VAT exemption not of direct effect
The CJEU held here, contrary to the decisions of the UK First-tier and Upper Tax Tribunals, that Article 13A(1)(n) of Sixth Council Directive 77/388/EEC, which exempts from VAT the provision of “certain cultural services… supplied by bodies governed by public law”, was not sufficiently clear and precise so as to have direct effect.
The significance of this was that The British Film Institute was not able to rely on the directive itself to recover tax paid in relation to periods prior to the UK implementing it into domestic law. The decision provides useful guidance as to the court’s approach where a Member State fails to implement a directive correctly or within the prescribed time-frame and the potential risks which taxpayers may face in such circumstances.
This article appears in the JHA February 2017 Tax Newsletter, which also features:
CJEU allows restriction on free movement of capital
The CJEU here considered the scope of the exception to the free movement of capital contained in Article 64(1) TFEU. This allows restrictions on capital movements that were adopted prior to 31 December 1993 and which involve direct investment, establishment, the provision of financial services or the admission of securities to capital markets. The court notably gave a broad interpretation to Article 64(1) and held, contrary to the findings of the Dutch Regional Court of Appeal, that the exception was not limited to restrictions on the movement of capital which relate solely to the categories referred to in Article 64(1). As such, it could apply to general measures, such as the extended time-period for the recovery of tax on foreign income here, provided that the particular case involved one of the prescribed types of capital movement.
This article appears in the JHA February 2017 Tax Newsletter, which also features:
Originally printed in The In-House Lawyer: Comparative Guides on 29 September 2016.
This country-specific Q&A provides an overview to tax laws and regulations that may occur in the United Kingdom (UK).
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-2/
Continue reading on The In-House Lawyer: Comparative Guides
First-tier Tribunal CGT appeal on foreign currency gains gives rise to interesting jurisdictional points on the Liechtenstein Disclosure Facility
The First-tier Tribunal has given a detailed decision in an appeal against discovery assessments to capital gains tax that HMRC made in consequence of the Appellant’s disposal of a property in Switzerland (declared via the Liechtenstein Disclosure Facility, the “LDF”) and associated penalties. The main issue was which method should was the correct method to calculate the chargeable gain on disposal:
The Tribunal judge found that he was bound by the Court of Appeal’s decision in Capcount Trading v Evans (HM Inspector of Taxes) [1993] STC 11 and the High Court’s decision in Bentley v Pike (Inspector of Taxes) [1981] STC 60, so Method B was correct. The point of principle arising out of the Court of Appeal’s decision in Capcount was that foreign currency was a distinct asset for CGT purposes. Thus, expenditure in foreign currency is expenditure consisting of giving up a distinct asset, not expenditure in money, and it falls to be valued by converting the foreign currency into sterling at the exchange rate prevailing on the date of expenditure. Similarly, receipts in foreign currency are receipts of separate assets which need to be converted into sterling at the rate prevailing on the date of receipt.
HMRC had applied the minimum percentage penalty (20%) in accordance with Schedule 24 of the Finance Act 2007 for deliberate inaccuracies, but the Appellants had also argued that the applicable penalty percentage under the terms of the LDF was 10%. The Tribunal found that this argument was fundamentally flawed in that the LDF was not a statutory provision and the Tribunal did not have any jurisdiction to consider complaints that HMRC had not honoured their agreement with the Government of Liechtenstein. Nor did the Tribunal have jurisdiction to consider arguments to the effect that HMRC should have applied a lower level of penalty given their public statements on the LDF: those were public law arguments that would have to be pursued in the courts by way of judicial review. In any event the Tribunal judge would not have accepted the Appellants’ arguments as he believed that HMRC had applied the LDF correctly. The Tribunal judge also considered whether HMRC’s perceived failure to apply the LDF amounted to a “special circumstance” which could justify reducing the penalty below the minimum level of 20% under paragraph 11 of Schedule 24. The Tribunal’s jurisdiction on “special circumstances” – which allows the Tribunal to reach a different decision to HMRC if the Tribunal thinks that HMRC’s decision is “flawed” – was, the Tribunal held, confined to considering HMRC’s approach in light of judicial review principles. The Tribunal took the view that HMRC had made no error of law in this regard: HMRC had turned their mind to the LDF and applied it in a manner that was reasonable (and in a manner which the Tribunal judge considered to be consistent with the terms of the LDF).
Finally, the Appellants had argued that HMRC should not have pursued enquiries into their tax affairs under HMRC’s Code of Practice 8 because the dispute between HMRC and the Appellants was essentially one of law, namely which method should have been used to calculate the chargeable gain. However, the Tribunal held that, as a creature of statute, it had no jurisdiction to consider this complaint. One option available to the Appellants would have been to complain to HMRC and, if not satisfied, to pursue the matter to the Adjudicator’s Office. Alternatively, they could have considered pursuing a judicial review in the courts.
Article 50 of the Treaty on the European Union provides, in summary terms, that, if a member state decides to withdraw from the European Union (“the EU”) ‘in accordance with its own constitutional requirements’, it should serve a notice of that intention (“a Notice”), and that the treaties which govern the EU (“the EU Treaties”) “shall cease to apply” to that member state within two years thereafter. Following the June 2016 referendum, the Government proposes to use its prerogative powers to withdraw from the EU by serving a Notice withdrawing the UK from the EU Treaties.
The principal issue in these appeals is whether such a Notice can, under the UK’s constitutional arrangements, lawfully be given by Government ministers without prior authorisation by an Act of Parliament and whether the terms on which powers have been statutorily devolved require consultation with or the agreement of the devolved legislatures before Notice is served, or otherwise operate to restrict the Government’s power to do so (‘the devolution issues’).
The Supreme Court by a majority of 8 to 3 dismisses the Secretary of State’s appeal. In a joint judgment of the majority, the Supreme Court holds that an Act of Parliament is required to authorise ministers to give Notice of the decision of the UK to withdraw from the European Union.
On the devolution issues, the court unanimously concludes that it is not necessary for the court to decide if the Northern Ireland Act 1998 imposes a discrete requirement for such legislation, and that the Sewel Convention, which says that the UK Parliament will not normally exercise its right to legislate with regard to devolved matters without the agreement of the devolved legislature, does not give rise to a legally enforceable obligation.
This article appears in the JHA January 2017 Tax Newsletter, which also features:
The case deals with circumstances in which a Member State may refuse – on the grounds of preventing tax evasion – an exemption from WHT that would normally be granted for dividend payments of a resident subsidiary to its non-resident parent company.
French tax authorities refused to exempt from WHT the dividends of a French company that were paid to its Luxembourg parent company, which was indirectly controlled by a Swiss company, on the grounds that proof was required to show that the ownership structure was not tax-related. Moreover, the proof had to come from the beneficiary of the dividends, i.e. the non-EU parent company, without the French tax authorities being obliged to provide sufficient indications of tax evasion. AG Kokott found that such a rule was disproportionate and that it went beyond what is required to prevent tax evasion. The mere reference to the direct/indirect control by shareholders in third States cannot be regarded as an indication of tax evasion.
AG Kokott also held that that it is irrelevant that the company relying on the freedom of establishment is controlled by persons with their seat in a non-Member State. The origin of the shareholders of companies does not affect the right of those companies, who are resident in the EU, to rely on the freedom of establishment. Consequently, a difference in the tax treatment of dividends between parent companies, based on the location of their seat, constitutes a restriction on the freedom of establishment.
Full opinion can be found here.
This article appears in the JHA January 2017 Tax Newsletter, which also features:
Where a tax exempt shareholder is denied a cash credit in breach of EU law on the distribution by a resident company of non-resident sourced income, in circumstances where resident-sourced income would carry a credit, what is the nature of the remedy? Is it a repayment remedy, recoverable as of right or is it a damages remedy which can only re recovered if certain conditions are met including the difficult requirement of a sufficiently serious breach?
In his opinion of 21 December in The Trustees of the BT Pension Scheme C-628/15, AG Wathelet concludes that it is neither. It is not the repayment of tax unduly levied as the exempt taxpayer paid no tax. However, he concludes, the principle of the primacy of EU law obliges the Member States to adopt such measures as are necessary to enable any person that has suffered discrimination prohibited by Art 63 TFEU to obtain the payment of any sums to which it would have been entitled in the absence of such discrimination. In the current instance the exempt shareholders had suffered a “direct loss” and were entitled to the dis-application of the restriction which excluded non-resident income from the grant of a cash credit.
Full opinion can be found here.
This article appears in the JHA January 2017 Tax Newsletter, which also features:
KEY POINTS
Due to the imposition of IHT on all enveloped structures holding UK residential property of any value from April 2017 an urgent review is required of any such holding structures.
INTRODUCTION
The Government confirmed in the consultation document published on 19 August 2016 that all UK residential property held in foreign companies or partnerships will come within the scope of UK IHT from 6 April 2017. The draft legislation setting out how this policy will be implemented was released on 5th December 2016.
BACKGROUND TO THE REFORMS
If a UK asset is held directly by a trust or an individual then IHT is already payable under the current legislation irrespective of where the individual or trust is domiciled or resident. The rate is broadly 40% on the death of an individual and 6% every ten years for UK assets held directly by trusts. In some cases a double IHT charge can arise if the asset is held in a trust from which the individual settlor can benefit, resulting in 40% on death and 6% every ten years.
In order to avoid IHT it has been common for foreign domiciliaries including non UK residents to hold UK assets such as pictures and houses through wholly owned foreign companies. This is often called “enveloping”. As the individual or trust then holds foreign situated property rather than the UK property no IHT is payable; it effectively becomes “excluded property” in that it is excluded from IHT by the Inheritance Act 1984 (IHTA) s6 and s48.
While enveloping still works for assets such as commercial property and pictures, from April 2017 such enveloping will no longer provide any IHT protection for UK residential property and indeed there may be positive disadvantages in enveloping such UK residential property.
The IHT changes are part of the Government’s ongoing attempts since 2013 to put the taxation of UK residential property between residents and non-residents on a more level playing field. The first shot in the bows was the introduction of Annual Tax on Enveloped Dwellings (“ATED”) in April 2013 which imposed an annual charge on any high value property (over £2m) owned through a company. The ATED charge has since been extended to any property worth £500,000 or more although it is not imposed on let property. The annual rates are high – over £23,000 pa for property worth more than £2m in April 2012 or at the date of acquisition if later. The next revaluation date will be April 2017 and some properties will fall into a new higher band then. On any disposal of such properties by the company a special CGT charge is imposed at 28% on the increase in value since 2013. However, the IHT protection afforded to enveloped structures meant that in many cases people were prepared to pay ATED to save IHT particularly where the owner was elderly and more likely to die. With the loss of IHT protection, ATED and ATED-related CGT has now become merely an additional cost without any offsetting benefits and makes the case for keeping enveloped structures much less compelling.
The second change in relation to UK residential property came in 2015 with the introduction of non-resident CGT: this applies to disposals of residential property by all non UK residents but only in respect of increases in value accruing since April 2015. The third change now is IHT: there will be IHT due at 40% on the death of an individual owning enveloped residential property after April 2017 irrespective of when the property was acquired. There are no transitional reliefs. That individual will be still entitled to the same reliefs and exemptions as a UK domiciliary or UK resident such as exemption on transfers between spouses. Trusts will also be subject to ten year charges at 6% on the value of their residential property going forward. Any transfers of enveloped property into trust will be taxed at up to 20% immediately and transfers of enveloped property out of trusts will be taxed at up to 6%.
Many advisers had hoped for some kind of de-enveloping relief to aid individuals in unravelling what are now tax inefficient structures but the Government has rejected the prospect of any such relief. As it stands therefore there may be a significant cost (mainly capital gains tax or SDLT) in extracting residential properties from the company especially for UK resident shareholders or where the property is subject to borrowing.
This note considers briefly the scope of the new legislation. Tread very carefully is the key message – the tax rules in this area are complex and navigation of these rules is not to be undertaken lightly. The legislation is only draft and is clearly likely to be amended and expanded before it finally becomes law but the broad shape of the proposal is now clear.
THE NEW IHT LEGISLATION
Clause 42 and Schedule 13 of the draft Finance Bill 2017 operate to amend the definition of excluded property in section 6 and section 48 IHTA to charge IHT on residential properties situated in the UK if held through foreign structures such as companies and partnerships. IHT is now imposed on the shareholder or loan creditor of the company or the partner of the foreign partnership that holds such UK residential property as if the company or partnership was UK situated. The charge only applies to companies that are closely held i.e. under the control of five or fewer participators.
The definition of residential property is widely drawn and includes any dwelling interest including those existing for off-plan purchase. There is no relief for let properties and it applies to all residential properties, whatever their value. The legislation includes a targeted anti-avoidance provision which disregards any arrangements entered into for the sole or main purpose of avoiding or mitigating the effects of the new legislation. Of interest for individuals who have long benefited from various double tax treaties mitigating the effect of a UK IHT charge, the new rules specifically exclude double tax relief where no such equivalent tax is charged in a home jurisdiction.
If the land changes in character from residential to commercial or vice versa during the course of ownership there is a tax charge only if it is residential at the relevant point of charge. The Government’s original proposal to have a two year clawback if, for example, the land changes in nature from residential to commercial in the two years before death, has been dropped. Where property is owned by a company and used for both commercial and residential purposes e.g. the flat above the shop, then one would assume a just and reasonable apportionment will be made between the commercial and the residential elements as the commercial element is not taxable albeit there is no provision for this in the legislation as drafted.
Any gifts to individuals or trusts should be done before April 2017 to avoid a PET or chargeable transfer for IHT purposes. If the settlor can benefit from any trust that holds enveloped property bear in mind that after April 2017 this property will be subject to a reservation of benefit and charged at 40% on his death so the settlor may need to be excluded or the trust ended prior to this date.
How this charge will be enforced and collected remains uncertain as no legislation has been published on this part of the proposals. It seems likely from comments in the related documentation that some sort of duty of disclosure will be placed on the directors.
PRACTICAL EFFECT
The practical effect of the changes can best be illustrated by way of some examples.
WHY DE-ENVELOPE?
It is gradually being acknowledged that the confidentiality and privacy attractions of these structures have in any event over time been lessened by the global transparency agenda quite apart from the hefty ATED cost of owning such structures. Many countries have now introduced a variant of a register of ultimate beneficial owners and the tendrils of the Common Reporting Standard stretch far and wide. How to tackle security and privacy issues will need to be considered alongside the tax issues. It is possible to hold properties in nominee names without falling foul of ATED charges.
HOW TO DE-ENVELOPE?
There will typically be two common incarnations of these property holding structures. Either the property is held in a non UK company, the shareholder of which is the non dom individual- either UK resident or non UK resident. Unwrapping from here is more straightforward and a liquidation and distribution of the property out to the shareholder, taking account of the capital gains tax position may be all that is required.
In the alternative, the property is held in a non UK company which is in turn held in the trust of the non-UK domiciled, likely UK resident settlor and the tax position on de-enveloping this structure is more complex, particularly where beneficiaries of the trust have been occupying the property, as the capital gains tax triggered on the liquidation and distribution may be significant.
In either scenario, in order to de-envelope, careful consideration of the historical CGT position will be required. The property will need to be valued at 5 April 2013 in relation to any ATED CGT and if the individual is non UK resident, a 5 April 2015 valuation will be required to take into account the gain that has accrued since the introduction of non-residents CGT. A 2008 valuation will also be needed as this may be relate to another transitional issue called trust rebasing.
The extent of the tax at stake will need to be carefully balanced and of course funding any tax charge may be a challenge if an individual needs to remit funds in order to do so. It may be possible to transfer the company shares out to the individual with hold over relief and thereby obtain CGT rebasing on the company shares if the individual becomes deemed domiciled for all tax purposes under the new rules on 6 April 2017.
WHY PUT OFF TO APRIL 2017 WHAT CAN BE DONE TODAY?
Delaying taking action will simply increase the cost of extracting these properties.
Transferring the property out of the trust in advance of April 2017 will avoid any additional IHT 10 yearly and exit charges. In relation to the “gift with reservation of benefit” rules, the settlor ought to be swiftly excluded from benefiting from the trust or the property should be distributed out to him.
Co-ordinating any liquidation/distribution process is a time consuming process which requires significant input from overseas advisers. There may be circumstances where consent is needed from funders and/or landlords which will also take time to navigate. Action sooner rather than later is therefore advisable.
* This is for the following reasons:
On 9 December 2016, the Swiss Federal Council reported that they had decided to extend the freezing of all the assets in Switzerland of President Yanukovych, as well as of other Ukrainian individuals allegedly associated with him. Amongst other things, the report asserted that “assets amounting to approximately CHF 70 million are involved” (without saying precisely to whom this amount might belong).
Joseph Hage Aaronson LLP has written to the Swiss authorities to ask that they withdraw or clarify this statement insofar as it suggests that CHF 70 million of frozen assets are owned by either President Yanukovych or his son, Oleksandr Yanukovych, which is simply not the case. In fact, President Yanukovych and his son contend that they have no bank accounts or money or other assets in Switzerland, other than Oleksandr Yanukovych’s company Mako Trading SA, which has around CHF 1 million in its account in Switzerland; and that account is transparent and audited.
END
Enquiries to: Joseph Hage Aaronson LLP, Tel: +44 (0)2078518888
Originally published in Tax Journal on 9 December 2016.
The Court of Appeal handed down its judgment in The Test Claimants in the FII Group Litigation v HMRC on 24 November 2016, finding largely in favour of the taxpayers. The method of computing double tax relief on EU sourced dividends for the period from 1973 to 1999 therefore remains as established by Henderson J. HMRC again raised its various ‘restitutionary’ defences as to why it should not have to repay the unlawful tax, but these were rejected. The court notably allowed the claimants’ cross-appeal regarding the date of discovery, extending the date from which the six-year limitation period began to run from 2001 to 12 December 2006 and bringing all claims in the GLO within time.
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