The government closes down debt buyback planning retrospectively whilst rapping knuckles over the Banking Code. A new Assurance Commissioner is appointed to oversee large settlements. The new CFC rules are amended again with a view to ‘Gateway’ simplification. The FATCA regulations are finally published with some concessions. France’s ambitions with respect to a domestic financial transactions tax prove to be relatively modest. And UK tax case law takes a stroll into Wonderland ...
Government bares its teeth over Banking Code
Anyone reading the newspapers in recent weeks will be aware that the government has acted to close down two allegedly ‘highly abusive’ tax avoidance schemes which were disclosed to HMRC under the disclosure of tax avoidance schemes (DOTAS) provisions by one particular bank, one of them retrospectively for the bank in question.
The first scheme involved the bank effectively buying back external debt at a price lower than the carrying value of the liability in the bank’s accounts in a way which avoided the profit being subject to tax under the debt buyback rules. It was not the first time that planning of this sort (known as the ‘new newco trick’) had been used and one might assume that the buyback was designed to deliver commercial (non-tax) benefits. Consequently the bank regarded its disclosure of the arrangements under DOTAS as voluntary as opposed to legally required. And yet it is the debt buyback rules which are to be amended retrospectively in such a way as to result in a tax charge for the disclosing bank. The HM Treasury press release of 27 February makes it clear that the recourse to retrospective legislation, a measure which the government has previously said it will use only in ‘wholly exceptional’ circumstances, was at least partly a response to perceived non-compliance by the bank with the Code of Practice on Taxation for Banks which ‘contains a commitment not to engage in tax avoidance’.
Prior to the changes (to CTA 2009 s 362), where an unconnected creditor became connected with a debtor, the debtor faced a tax charge to the extent that the creditor would have reflected an impairment adjustment if a period of account of the creditor had ended immediately before it became connected with the debtor. Now, there is no requirement that such an impairment adjustment would be required and instead the debtor’s tax charge is computed by reference to the greater of the notional impairment adjustment and the amount by which the carrying value of the liability in the debtor’s accounts exceeds the carrying value of the asset in the creditor’s accounts. An anti-avoidance rule designed to thwart any planning designed to get round the charges in s 361 (acquisition by connected company of creditor position) and s 362 is also being introduced. On the face of it, this would also seem to catch arrangements designed to fall within one of the specific exemptions, eg, the equity-for-debt exemption.
The second scheme involved the generation of income tax credits using the special tax rules applicable to authorised investment funds (authorised unit trusts and open-ended investment companies) (AIFs). Distributions made by AIFs to corporate investors may be categorised in one of three ways, depending on the type of income from which they are sourced. At the risk of over-simplification, interest income may (subject to certain conditions) be paid out as an ‘interest distribution’, dividend income is paid out as a ‘dividend distribution’ and distributions of income not falling within either the interest or dividend categories are characterised as annual payments and treated as having suffered deduction of income tax at source at the basic rate (so carrying income tax credits for investors to that extent). The rationale for annual payment with credit treatment is that this other income is assumed to have already suffered tax at the basic rate in the hands of the AIF. The revised rules will disapply annual payment with credit treatment to the extent that the underlying source of the distribution does not constitute taxable income for the AIF. A new anti-avoidance rule will also deny an investor the credit where arrangements have a main purpose of generating that credit. A simultaneous change to the grandfathering rules will in any event mean that the AIF rules will be less fertile ground for planning going forward.
Assurance Commissioner
The government has announced the appointment of a new Assurance Commissioner who will be responsible for overseeing all large settlements reached by HMRC. New rules will ensure that all cases involving tax in excess of £100m will be settled only once the Assurance Commissioner and two other tax-experienced Commissioners agree on the proposed outcome. The move is a response to concerns voiced about HMRC treating big businesses more favourably than other taxpayers. The role of HMRC’s Audit and Risk Committee – which includes representation from the National Audit Office – is also to be enhanced with a view to increasing independent oversight and transparency.
Controlled foreign companies
A further draft of the new controlled foreign companies (CFC) rules and accompanying technical note was released on 29 February. The main change this time is a re-engineered ‘gateway’. As previously formulated, the Gateway provisions sought to stream profits into ‘good’ and ‘bad’ (chargeable) profits. The reworked Gateway provisions comprise an entity filter and a profits filter. If the entity filter applies, then there is no need to go on to consider the rules on identifying chargeable profits.
For entities with (non-financial) trading profits, the entity filter will apply if:
For entities with other types of profits, the filters are mainly re-jigged versions of earlier drafts. (To add to the difficulties in tracking the mutation of these rules, the provisions have been substantially re-ordered.)
The full exemption for profits arising from ‘qualifying loan relationships’ (QLRs) has been tweaked in response to representations. In particular, in relation to the exemption for loans funded by ‘qualifying resources’, the concept of qualifying resources has been extended to cover not just the proceeds of a rights issue, but the proceeds of any issue of ordinary, non-redeemable shares to external shareholders.
Banking groups still face problems with relying on the partial exemption for QLR profits, however, even where the CFC is debt-funded by the UK (debt-funding not generally lending itself to abuse – the interest income will be taxed in the hands of the UK lender).
FATCA
The US Treasury Department finally released proposed regulations implementing the provisions of the Foreign Account Tax Compliance Act (FATCA) on 8 February. The regulations largely restate previously published guidance but some changes have been made in response to taxpayer representations, including:
The US Treasury also announced an agreement on a possible framework for co-operation on information reporting with France, Germany, Italy, Spain and the UK. Under this framework, each of the ‘FATCA partners’ would enact legislation permitting information reporting on accountholders. Foreign financial institutions (FFIs) operating in these jurisdictions would be able to report information about US accountholders to their own domestic authorities, which would then share this information with the IRS under pre-existing information sharing provisions of a tax treaty. Such FFIs would escape FATCA withholding on US payments received and would not be obliged to withhold on passthru payments to ‘recalcitrant holders’ or non-participating FFIs in the same or another FATCA partner jurisdiction.
French FTT
On 29 February, the French parliament adopted a proposal for a limited financial transactions tax (FTT), to take effect from 1 August of this year. The French FTT would be considerably narrower in scope than the previously proposed EU-wide tax which the European Commission had suggested and the French government had backed. It would cover speculative sovereign credit default swaps and high-frequency equity trades, as well as trades in companies quoted on the Paris stock exchange, and the rate would be 0.1%.
Cases round-up
In AH Field (Holdings) Ltd [2012] UKFTT 104 (TCC) the First-tier Tribunal found against the taxpayer on a FA 1996 Sch 9 para 13 point. The taxpayer borrowed externally to cash fund an intra-group dividend. The bulk of the dividend was reinvested in the taxpayer by way of a zero coupon bond, the proceeds of which were used to repay the external debt. The Tribunal made a number of interesting observations on the para 13 purpose test, including that the weight accorded to commercial factors needs to be measured against the amount of attention given to them as part of the planning process.
Meanwhile the courts’ general impatience with employment income avoidance schemes manifested itself again in Aberdeen Asset Management plc v HMRC [2012] UKUT 43 (TCC), in which the Upper Tribunal found that an employer should have operated PAYE in respect of awards to employees of shares in ‘cash-box’ companies on the basis that they were readily convertible assets.
On a final note, Mann J’s judgment in HMRC v Anson [2012] UKUT 59 (TCC) is an amusing read. This was part two of an appeal to the Upper Tribunal in the case formerly known as Swift. It concerned whether the taxpayer could invoke anti-avoidance provisions which contained a ‘no avoidance purpose’ get-out (the transfer of assets abroad rules) to his own advantage. That’s right: the taxpayer wanted the anti-avoidance rules to apply (because their application would mean he could claim credit for US tax suffered against his UK tax bill), whereas it was in HMRC’s interests to prove that the rules were not in point by reason of the taxpayer not having a tax avoidance purpose. Mr Justice Mann refers to the ‘Lewis Carroll-like inversion’ before finding in favour of HMRC on the factual question: the taxpayer did not set out to avoid tax …
