Weekly Tax Update 23 December 2020

The CA has found that the UT was not justified in setting aside a FTT decision on company residence. The FTT’s decision therefore stands, but one CA judge noted that he did not endorse the FTT reasoning.  

In 2004, a tax planning scheme was devised to enable a group of companies to access indexation relief on the disposal of companies and properties. The scheme depended on three newly incorporated companies being tax resident in Jersey at the time they acquired particular assets. The FTT had ruled that those companies were UK tax resident because central management and control of the companies was exercised in the UK. The UT reversed the decision.

The only issue before the CA was whether or not it was open to the UT to make the decision that it did. The CA set out seven points on which the UT had mischaracterised the FTT’s decision. More generally, it found that the UT did not recognise the significance of findings of fact that the FTT had made. The UT’s ruling was therefore set aside; in light of the FTT’s decision, the companies were therefore UK tax resident.

HMRC v Development Securities plc (and others) [2020] EWCA Civ 1705

www.bailii.org/ew/cases/EWCA/Civ/2020/1705.html

The UT has requested a preliminary ruling from the CJEU in respect of two cross-border group gains transactions. The CJEU’s decision may affect the interpretation of the recently introduced instalment regime for exit charges. 

The taxpayer, a UK company, made two disposals to non-resident group companies. Neither disposal qualified for nil gain/nil loss treatment, which would have operated had the transferees been UK tax resident. The taxpayer argued that the tax charges violated the EU principle of freedom of establishment. In a long and complex judgment, the FTT found that the freedom of establishment was infringed in relation to only one of the two transactions. Both the taxpayer and HMRC appealed this decision.

The UT found that it could not resolve the issues with complete confidence. Furthermore, the outcome of the case was likely to be widely applicable to other transactions. It therefore decided that a preliminary ruling should be requested from the CJEU before the transition of the UK out of the EU is completed. In addition, after the FTT’s decision HMRC had introduced an instalment method for paying the tax arising on transactions such as the ones in this case. The UT noted that the CJEU’s decision may inform the interpretation of that regime.

Gallaher Limited v HMRC [2020] UKUT 354 (TCC)

www.bailii.org/uk/cases/UKUT/TCC/2020/354.html 

HMT is inviting responses to proposed changes to the taxation of asset holding companies (AHCs). The reforms are intended to encourage AHCs to be established in the UK by introducing targeted exemptions from capital taxes and withholding taxes. 

An initial consultation on the taxation of AHCs in alternative fund structures was held earlier in 2020. The second consultation focuses on the detailed design features of a new regime for taxing AHCs. The aim of the reform is to deliver an appropriately targeted, proportionate and internationally competitive tax regime for AHCs. This is expected to encourage more AHCs to be established in the UK. The proposal also includes changes to the taxation of Real Estate Investment Trusts (REITs).

AHCs are companies used as intermediate entities in investment fund structures, to facilitate the flow of capital, income and gains between investors and underlying investments. The reforms include specific reliefs for gains realised by AHCs, which would not pay tax on disposals of investment assets. Instead, the gains would be taxed in the hands of the investors on disposal of their interests in the AHC. The relief would not apply to assets that derive 75% or more of their value from UK land. The Government is also considering exempting AHCs from withholding tax on interest payments and limited exemptions from stamp taxes.

The second consultation closes on 23 February 2021. The Government anticipates publishing draft legislation in 2021, before holding a technical consultation period.

www.gov.uk/government/consultations/taxation-of-asset-holding-companies-in-alternative-fund-structures-second-stage-consultation 

HMRC has confirmed that in some circumstances it will allow corporate non-resident landlords (NRLs) to file their final IT tax return on the basis of a 31 March year end. The final five days from 1 April to 5 April 2020 should then be included in the first CT return. 

Many property businesses draw up accounts to 31 March, rather than 5 April, and habitually file IT returns on that basis. The five days from 1 April to 5 April are often included in the tax return for the following tax year such that each tax return covers a full year from 1 April to 31 March. HMRC has updated its Property income Manual to confirm that it will accept this approach for the last IT return of corporate NRLs, which transferred to CT on 6 April 2020. Their final IT return is for the tax year 2019/20. This relaxation applies where the NRL has consistently filed its IT return on a 31 March basis, and the difference in adjusting for the five days is not substantial. HMRC expects such NRLs to include those five days in its first CT return. The same pragmatic approach will also be accepted where an NRL’s year ends on an earlier date, for example 30 September 2020. In this situation, the first CT return should reflect the NRL’s results for the period 1 April 2020 to 30 September 2020.

www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1010 

The report provides guidance on the practical application of the OECD Transfer Pricing Guidelines (TPG) in light of the COVID-19 pandemic. 

The recent economic disruption has presented new challenges for businesses and tax authorities implementing the OECD TPG. The TPG informs many domestic transfer pricing regimes around the world. The new report explains how the TPG should be applied in view of the current economic environment. It addresses issues such as comparability analysis, losses, COVID-specific costs, government assistance and advance pricing arrangements.

www.oecd.org/tax/transfer-pricing/guidance-on-the-transfer-pricing-implications-of-the-covid-19-pandemic.htm