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The Supreme Court has provided important guidance on the application of the principle of commercial common sense when interpreting written contracts.

The case involved the disputed interpretation of a clause dealing with service charges in the leases of chalets in a caravan park.

The Supreme Court held as follows:

• The natural meaning of the words used was clear. The first half of the clause stipulated that the lessee was to pay an annual charge to reimburse the lessor for the costs of providing the services which he covenanted to provide, and the second half of the clause identified how that service charge was to be calculated.
• The fact that the service charge was a fixed sum which increased at a compound rate of 10% per annum, meaning that by 2072 each tenant would be paying in excess of £550,000 per annum, did not justify departing from the natural meaning of the clause.
• While commercial common sense was an important factor to take into account when interpreting a contract, a court should be slow to reject the natural meaning of a provision as correct simply because it appeared to be a very imprudent term for one of the parties to have agreed. The mere fact that a contractual arrangement, if interpreted according to its natural language, had worked out unfavourably for one of the parties was not a reason for departing from the natural language. Commercial common sense was only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made.

Arnold v Britton and others [2015] UKSC 36, 10 June 2015

According to a European Parliament press release, a draft law to improve and broaden the use of a simplified procedure for low-value cross-border claims to recover money from abroad has been informally agreed by MEPs and the Latvian Presidency of the Council.

New rules, which still need to be approved by Parliament and the Council, would raise the threshold for claims covered by the procedure from EUR 2,000 to EUR 5,000.

The European Small Claims Procedure, in use since 2009, is a simplified procedure based on standard forms for recovering money owed by someone in another EU country. The proposed changes would make the procedure available for more cases, cut court fees and encourage the use of electronic communications, such as videoconferencing, and means of distance payment.

To broaden the use of the procedure while safeguarding the procedural rights of citizens, MEPs and the Latvian Presidency agreed to extend the procedure to cross-border claims worth up to EUR 5,000. Currently, the procedure is available only for cases with a value of up to EUR 2,000. The possibility of raising the threshold even further will be examined during the first five years of the application of the new rules.

The EU Commission has published an action plan entitled “A fair and efficient corporate tax system in the European Union: 5 key areas for action”.

This plan sets out core areas of work for the immediate, medium and long-term future. The 5 areas are:
The harmonisation of tax rates is not one of the core areas.

• Re-launching the Common Consolidated Corporate Tax Base
• Ensuring fair taxation where profits are generated
• Creating a better business environment
• Increasing transparency; and
• Improving EU coordination.

The area of work which will attract the most interest is likely to be the revival of the proposal to create a common consolidated corporate tax base (“CCCTB”). This proposal was not universally welcomed by Member States when it was last discussed. Nevertheless the Commission believes that the proposal could be highly effective in tackling profit shifting and corporate tax abuse in the EU and that the time is right for the proposal to be raised again. The possibility of manipulating transfer pricing would be removed as intra group transactions would be ignored and the consolidated group profit figure shared by a formula. The Commission, perhaps recognising the political difficulties, describes the proposal as an “ambitious initiative” and is advocating a step by step approach to agreeing different elements of the proposal. In particular, the element of consolidation is recognised as the most difficult aspect of the proposal and the Commission proposes that work on consolidation is postponed until the common base has been agreed and implemented.

The Commission will also propose that until full CCCTB consolidation is introduced, group entities should be able to offset profits and losses they make in different Member States. However there would also be a mechanism to recapture losses once the group becomes profit making again. The Commission plans to include this initiative as one of the stages in its revised proposals on the CCCTB.

This Commission proposal has clear overlaps with the work being done in the OECD BEPS project. It will be interesting to see how these proposals develop in the future.

A Fair and Efficient Corporate Tax System in the European Union: 5 Key Areas for Action, COM(2015) 302 final

Post-script: According to the Guardian, David Gauke, financial secretary to the Treasury, has told EU Parliament representatives that the UK would not adopt the Commission’s proposals for a consolidated tax base. It seems that the UK favours tax competition.

HMRC invites comments on options to replace the Extra-Statutory Concession (ESC) allowing relief from excise duty on recovered petrol vapour.

HMRC is considering the future of the Extra-Statutory Concession (ESC) on recovered petrol vapour. This consultation is seeking views on two options:

• legislation to place the existing “vapour recovery scheme” on a legal footing
• an alternative option to address the issue within existing warehousing approval terms and conditions.

Vapour recovery scheme: consultation on the options for replacing the Extra-Statutory Concession (ESC)

The European Parliament has confirmed draft EU-level rules aimed at helping businesses to obtain legal redress against the theft or misuse of their trade secrets.

The draft rules, approved by the legal affairs committee by 19 votes to 2, with 3 abstentions, aim to better protect EU businesses against the theft or misuse of trade secrets, such as specific technology, recipes or manufacturing processes.

The proposed rules would introduce an EU-wide definition of trade secrets and oblige member states to adopt a range of tools to ensure that victims of trade secret misuse will be able to defend their rights in court and seek compensation.

To ensure that the legislation does not restrict the work of journalists, in particular with regard to investigation, protecting their sources and the public right to be informed, legal affairs MEPs clarified and reinforced the provisions ensuring respect for freedom of expression and information and adequate protection for whistle-blowers.

To ensure the transparency of the EU institutions and national public authorities, the committee inserted a clause providing that the rules do not affect the disclosure of business-related information by the EU institutions and national public authorities.

The committee also amended the rules to ensure that they do not affect the use of information, knowledge, experience and skills honestly acquired by employees in the normal course of their previous employment.

HMRC has issued draft technical guidance on how Scottish taxpayer status should be decided for the purposes of income tax.

The Scottish rate of income tax (SRIT) was introduced by the Scotland Act 2012. It will be charged on the non-savings and non-dividend income of those defined as Scottish taxpayers, and will start from April 2016.

The definition of a Scottish taxpayer is focused on where an individual lives or resides in the course of a tax year. Scottish taxpayer status applies for a whole tax year. It is not possible to be a Scottish taxpayer for part of a tax year.

For most individuals, the question of whether they are a Scottish taxpayer is simple: they either live in Scotland and are a Scottish taxpayer, or live elsewhere in the UK and are not a Scottish taxpayer. The draft guidance addresses instances where this question is not simple. It provides initial detail on the way in which HMRC will interpret some of the terms used in the sections of the
Scotland Act 2012 which set out the definition of a Scottish taxpayer.

HMRC, Scottish Rate of Income Tax – Technical Guidance on Scottish Taxpayer Status, 12 June 2015

The Supreme Court has ruled that a scheme reducing VAT liability for car sales is abusive under EU law.

The respondent car sales group employed a VAT liability reduction scheme, so that it would only account for VAT on the difference between the wholesale purchase price and the retail sale price of its demonstrator cars. The scheme satisfied the conditions for VAT exemption and the application of the margin scheme. HMRC argued that the scheme was abusive under EU law and that the respondent should pay back the VAT avoided. The FTT dismissed the appeal decision, which was overturned by the UT on appeal. The Court of Appeal agreed with the FTT and ruled that the scheme was not abusive.

The Supreme Court held that the scheme was abusive, as follows:

• For the scheme to be abusive the transactions had to confer a tax advantage contrary to the purpose of the relevant EU Directive (the Sixth Directive). Here, the direct purpose of the margin scheme was to grant relief to traders who had purchased goods from a supplier who had no right to deduct input tax in respect of its own acquisition of them. The indirect purpose of the margin scheme was therefore to avoid double taxation. However, in the present case, a system designed to prevent double taxation had been exploited so as to prevent any taxation at all.
• Secondly, it had to be objectively apparent that the essential aim of the transaction was to obtain a tax advantage. Even if a transaction had a legitimate commercial purpose, it could be challenged if its main aim was the accrual of a tax advantage. It was not in itself objectionable that the respondent chose to enter into a transaction with an offshore bank. However, it was essential to the scheme that one of the captive leasing companies should acquire the cars as part of a business as a going concern, and for that to be possible, it was essential that the transferor of the business should have acquired the cars by assignment. These steps were included for the sole purpose of reducing VAT liability.

Commissioners for Her Majesty’s Revenue and Customs (Appellant) v Pendragon plc and others (Respondents) [2015] UKSC 37, 10 June 2015

The OECD has published a discussion draft which deals with work in relation to Action 8 of the Action Plan on Base Erosion and Profit Shifting (BEPS).

Action 8 of the BEPS Action Plan (“Assure that transfer pricing outcomes are in line with value creation: Intangibles”) identifies the requirement for development of “transfer pricing rules or special measures for transfer of hard-to-value intangibles”. The discussion draft sets out an approach to hard-to-value intangibles and proposes revisions to the guidance in the 2014 BEPS Report, “Guidance on Transfer Pricing Aspects of Intangibles”.

The draft further proposes an approach based on the determination of the arm’s length pricing arrangements (including any contingent pricing arrangements) that would have been made between independent enterprises at the time of the transaction. This approach is applied when specific conditions are met and is intended to protect tax administrations against the negative effects of information asymmetry.

Comments on the draft are invited by 18 June 2015.

OECD press release

OECD discussion draft

The European Commission has announced that it will ask 15 Member States to provide a substantial number of individual tax rulings.

The request forms part of the Commission’s investigation into whether the tax rulings of Member States may constitute state aid. Tax rulings are comfort letters issued by tax authorities to an individual company on a specific tax matter. They are not generally problematic from a state aid perspective. However, if a tax ruling results in a Member State providing selective advantages to specific companies or groups of companies, this distorts competition in the single market in breach of EU state aid rules.

All EU countries except Estonia and Poland have cooperated and provided the required information in full. The European Commission has therefore issued two injunctions ordering Estonia and Poland to deliver within one month requested information on their tax rulings practice. Should either country fail to deliver the missing information by the deadline, the Commission may refer that country to the Court of Justice.

The ECJ has ruled that the UK’s reduced rate of VAT applicable to energy-saving materials breaches EU law, namely the VAT Directive.

Under the Directive reduced VAT rates lower than the stipulated minimum “must have been adopted for clearly defined social reasons and for the benefit of the final consumer”. In the context of the provision, construction, renovation and alteration of housing, the reduced rates must have been adopted as part of a social policy. In the context of renovation and repair of private dwellings, such rates must exclude materials which account for a significant part of the value of the service supplied.

The ECJ held as follows:

• By providing for the application of the reduced rate to all supplies of services of installing energy-saving materials and to supplies of such materials, irrespective of the housing concerned and with no differentiation among people living in that housing, the UK rules could not be regarded as adopted for reasons of social interest within the meaning of EU law.
• Further, the UK rules provided that supplies of services of installing energy-saving materials in residential accommodation and supplies of such materials may qualify for a reduced rate of VAT, without excluding materials which accounted for a significant part of the value of the service supplied.
• Overall, therefore, the UK rules breached the aforementioned provisions of the VAT Directive.

Case C-161/14 Commission v United Kingdom