European Court of Justice

Velvet & Steel Immobilien und Handels GmbH v Finanzamt Hamburg-Eimsbuttel (Case C-455/05)

VAT – assumption of obligation

There are three parties to this case – the sellers of the land with rented apartments; the purchaser of the land and the taxpayer. The sellers had given the purchaser undertakings on the land, including the undertaking to carry out renovation work on the buildings. The taxpayer assumed the undertakings from the sellers in exchange for part of the purchase price. The purchaser then released the taxpayer from its obligations in exchange for part of that fraction of the purchase price.

The transaction in question in this case is the assumption by the taxpayer of the obligation to renovate the buildings. The Revenue Authority argued that this was a provision of service subject to VAT.

The ECJ ruled that the assumption of the obligation to renovate the buildings was a supply of service for the purposes of the Sixth Directive. The key issue in reaching this decision was that the obligation to renovate a property was not, by its nature, a financial transaction (financial transactions are exempt) and that the exemption included in the Sixth Directive did not extend to obligations that were non-pecuniary, such as the obligation to renovate a property.

For further information, see page 30

UK High Court (Chancery Division)

Pirelli Cable Holding NV & Ors v IR Commrs [2007] EWHC 583 (Ch)

ACT

There have been a number of ACT cases recently in the UK courts and the ECJ.

This case is described as part of the “forensic fallout” of the decision of the Court of Justice of the European Communities (“the ECJ”) in Metallgesellschaft Ltd v. Inland Revenue Commissioners and Hoechst AG v. Inland Revenue Commissioners (Joined Cases C-397 and 410/98); [2001] Ch. 620 (“Hoechst”). The essence of the Hoechst decision was that United Kingdom revenue law, which had between 1973 and 1999 allowed companies with parents resident in the United Kingdom (“UK”) to elect to pay dividends to those parents free of advance corporation tax (“ACT”), discriminated unlawfully against companies with parents resident in other member states by not giving them a like right of election.

You may recall that a Pirelli company had been involved in another ECJ decision – the December 2006 ECJ decision in Test Claimants in Class IV of the ACT Group Litigation v IR Commrs Case (C-374/04), (see the March 2007 edition oftax.point). The present UK case is different – the ECJ case concerned the different treatment applied to the receipt by UK resident companies of dividends received from non-resident companies as compared with that applied to a UK resident company receiving dividends from its UK subsidiary. This is the reverse of the circumstances in the present case.

The present case had gone as far as the House of Lords and had been remitted to the High Court. The taxpayer put forward a new argument that the DTA tax credit which the non-UK resident company received should not be treated as a DTA credit to which those companies were not entitled.

The High Court firstly ruled that the new point was not an abuse of process as the Revenue had already been aware of it, and in deciding on its merits ruled that if a group election had been made, the non-UK resident parent would not have been entitled to a tax credit upon the payment by the subsequent payment by the UK subsidiary of its mainstream corporation tax.

For further information, see page 31

Special Commissioners

Re an application by R & C Commrs to serve a s.20 notice on Financial Institution No.3 in respect of customers with UK addresses holding non-UK accounts

Re an application by R & C Commrs to serve a s.20 notice on Financial Institution No.4 in respect of customers with UK addresses holding non-UK accounts

Investigation into offshore accounts

These cases were discussed in Section 1.43 of the June 2007 edition of tax.point.

For further information, see page 32 and page 33

Boparan v R & C Commrs

Roll-over relief

In this case, the taxpayer had claimed roll-over relief in relation to the sale and replacement of properties which were let to a company owned by the taxpayer and his wife.

The Special Commissioner decided that the taxpayer was not entitled to roll-over relief because the company was not the taxpayer's ‘personal company’. If the company had been a ‘personal company’ then the trade would have been treated as carried on by the taxpayer.

The key issue in this decision related to the fact that almost all of the voting rights in the company had been held by a holding company rather than directly by the taxpayer. It was acknowledged that it was difficult to understand the rationale of a scheme which allowed relief for assets used in a trade by a company in which the individual concerned had a five per cent voting interest, but did not allow relief where the individual's interest was indirect through a holding company.

There is no similar relief in Ireland – roll-over relief was deleted in the Finance Act 2003.

For further information, see page 34

Gabon Management Ltd v R & C Commrs

CIS – Refusal to grant certificate

The taxpayer company provided a comprehensive administrative, compliance and company secretarial service to a number of personal service companies (PSCs), with about 65% of the taxpayer's business related to PSCs providing labour in the construction industry.

The taxpayer had a CIS 5 certificate for a three-year period ending on 30 June 2006. It applied for a new certificate but was refused on the basis that the business of the company was that of administration rather than furnishing labour and the taxpayer had not complied with the Tax Acts by failing to deduct tax and NICs.

The Special Commissioners dismissed the appeal. The key point in the decision is that while the taxpayer did not furnish labour, it did arrange for the furnishing of labour. However, the taxpayer's failure to deduct tax and NICs was not minor and technical and hence the Revenue were entitled to refuse to renew the certificate.

For further information, see page 35

Trustees of Fenston Will Trusts v R & C Commrs

Capital contributions – deductibility for CGT

In this case, the trustees owned the shares in a Delaware company and made capital contributions of £1.5 million to the company. The company's business failed and the trustees sold the shares for $1. The trustees claimed an allowable loss by including the capital contributions as “enhancement expenditure”.

The Special Commissioners decided that the capital contributions made by the trustees to the Delaware company were not enhancement expenditure. The basis of the decision was that the expenditure was not in accordance with the legislative provision, i.e. “expenditure reflected in the state or nature of the asset at the time of the disposal.” The expenditure on the capital contributions would have been allowable had the company issued even one share.

It is interesting to note that the difference of treatment of the capital contribution in terms of US tax law and UK tax law was considered – the fact that US federal law might regard a share as having been issued in some circumstances for certain US federal income tax purposes, even if, as a matter of fact, no such share was ever issued was irrelevant to the application of UK law.

On the basis that a similar wording is used in s.552(1)(b) TCA 1997, this decision should have relevance for Ireland also.

For further information, see page 36

Adkins v R & C Commrs

Failure to submit tax returns – daily penalties

In this case, the taxpayer appealed against the amount of the penalty of £35 per day for not submitting tax returns as being too much to be fair in all circumstances. The taxpayer gave the following reasons:

The taxpayer had moved house three times, which made it hard for his representative to obtain the relevant information;

• The taxpayer had been involved in a big project which had gone ‘sour’;
• It had taken a long time to obtain information from the bank;
• The Revenue had told the taxpayer's representative that an unlimited extension of time would be given before applying the daily penalty.

The Revenue submitted that the returns had been outstanding for more than six years.

The Special Commissioner decided that the £35 was appropriate where the returns had been outstanding for six years and that Revenue had considered all circumstances in deciding that the £35 per day was the appropriate level of daily penalty.

For further information, see page 38

Phizackerley (as personal respreventative of Phizackerley dec'd) v R & C Commrs

Inheritance tax – non-deductible debt

In this case, the deceased incurred a liability in relation to the estate of his spouse who pre-deceased him. Her half-share of their house valued at £150,000 was assented to the deceased on his promising to pay £150,000 (subject to indexation) to the trustees of the nil rate band discretionary trust. It is that debt that the Revenue argued was non-deductible for inheritance tax on the deceased's death.

The deceased and his spouse had purchased a house in joint names with funds provided by the deceased. The joint tenancy had later been severed. The half share in the house had been the subject matter of a disposition made by the deceased to his spouse.

The Special Commissioner decided that the debt was not deductible. The key issue in the decision was that the transfer of the half-share of the house to the deceased's spouse was not ‘for the maintenance of’ his spouse and hence the disposition was not for maintenance. It followed that the debt was not deductible in computing the value of the deceased's estate.

For further information, see page 38

Eder v R & C Commrs

Extension of enquiry where relief carried back to previous year

In this case the Revenue opened an enquiry into a tax year. In that year, the taxpayer made gift aid payments. Part of the gift aid payments were carried back to the prior year. The Revenue requested details of the payments. The taxpayer only gave details of the payments that related to the year of enquiry. He refused to provide details of all payments on the basis that part of the payments related to an earlier year which was not part of the enquiry.

The Special Commissioner decided that the total gift aid payments made in the year were contained in the return and so the enquiry extended to them. The evidence required was within the plain words of the legislative provision and was reasonably required for the purpose of determining whether the return was correct.

In Ireland, the Revenue Audit letter contains a provision for the extension of an audit to earlier years, if there is evidence that it is necessary to do so.

For further information, see page 39

Trustees of Fairbairn or Douglas v R & C Commrs

Inheritance tax – interest in possession

In this case, a trust deed created a life-rent in favour of a beneficiary in the free annual income of the trust fund. However, that was subject to the trustees's powers to pay or apply to or for her benefit not all the ‘free annual income of the trust fund’ but only such part of it as they might consider ‘proper and expedient’, provided the beneficiary concurred with the decision.

The Special Commissioner decided that the beneficiary had an interest in possession under the terms of the trust so that the value of the property in which that interest subsisted should be aggregated with her free estate for the purpose of calculating the charge to inheritance tax arising upon her death.

The key issue in the decision was that the beneficiary, in effect, had a power of veto over the free annual income of the trust fund. The trust deed provided evidence of this power.

For further information, see page 40

Maclean & Anor v R & C Commrs

Shares – Reinvestment relief

In this case, the taxpayers sold shares in a property company and reinvested the capital gain in another company whose business was the provision of serviced accommodation.

The Special Commissioner decided that the taxpayers were not entitled to reinvestment relief. The key issue in the decision was that the letting of furnished accommodation was deemed to be a trade; and reinvestment relief did not apply to deemed trades.

The decision seems to be so clear cut that one cannot help but wonder why the taxpayers appealed the Revenue's assessment. When the report is analysed further, the distinction between the taxpayers’ argument and the Revenue's argument is that the taxpayers described the business of the company as the ‘provision of serviced accomodation’, whereas the Revenue argued that the provision of the services was relatively insignificant compared with the main activity of letting furnished holiday accommodation. The Revenue's argument is strengthened as the provision of services ceased entirely over the winter months, so for several months of the year the company was not carrying on a qualifying trade.

In Ireland, reinvestment relief is no longer available.

For further information, see page 41

Trustees of the Peter Clay Discretionary Trust v R & C Commrs

Discretionary trusts-attribution of expenses

This case relates to the proportion, if any, of the investment management fee of a trust which was attributable to income of the trust. The discretionary trust produced a seven-figure income. The trustees argued that the expenses should be deductible against the income of the trust. The Revenue argued that investment management fees were by their nature only applicable to capital and so should be deductible against capital.

The Special Commissioner decided in favour of the Revenue.

In general if a trust expense relates to income then it is deductible against income, whereas if it relates to capital, it is deductible against capital. The key issue in this decision is that the income was accumulated, so that it became capital and hence the expenses of investing it were capital.

This decision could have implications for Ireland.

For further information, see page 42

Duffy v R & C Commrs

Tax administration

The key issue in this case was whether an entire enquiry, and discovery assessments, was invalid because questions outside the scope of the enquiry were also asked.

The Special Commissioner decided that the validity of the discovery assessments was not affected by the fact that some questions were outside the scope of the enquiry.

The key issue in the decision was that the relevant piece of legislation related to the time limit for making the enquiry (which was within permitted time-limits) and not to the demand for information. Hence the additional questions were irrelevant to the validity of the enquiry.

For further information, see page 43

Clifton & Ord v R & C Commrs

PAYE – cancellation of share options

The taxpayers were former employees of a company. On 30 April they received cash payments for the cancellation of share options. Those payments gave rise to emoluments chargeable under schedule E.

The Revenue had previously sought to recover PAYE from the employer. The employer appealed against the determination in another Special Commissioner's decision [Demon Internet Ltd v Young (2004) Sp 449], which did not include the employees. The employer won the appeal on the basis that the relevant legislation for the imposition of PAYE had not been in place at the time of the payment of the cash. The Revenue then amended the taxpayers’ self-assessment returns so as to recover the tax from the employees. The taxpayers appealed against those amendments on the basis that the tax should have been paid by the employer and so was not assessable on them.

The Special Commissioner decided that the employees were liable for tax on the cash payments for the cancellation of share options where their employer should have, but failed to, account for the tax due.

The key issue in the decision was that where an employer had to account but could not deduct, a statutory liability fell on the employee.

On the basis that a similar provision exists in Irish legislation, this decision may have relevance for Ireland.

For further information, see page 44