 2019 (Super Saturday). The New WA itself does not become binding until it is ratified. Pursuant to the EUWA, the UK cant do this without the House of Commons passing a motion known as a meaningful vote. The EU process of ratification is discussed in our article The Withdrawal Agreement Is It Legal?. Importantly, the New WA is not legally binding under domestic law and must, therefore, be given effect through an Act of Parliament, hence the introduction of the WAB into the House of Commons. On Super Saturday, MPs opted to withhold approval of the New WA through a meaningful vote until the means for transposing it into domestic law had been agreed. What this means practically is the New WA cannot become binding unless the WAB is first passed. If passed, the WAB will also amend the EUWA. The passing of the WAB would amend existing provisions in the EUWA and introduce a buffer period known interchangeably as the transition period or implementation period. This is the period between exit day and 31st December 2020. The latter date is frequently referred to as IP completion day. It is envisioned that during this period, a more permanent agreement with the EU will be reached and passed. This transition period may be extended once for up to 1 or 2 years but only if it is agreed by 1st July 2020. Unlike the current situation, once the UK has left the EU, the ability to bilaterally agree on an extension beyond and/or after this deadline will not be an option.
The Transition Period
Under the EUWA, EU law after exit day only has effect in so far as it has been transposed into UK Law. In contrast, the WAB introduces two provisions which effectively delay this. Under these two sections, both EU Law which applies directly or has direct effect, as well as EU, derived law continue to apply as if the UK was still a member of the EU. Similarly, rules regarding the relationship with the CJEU are postponed to the end of the transition period. It, therefore, appears that the elements of EU law excluded by EUWA will continue to have effect in the UK until at least 31st December 2020. The introduction of a transition period has broadened more than just the types of laws which will apply in the short-term. It has also expanded the potential scope of the laws to be retained. This is because any new law (for example a European Commission Decision) made after exit day will still apply to the UK, as long as it is made or passed before the IP completion day.
The Law After the Transition Period
Save for changing the date to which the rules applies to, the original provisions in the EUWA remain largely unchanged. This said a new section has been introduced which appears to reduce the scope of the exceptions to the retained law by recognising rights and remedies created or arising under the New WA. The explanatory notes published with the WAB provides an insight into what specific rights and remedies are likely to be covered by this, namely:
The ability to rely directly on the New WA to bring claims before UK courts;
The supremacy of the New WA over any inconsistent domestic laws;
The use of the EU method of interpretation and principles when examining references contained in New WA to EU law and its concepts.
The introduction of another new provision confirms that the when determining the validity, meaning or effect of the New WA, and by default, the rights and remedies created therein, EU rules of interpretation and EU general principles apply. This niche group of laws, therefore, grant those relying on or interpreting it much broader scope than the general retained laws. In contrast, all other retained laws will be subject to the much stricter UK rules of interpretation. In practical terms what this means for litigation is, if a party wishes to challenge the application of domestic law and can establish a relevant right which has been breached, the scope for arguing that the domestic law has been misapplied will be significantly wider. It also offers the opportunity to have the relevant law declared inconsistent, thereby preventing its application to the matter at hand.
Conclusion
As is evident from the variety of possible avenues the UK may still follow, much is still yet to be decided and agreed. With the pending election in December, it is also largely impossible to predict which route we shall be driven towards. The New WA does not, therefore, bring the clarity and conclusion some may hope it would achieve.
A recent opinion by Advocate General Kokott in the AURES Holdings case (C-405/18) serves as a warning to those considering the relocation of their companies pursuant to the freedom of establishment granted under Articles 49 and 54 TFEU. As background to this case, AURES Holdings (Aures) suffered a tax loss whilst it was established in the Netherlands in 2007. On 1 January 2008, it set up an organisational entity in the Czech Republic. Following the move, it remained a taxable entity in the Netherlands but did not carry on any economic activity. As such, it could no longer take the loss into account when calculating its tax liability in the Netherlands. Aures, therefore, looked to offset these losses against its tax liability in the Czech Republic. However, the tax authority for the Czech Republic refused this relief on the basis that the loss had not been suffered in the Czech Republic. Following proceedings brought by Aures to challenge this decision, the ECJ has been asked to determine (a) whether such circumstances fall within the remit of freedom of establishment and (b) if so, is it contrary to freedom of establishment to deny claims for a tax loss incurred in another member state before the relocation of the claiming company? The Advocate General made three key findings. First, she confirmed that Aures relocation should fall within the scope of freedom of establishment. Second, and most importantly, she considered that whilst there was a restriction imposed by the Czech Republic, this restriction was justified on the basis of the balanced allocation of taxing powers. Third, she found that the restriction was proportionate as no less severe restriction was evident. It is also interesting to note that AG Kokott referenced the contentious nature of the Marks & Spencer decision, which led her to conclude that the principle contained therein (that a subsidiary or a permanent establishment's final losses could be used by the parent) should not be extended.
Brexit is a well-discussed but a scarcely-understood topic that has dominated headlines and news articles for the last few years. With the passing of the latest Deadline Day, in this article, we look at the various options now faced by the UK if it fails to ratify the new deal and the legal ramifications of each choice. The legal implications of passing the deal are discussed in our article Brexit What happens if Parliament passes the new deal?. There are 3 possible routes the UK could go down if the WAB has not received royal assent by exit day which, following an agreement with the EU on the 28th October to another extension, is now set to be 31st January 2020. First, as it has not yet left the EU, the UK could revoke its Article 50 Notice thereby withdrawing its intention to leave the EU. Were this to happen, there would be no change to the UK-EU legal relationship and the law would, therefore, stay the same. The second option would be to extend the deadline for Brexit beyond the currently agreed date of 31st January 2020. As with previous extensions, this could not be done unilaterally by the UK and would instead need the consent of the EU. Furthermore, it would only serve to delay the date on which the UK leaves the EU and the legal ramifications attached to this. Finally, the UK could leave the EU on 31st January 2020 without a deal. Following the passing of the EUWA, this does not mean that all EU Law no longer bears any relevance to the UK. Instead, for the most part, the EUWA transforms all EU law made before exit day into UK Law. These laws are known as the retained laws. This applies both to EU Law that was directly effective and applicable to the UK, as well as any law passed in the UK for the purpose of transposing EU law into domestic law (defined as EU derived law). This general rule is far-reaching as it includes all rights contained in the EU treaties up to exit day and pre-exit case law of the Court of Justice of the European Union (CJEU).
Exceptions to the General Rule
There are, however, some exceptions contained in EUWA to this general rule. The first exception is the primacy of EU law. Currently, if two primary laws are inconsistent, the law which was passed later will override the earlier law. A caveat to this is when one of those laws is an EU Law. Where this is the case, the EU law will take precedence over the domestic law, regardless of when the latter was passed. After the exit day, this will no longer be the case. Future parliaments will, therefore, be able to legislate against or away from what was EU Law. The second exception to the general rule of incorporation is the general principles of EU Law. Under this exception, no claim can be brought to the UK courts on the basis of the general principles of EU law after exit day. Similarly, no UK court will be able to disapply or quash any enactment or rule of law nor quash any conduct on the grounds that it is incompatible with such principles. There is an important caveat, however, to this exception. If the general principle has been recognised in a case decided by the CJEU prior to exit day, the general rule applies and this specific principle forms part of the retained law. Principles such as proportionality, equivalence and effectiveness should, therefore, be incorporated into domestic law. Finally, after the exit day, Francovich damages are excepted from the general rule of incorporation. Francovich damages are the compensation the UK could currently be liable to pay to individuals for a failure to transpose an EU directive either correctly or in time. After exit day, however, any future litigation about the failure or validity of transposition of EU directives created prior to exit day will not have that remedy available. A further exception, namely the Charter of Fundamental Rights, relates to the rights of EU citizens and therefore falls out the scope of this article.
Claw-Back Provisions The Exception to the Exceptions
The exceptions just set out, also come with three key caveats. Scenarios that fall within these caveats, fall outside the scope of the exceptions, meaning the general rule will apply. The first caveat confirms that the exclusion of the general principles and Francovich damages will not apply to proceedings which have begun before a UK court or tribunal but are not finally decided before exit day. As such, based on the currently set exit day, any claims based on the general principles and/or Francovich claims brought before 31st January 2020 can continue. The second caveat relates to the exclusion of rights of action based on the general principles of EU law. Pursuant to this caveat, any proceedings brought within 3 years of exit day can be based on the general principles provided that:
They do involve a challenge to anything which occurred before exit day (for example, the payment of unlawfully levied tax on 30th October 2019); and
The challenge is not for the disapplication or quashing of (a) an Act of Parliament, (b) rule of law, (c) anything else which enforce (a) or (b), or (d) anything else which could not have been different because of anything passed which falls under (a) or (b).
In practice, this caveat acts as an overruling limitation period for bringing actions based on general principles, whilst also maintaining the exclusion of the disapplication/quashing option currently available to UK courts. As exit day is currently set to be 31st January 2020, this would mean that such claims could still be brought up to and including 30th January 2023. Notably, the stipulation regarding the disapplication or quashing of Acts of Parliament and so on is not specified in the first caveat. Presumably, therefore, it will still be open to a court or tribunal to disapply or quash the relevant Act or rule of law if the relevant proceedings were brought before exit day. The third caveat relates to the exclusion of Francovich damages. This allows claims for Francovich damages to be sought provided that:
The claim is brought within two years of exit day; and
The proceedings relate to anything which occurred before exit day.
CJEU Case-Law
The EUWA also makes specific provisions regarding the relationship between the CJEU and UK courts. First, it distinguishes between laws made before exit day (retained law) and those made on or after it. In the case of the former, the Supreme Court is not bound by it. Similarly, the supreme criminal court in Scotland, the High Court of Justiciary, is not bound by retained law when determining certain matters under the Criminal Procedure (Scotland) Act 1995 and Scotland Act 1998. This does not mean these two courts will depart from EU law lightly as the test for departure will be the same for that used by the court for overturning its own previous decisions. All other UK courts and tribunals will only be bound by the retained law by reason of its domestic nature as primary legislation. These are the precedence rules. Subject to the precedence rules, after exit day UK courts will still be able to determine the validity, meaning or effect of any retained law. When doing so, any decision should be made in accordance with any pre-exit case-law and any retained general principles of EU law (as detailed above). Another factor which remains relevant to this decision is the competences of the EU. Here too there is a caveat, namely that if the relevant retained law has subsequently been modified, the decision can only be made (with regard to the relevant factors) in so far as to do so is consistent with the intention behind the modification of the law. The EUWA also confirms that UK courts and tribunals will not be bound by any principles or decisions made by the CJEU after exit day, nor may they refer any matter to the CJEU after exit day. However, the EUWA also stipulates that UK courts and tribunals may have regard to anything done by the CJEU, another EU entity or the EU in so far as it relates to the matter being decided by the UK court or tribunal. Presuming no further amendments are made to this provision, the discretion awarded to judges to have regard to EU law will likely be crucial in challenging any reliance on EU law which was valid up to exit day but which has since been overruled. This will be especially relevant to any parties who have had matters decided by the General Court or European Commission which are or may still be appealed to the European Court of Justice after the exit day.
