Success for the taxpayer
On 5 October 2016, Henderson J handed down his judgment in Six Continents, a case concerning dividends from an EU subsidiary enrolled in the FII GLO and the notional credit for foreign tax which a claimant is entitled to when calculating restitution due for unlawfully levied Case V corporation tax. The judgment found largely for the taxpayer.
The judgment holds that Six Continents are entitled to a credit at the foreign nominal rate (FNR) on dividends where the underlying foreign profits incorporated:
The court found that the accounting profits derived from adjustments and the profits arising from the liquidation of a subsidiary of Six Continents were in principal subject to the Dutch standard rate of corporation tax. Notwithstanding the fact that most of these profits were exempt (or removed from the base), only a tax credit at the FNR is capable of eliminating economic double taxation, this being the objective of the decision of the European Court of Justice in Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2013] STC 612.
However, Six Continents were not entitled to a credit at the FNR in relation to dividends sourced from the share premium account of a Dutch subsidiary. Henderson J held that this was not a case in which the UK taxed returns of capital made by UK-resident companies more advantageously than it taxed similar returns of capital made by non-resident companies. Rather, the return of capital by a non-UK resident company is outside the scope of UK tax altogether. Therefore, the Case V charge on Dividends was, to this extent, compliant with EU law.
The decision is helpful to taxpayers seeking restitution of DV corporation tax levied on controlled holdings.
A copy of the judgment can be found here.
This article appears in the JHA October 2016 Tax Newsletter, which also features:
Originally printed in Tax Journal on 30 September 2016.
Tax avoidance is now a headline-grabbing and career-threatening subject. But over seventy years ago, the highest court in the land told us that taxpayers are entitled to do anything legal to reduce their tax bill. How we have got to here from there is a journey driven by strong personalities reacting to major economic events, changes in tax rates and what until very recently was an ever growing tax avoidance industry.
Graham Aaronson QC (Joseph Hage Aaronson) presents a personal view of tax avoidance in the UK over the past 100 years, looking at the case law and legislation which developed in the first half century, and the social and economic context in which they evolved.
Continue reading on Tax Journal (subscription required)
JHA is to host a CIArb conference on Dealing in Looted Art from Post-Conflict Countries at 6pm on Friday 7 October 2016.
On 4 August, the Court of Appeal handed down its judgment in Chappell v HMRC [2016] EWCA Civ 809, finding in favour of HMRC.
The taxpayer had appealed against an amendment to his self-assessment tax return by HMRC, which effectively disallowed a deduction from his total income. Mr. Chappell’s entitlement to make the deduction depended upon two payments which he made to a company as manufactured overseas dividends. HMRC’s case, based on Ramsay principles, was that the payments were not deductible because they had been made as part of a tax avoidance scheme. The scheme in question had been implemented by 305 high net worth individuals.
In line with the FTT and UT, the Court of Appeal held that, construing the statutory provisions purposively, they were intended to benefit the parties to real-world, commercial transactions involving the lending of marketable securities and not to transactions which lacked those characteristics and whose only purpose was to obtain tax relief. Accordingly, the relief was denied.
Mr Aby Rosen, a New York based real estate developer and art collector, and Ms. Victoria Gelfand, a director at Gagosian Gallery Inc., have reportedly agreed to settle New York state claims that they did not pay sales and use taxes on fine art. According to New York State laws, art dealers are exempt from sales taxes if they acquire artwork for the sole purposes of resale. However, according to the New York attorney general, Mr. Rosen could not avoid paying sales or use taxes by claiming that the purchased artwork was for resale because he was treating the pieces as his personal possessions and used the works to enhance the value of his real estate brand and/or for his own enjoyment. In Ms. Gelfand’s case, the attorney general argued that art dealers who display purchased artwork in their homes owe sales or use taxes.
Orrin Hatch (Republican-Utah), Chairman of the Senate Finance Committee recently concluded a review into private, non-profit museums that enjoy tax-exempt status. His finding were summarised in a letter he sent to the IRS (the letter is available here).
To meet the tax-exemption standards, private museums must perform work that benefits the public. Founders of tax-exempt private museums can deduct from their taxes the fair-market value of the art they buy as well as the value of cash and stocks they donate. They can also deduct the cost of insurance, conservation and storage of donated works. However, in the letter Mr. Hatch noted that some of the museums he investigated did not deserve the tax benefits they were getting. He noted that some of the museums were not readily accessible to the general public, requiring reservations sometimes months in advance. In the letter Mr. Hatch mentioned that some of the museums were open to the public as little as 20 hours a week. Furthermore, many of the founding donors continued to play an active role in the management and operation of the museums.
Although the factors listed in the letter do not amount to revocation of the tax-exempt status of private museums, Mr. Hatch has urged the IRS to conduct further reviews into this matter.
The General Court of the European Union (“the Court”) has annulled the sanctions that the EU imposed in 2014 on Viktor Viktorovych Yanukovych, a member of Ukraine’s parliament, the Verkhovna Rada, and one of the sons of Ukraine’s President Viktor Fedorovych Yanukovych.
In this Case, which started in May 2014, Viktor Viktorovych Yanukovych challenged in the Court the EU’s sanctions, seeking the annulment of the relevant EU Council Decisions and Regulations insofar as they applied to him. Mr. Yanukovych died in March 2015 and his widow, Olga Stanislavivna Yanukovych, was granted permission to continue the Case as his heir and legal successor. The Council of the European Union by its own decision removed Mr. Yanukovych’s name from the sanctions list in June 2015.
According to the Court’s Order of 12 July 2016 the sole basis used by the Council of the European Union to support Mr. Yanukovych’s listing in 2014 was a letter from the Office of the Prosecutor General of Ukraine to the High Representative of the European Union for Foreign Affairs and Security Policy, at the time Baroness Catherine Ashton.
The Court found that the letter did not provide any details 1) as to confirmation of the acts of misappropriation of Ukrainian State funds alleged against Mr. Yanukovych and 2) as to Mr. Yanukovych’s individual liability, even if presumed, in respect of those acts. The Court therefore held that the challenge to the 2014 sanctions was “manifestly well founded”, which meant that it did not even need to hold an oral hearing.
The Court did not determine the merits of a related challenge to the 2015 measures, which was brought after Mr. Yanukovych’s death.
ENDS
Notes to editors
Mr. Yanukovych and latterly his widow were represented before the General Court by Joseph Hage Aaronson LLP, a law firm based in London:
www.jha.com
An action for annulment seeks the annulment of acts of the institutions of the EU, in this case the Council, that are contrary to EU law.
The text of the Court’s Order is available on the website of the Court of Justice of the EU at:
http://curia.europa.eu
OR alternatively direct link:
http://curia.europa.eu/juris/document/document.jsf?text=&docid=182398&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=211515
HMRC v Leekes [2016] UKUT 320 (12 July 2016)
The Upper Tribunal (“UT”) has recently overturned a First-tier Tribunal (“FTT”) decision in relation to loss relief under section 343(3) of the Income and Corporation Taxes Act 1988 (“s343”) (now section 944 of the Corporation Tax Act 2010).
In November 2009, a retailer (“Leekes”) acquired the entire share capital of a furniture retailer (“Coles”) who had losses in that year, as well as carried forward losses, amounting to £3 million. Coles’ business was immediately incorporated into Leekes, rendering Coles dormant.
In the following year, Leekes sought to set off Coles’ losses against the trading profits of the enlarged business on the basis that it was the successor to Coles’ trade under s343. In 2013, HMRC opened an enquiry into that year on the basis that the set off could only be applied against income generated by what was formerly the Coles business and not the combined income of the enlarged business.
At first instance the FTT held that under s343 the Coles losses could be set off against the trading profits of the combined trade. However the UT has recently reversed this decision, ruling that ‘streaming’ is in fact the correct approach. This decision therefore restricts a taxpayer that acquired a loss making company and succeeded to its trade, from setting off the Predecessor’s carried forward trading losses against the trading profits from its combined trade. The correct approach is to use the losses only against the trading profits generated in respect of the predecessor’s trade. In this case, no relief would therefore have been available to Leekes because that trade remained unprofitable.
The UT agreed with HMRC’s argument that to interpret the legislation in any other way would put the successor company in a better position than the predecessor would have been in had the predecessor continued to carry on trade alone and as such there would be “ample opportunity for abuse” if the FTT decision was left to stand. Arguments by Leekes as to the potential practical difficulties in performing such a ‘streaming’ exercise were dismissed.
A taxpayer with two trades, one subject to corporation tax and the other subject to income tax, can set a corporation tax loss against an income tax profit.
The Appellant (English Holdings) was a company registered in the BVI. At the relevant time, English Holdings had a permanent establishment (“PE”) in the UK which was trading in land situated outside the UK, the profits of which would have been subject to corporation tax. In the year ending 31 March 2011, however, it made a trading loss of over £2m.
English Holdings also owned a number of investment properties on which it earned rental income. Since the letting business was not carried on through a PE, the profits from this business were subject to UK income tax. In the tax year ending 31 March 2010, the investment properties brought in a profit of over £1m which resulted in an income tax liability of £203,043.95.
The principal question for the Tribunal was whether the Appellant could set off losses arising out of the trading activities of its PE against its profit on its non-PE trading activities. The effect was to reduce the income tax liability of the rental business from £203,043.94 to zero. The Appellant based its claim on s64 Income Tax Act 2007 (ITA) which makes provision for trade loss relief against general income if a person carries on a trade and makes a loss.
HMRC argued that s64 does not extend to a loss which, had it been a profit, would have been subject to corporation tax. This was based on s5 ITA which disapplies provisions of the ITA relating to the charge of income tax in relation to income of a company if “the company is non-UK resident and the income is within its chargeable profits as defined by section 19 of that Act”. HMRC further argued that, in any event, the legislation should be read purposively, primarily on the basis of differences in policy behind corporation tax and income tax on losses.
The Tribunal disagreed and allowed the appeal. In the first place it held that the word ‘income’ did not include losses so that the exception did not apply. Even if ‘income’ were to be read as meaning ‘income and losses’, HMRC would still have to show that the losses were within the company’s chargeable profits as defined by s19. However, this could not be so since s19 refers only to ‘gains’ as opposed to ‘losses’. Finally a purposive construction was not possible because the wording of the legislation was clear. In any event, there was no obvious reason why Parliament would have intended that taxpayers would be unable to set a loss from one trade against a profit from another.
As foreshadowed at Autumn Statement 2015 the Government has published a consultation document ‘Tackling Offshore Tax Evasion: A Requirement to Correct’. The consultation period closes on 19 October 2016.
The essence of the requirement to correct (RTC) is that any person with UK tax irregularities related to offshore interests must come forward and correct those liabilities by 30 September 2018. After September 2018 any person found to have failed to correct their affairs will be subject to a new set of, tougher, sanctions.
The context of this new policy is what HMRC views as the changing scope of information exchange. HMRC strategy (No Safe Havens, 2014) includes an objective that there should be no jurisdictions where UK taxpayers feel safe to hide their income and assets from HMRC. However in the past it has been difficult for HMRC to detect offshore evasion owing to lack of data. It is thought that this will change greatly with Common Reporting Standards (effective from 2018 and involving automatic exchange of tax data by over 100 countries) and exchange of data from registers of beneficial ownership.
In December 2015 HMRC closed previous offshore disclosure facilities and will launch a new, tougher Worldwide Disclosure Facility on 5 September 2016.
This article appears in the JHA August 2016 Tax Newsletter, which also features:
