Our pick of the five important tax cases in the first quarter of 2015
In Eclipse Film Partners No. 35 v HMRC [2015] EWCA Civ 95 (17 February 2015), the Court of Appeal found that Eclipse 35 had not been trading.
Eclipse 35, a partnership, and its members had entered into a complex series of transactions for the acquisition, distribution and marketing of film rights.
The members had borrowed money to contribute to the capital of the partnership. They could only claim tax relief in respect of the interest if the loan was used wholly for the purpose of a trade carried on by Eclipse 35 (ITTOIA 2005 s 863 and ICTA 1988 ss 353, 362).
The FTT had found that Eclipse 35 had not played ‘a meaningful part in the marketing and distribution of the films’; it had therefore not carried on a trade. The FTT’s decision had been upheld by the UT.
The Court of Appeal noted that the transactions had two aspects. One aspect was that a payment by Eclipse 35 of £503m would be repaid with interest over a 20 year term and would produce a profit unrelated to the success of the exploitation of film rights. That aspect had the character of an investment. The second aspect was the possibility for Eclipse 35 to obtain a share of ‘contingent receipts’. The court accepted the FTT’s finding that the possibility of receiving such receipts was too remote for this aspect to be significant.
Finally, the court rejected the contention that the activity of entering into a licence and sub-licence inherently constituted the carrying on of a trade.
Why it matters: Like the tax tribunals, the Court of Appeal accepted that the transactions were not ‘shams’. However, this finding did not prevent the court from holding that ‘on a realistic view of the facts’ (applying the Ramsay doctrine), Eclipse 35 had acquired an investment rather than carried on a trade.
Tax Journal’s coverage: See the article by Chris Bates and Judy Harrison: ‘The court has confirmed that in assessing whether an activity amounts to a trade, it is necessary to consider the totality of what is done. The court has indicated that the concept of trade has a variety of meanings or shades of meaning.’
In European Commission v UK (C-172/13) (3 February 2015), the CJEU found that the UK legislation on cross-border group relief complies with EU law principles.
The European Commission was applying for a declaration by the CJEU that CTA 2010 s 119(4) makes it virtually impossible in practice to obtain cross-border group relief, so that the UK has failed to fulfil its obligations under TFEU arts 31 and 49.
Cross-border group relief is only available if the ‘no possibilities test’ is satisfied; that is, if the losses are not relievable in the country where the loss-making subsidiary is established. Under CTA 2010 s 119(4), the determination as to whether losses may be taken into account in the future must be made ‘as at the time immediately after the end’ of the accounting period in which the losses were sustained. According to the Commission, cross-border relief can therefore only be available if either carry forward of losses is not possible under the legislation of the country of residence of the subsidiary; or if the subsidiary is liquidated at that time.
However, the CJEU observed that the first situation mentioned by the Commission was irrelevant for the purpose of assessing the proportionality of s 119(4). In such a situation, the member state in which the parent company is resident may not allow cross-border group relief without thereby infringing art 49 (K C-322/11). As for the second situation, the CJEU considered that s 119(4) does not require the subsidiary to be put into liquidation before the end of the accounting period in which the losses were sustained. The provision only imposes a requirement to make an ‘assessment’ at that time.
The Commission also submitted that the UK was in breach of TFEU arts 49 and 31 in that its legislation precludes cross-border group relief for losses sustained before 1 April 2006. The CJEU found, however, that the Commission had not established the existence of situations in which cross-border group relief for losses sustained before 1 April 2006 was not granted.
The CJEU therefore rejected both complaints.
Why it matters: By confirming that the UK legislation on cross-border group relief is now compliant with the EU law principles of freedom of establishment and of movement of capital, the CJEU’s decision may have come as a disappointment to some international groups.
Tax Journal’s coverage: See the article by Rupert Shiers: ‘HMRC may argue that [this judgment] prevents all cross-border group relief claims, except for foreign losses which were evidently – immediately after the end of the accounting period – unusable. This judgment does limit claims for time expired losses. It will also at least delay settlement of claims for terminal losses where it only became evident at a later stage that the losses were terminal. But that part of the judgment is arguably narrow and may not do what HMRC will hope.’
In Malcolm Healey v HMRC [2015] UKUT 140 (25 March 2015), the UT found that a discount on a stripped coupon security was of an income nature.
Mr Healey had purchased commercial securities issued by a bank and from which the interest coupons had been stripped. The price paid by Mr Healey was lower, to reflect the low return on the coupons. The interest coupons were later reattached to the notes, which Mr Healey then sold on the market for their full market price. This provided him with an after-tax return much higher than on a fixed-term deposit.
It was accepted that Mr Healey had acquired the notes at a discount ‘in the normal commercial sense of the term’. The issue was whether the discount was of an income nature (chargeable under ICTA 1988 Sch D Case III). The UT found that the discount was clearly not intended to compensate Mr Healey for any capital risk, as the issuer had a high credit rating. Clearly, the purpose of the discount was to compensate Mr Healey for the absence of interest. The position was essentially the same as it would have been if Mr Healey had bought a non-interest bearing note issued at a discount. From Mr Healey’s perspective, it was immaterial that interest was payable to a third party.
The UT stressed, however, that the fact that the transaction was marketed as a way of providing an enhanced after-tax return was not relevant when ascertaining the tax position.
Why it matters: The UT focused on the acquisition of the notes at a discount, rather than on their disposal at a profit. The discount was of an income nature as it compensated for the absence of interest. The UT also dismissed the taxpayer’s appeal in Savva and others v HMRC [2015] UKUT 141, which turned on similar facts. The scheme would not have achieved its intended result today, as income tax returns which are economically equivalent to interest are charged under FA 2013 s 12.
Tax Journal’s coverage: See the article by Andrew Goldstone and Sarah Albury: ‘HMRC has won three separate anti-avoidance cases in the UT against a scheme promoted by NT Advisors (see Healey v HMRC [2015] UKUT 0140 (TCC); Savva v HMRC [2015] UKUT 0141 (TCC); and Steve Price, John Myers and James Lucas v HMRC [2013] UKFTT 297 (TC)). These latest cases are further evidence, should it be needed, of HMRC’s approach to tax avoidance schemes and the judiciary’s view of attempts by taxpayers to characterise taxable income returns as exempt capital gains.’
In HMRC v Colaingrove [2015] UKUT 80 (10 March 2015), the UT found that the reduced rate could not apply to an element of a complex supply to which the standard rate applied.
Colaingrove provided serviced chalets and static caravans at holiday parks. The issue was whether the provision of electricity by Colaingrove to holiday makers should be taxed at a reduced rate of VAT (under VATA 1994 Sch 7A Group 1), notwithstanding that the charge for electricity was an element of a single complex supply of serviced accommodation taxed at the standard rate.
Colaingrove contended that UK domestic legislation, on its true construction, provided for a reduced rate to apply to the supply of electricity, where that supply formed a concrete and separate part of a wider supply. It therefore fell to the UT to decide whether the exemptions, as enacted in the UK, fell within the ambit of the derogation permitted by EU law.
The UT wondered why Parliament would only give a tax break to those holiday makers that received their electricity by means of a single supply. It considered, however, that Parliament may have wanted to draw a distinction between the provision of electricity in a verifiable amount and the provision of a fixed charge irrespective of use. Agreeing with AN Checker [2013] UKFTT 506, the UT concluded that the ‘stumbling block’ was the combined effect of the Card Protection Plan (CPP) (C-349/96) line and the provision in VATA 1994 s 29A that a reduced rate of VAT may only be charged on a ‘supply that is of a description for the time being specified in Schedule 7A’. Neither French Undertakers (C-94/09) nor Talacre (C-251/05) ‘trumped’ the CPP analysis. The supply was not a supply specified in Sch 7A; and s 29A applied only to the single complex supply and not to elements of that supply.
Why it matters: Since French Undertakers and Talacre, many have wrestled with the notion that elements of a complex standard rated supply may be taxable at a reduced rate. This case suggests that those decisions were of limited application, so that most complex supplies should be charged at a single rate. In finding as it did, the UT recognised that its decision would have undesirable results when seen from the point of view of the recipients of the supply.
Tax Journal’s coverage: For further analysis, see the article by Lee Squires and Fiona Bantock: ‘The analysis of the interaction between French Undertakers and the CPP line of cases, and the domestic reduced rating provisions, will provide useful guidance for taxpayers more generally when determining whether reduced VAT rates could apply in the context of single composite supplies involving non-reduced rated elements. Hildyard J expressed some sympathy for the taxpayer’s arguments, and so an appeal to the Court of Appeal seems likely.’
Our pick of the five important tax cases in the first quarter of 2015
In Eclipse Film Partners No. 35 v HMRC [2015] EWCA Civ 95 (17 February 2015), the Court of Appeal found that Eclipse 35 had not been trading.
Eclipse 35, a partnership, and its members had entered into a complex series of transactions for the acquisition, distribution and marketing of film rights.
The members had borrowed money to contribute to the capital of the partnership. They could only claim tax relief in respect of the interest if the loan was used wholly for the purpose of a trade carried on by Eclipse 35 (ITTOIA 2005 s 863 and ICTA 1988 ss 353, 362).
The FTT had found that Eclipse 35 had not played ‘a meaningful part in the marketing and distribution of the films’; it had therefore not carried on a trade. The FTT’s decision had been upheld by the UT.
The Court of Appeal noted that the transactions had two aspects. One aspect was that a payment by Eclipse 35 of £503m would be repaid with interest over a 20 year term and would produce a profit unrelated to the success of the exploitation of film rights. That aspect had the character of an investment. The second aspect was the possibility for Eclipse 35 to obtain a share of ‘contingent receipts’. The court accepted the FTT’s finding that the possibility of receiving such receipts was too remote for this aspect to be significant.
Finally, the court rejected the contention that the activity of entering into a licence and sub-licence inherently constituted the carrying on of a trade.
Why it matters: Like the tax tribunals, the Court of Appeal accepted that the transactions were not ‘shams’. However, this finding did not prevent the court from holding that ‘on a realistic view of the facts’ (applying the Ramsay doctrine), Eclipse 35 had acquired an investment rather than carried on a trade.
Tax Journal’s coverage: See the article by Chris Bates and Judy Harrison: ‘The court has confirmed that in assessing whether an activity amounts to a trade, it is necessary to consider the totality of what is done. The court has indicated that the concept of trade has a variety of meanings or shades of meaning.’
In European Commission v UK (C-172/13) (3 February 2015), the CJEU found that the UK legislation on cross-border group relief complies with EU law principles.
The European Commission was applying for a declaration by the CJEU that CTA 2010 s 119(4) makes it virtually impossible in practice to obtain cross-border group relief, so that the UK has failed to fulfil its obligations under TFEU arts 31 and 49.
Cross-border group relief is only available if the ‘no possibilities test’ is satisfied; that is, if the losses are not relievable in the country where the loss-making subsidiary is established. Under CTA 2010 s 119(4), the determination as to whether losses may be taken into account in the future must be made ‘as at the time immediately after the end’ of the accounting period in which the losses were sustained. According to the Commission, cross-border relief can therefore only be available if either carry forward of losses is not possible under the legislation of the country of residence of the subsidiary; or if the subsidiary is liquidated at that time.
However, the CJEU observed that the first situation mentioned by the Commission was irrelevant for the purpose of assessing the proportionality of s 119(4). In such a situation, the member state in which the parent company is resident may not allow cross-border group relief without thereby infringing art 49 (K C-322/11). As for the second situation, the CJEU considered that s 119(4) does not require the subsidiary to be put into liquidation before the end of the accounting period in which the losses were sustained. The provision only imposes a requirement to make an ‘assessment’ at that time.
The Commission also submitted that the UK was in breach of TFEU arts 49 and 31 in that its legislation precludes cross-border group relief for losses sustained before 1 April 2006. The CJEU found, however, that the Commission had not established the existence of situations in which cross-border group relief for losses sustained before 1 April 2006 was not granted.
The CJEU therefore rejected both complaints.
Why it matters: By confirming that the UK legislation on cross-border group relief is now compliant with the EU law principles of freedom of establishment and of movement of capital, the CJEU’s decision may have come as a disappointment to some international groups.
Tax Journal’s coverage: See the article by Rupert Shiers: ‘HMRC may argue that [this judgment] prevents all cross-border group relief claims, except for foreign losses which were evidently – immediately after the end of the accounting period – unusable. This judgment does limit claims for time expired losses. It will also at least delay settlement of claims for terminal losses where it only became evident at a later stage that the losses were terminal. But that part of the judgment is arguably narrow and may not do what HMRC will hope.’
In Malcolm Healey v HMRC [2015] UKUT 140 (25 March 2015), the UT found that a discount on a stripped coupon security was of an income nature.
Mr Healey had purchased commercial securities issued by a bank and from which the interest coupons had been stripped. The price paid by Mr Healey was lower, to reflect the low return on the coupons. The interest coupons were later reattached to the notes, which Mr Healey then sold on the market for their full market price. This provided him with an after-tax return much higher than on a fixed-term deposit.
It was accepted that Mr Healey had acquired the notes at a discount ‘in the normal commercial sense of the term’. The issue was whether the discount was of an income nature (chargeable under ICTA 1988 Sch D Case III). The UT found that the discount was clearly not intended to compensate Mr Healey for any capital risk, as the issuer had a high credit rating. Clearly, the purpose of the discount was to compensate Mr Healey for the absence of interest. The position was essentially the same as it would have been if Mr Healey had bought a non-interest bearing note issued at a discount. From Mr Healey’s perspective, it was immaterial that interest was payable to a third party.
The UT stressed, however, that the fact that the transaction was marketed as a way of providing an enhanced after-tax return was not relevant when ascertaining the tax position.
Why it matters: The UT focused on the acquisition of the notes at a discount, rather than on their disposal at a profit. The discount was of an income nature as it compensated for the absence of interest. The UT also dismissed the taxpayer’s appeal in Savva and others v HMRC [2015] UKUT 141, which turned on similar facts. The scheme would not have achieved its intended result today, as income tax returns which are economically equivalent to interest are charged under FA 2013 s 12.
Tax Journal’s coverage: See the article by Andrew Goldstone and Sarah Albury: ‘HMRC has won three separate anti-avoidance cases in the UT against a scheme promoted by NT Advisors (see Healey v HMRC [2015] UKUT 0140 (TCC); Savva v HMRC [2015] UKUT 0141 (TCC); and Steve Price, John Myers and James Lucas v HMRC [2013] UKFTT 297 (TC)). These latest cases are further evidence, should it be needed, of HMRC’s approach to tax avoidance schemes and the judiciary’s view of attempts by taxpayers to characterise taxable income returns as exempt capital gains.’
In HMRC v Colaingrove [2015] UKUT 80 (10 March 2015), the UT found that the reduced rate could not apply to an element of a complex supply to which the standard rate applied.
Colaingrove provided serviced chalets and static caravans at holiday parks. The issue was whether the provision of electricity by Colaingrove to holiday makers should be taxed at a reduced rate of VAT (under VATA 1994 Sch 7A Group 1), notwithstanding that the charge for electricity was an element of a single complex supply of serviced accommodation taxed at the standard rate.
Colaingrove contended that UK domestic legislation, on its true construction, provided for a reduced rate to apply to the supply of electricity, where that supply formed a concrete and separate part of a wider supply. It therefore fell to the UT to decide whether the exemptions, as enacted in the UK, fell within the ambit of the derogation permitted by EU law.
The UT wondered why Parliament would only give a tax break to those holiday makers that received their electricity by means of a single supply. It considered, however, that Parliament may have wanted to draw a distinction between the provision of electricity in a verifiable amount and the provision of a fixed charge irrespective of use. Agreeing with AN Checker [2013] UKFTT 506, the UT concluded that the ‘stumbling block’ was the combined effect of the Card Protection Plan (CPP) (C-349/96) line and the provision in VATA 1994 s 29A that a reduced rate of VAT may only be charged on a ‘supply that is of a description for the time being specified in Schedule 7A’. Neither French Undertakers (C-94/09) nor Talacre (C-251/05) ‘trumped’ the CPP analysis. The supply was not a supply specified in Sch 7A; and s 29A applied only to the single complex supply and not to elements of that supply.
Why it matters: Since French Undertakers and Talacre, many have wrestled with the notion that elements of a complex standard rated supply may be taxable at a reduced rate. This case suggests that those decisions were of limited application, so that most complex supplies should be charged at a single rate. In finding as it did, the UT recognised that its decision would have undesirable results when seen from the point of view of the recipients of the supply.
Tax Journal’s coverage: For further analysis, see the article by Lee Squires and Fiona Bantock: ‘The analysis of the interaction between French Undertakers and the CPP line of cases, and the domestic reduced rating provisions, will provide useful guidance for taxpayers more generally when determining whether reduced VAT rates could apply in the context of single composite supplies involving non-reduced rated elements. Hildyard J expressed some sympathy for the taxpayer’s arguments, and so an appeal to the Court of Appeal seems likely.’
