Landmark cases and avoidance measures

It has been a busy month, with the Supreme Court releasing its decision in the land-mark Marks and Spencer (M&S) cross-border group relief case; several cases considering the definition of a business; and a number of other cases. Avoidance and counter-evasion measures stayed on the agenda too, following a joint statement on EU tax transparency.

Cross border group relief in M&S case

The Supreme Court unanimously dismissed HM Revenue & Customs' (HMRC's) appeal in Revenue & Customs v Marks and Spencer plc [2013] UKSC 30 on the first of several issues under appeal in the long-running EU group relief case.

The court decided that the 'no possibilities test' should be applied at the date of the claim, rather than at the end of the loss-making accounting period.

The no possibilities test considers whether or not the loss-making company had 'exhausted the possibilities available in its state of residence' to gain relief in current, prior or future accounting periods, including by selling its losses. This test was established by the then European Court of Justice (ECJ) when the case was heard before it.

HMRC had argued for the test to be applied at the end of the loss-making period to prevent companies from taking steps to ensure the no possibilities test was satisfied, thereby effectively choosing where to claim relief.

Crucially, this judgment confirms that steps taken by taxpayers after the end of the loss-making period, such as liquidating the loss-making company, will not prevent them from making a claim.

Decision in a trio of cases raises questions on definition of a business

Three recent cases shed light on the definition of a business. Firstly, in Elisabeth Moyne Ramsay v HMRC [2013] UKUT 0226, Mrs Ramsay let out several flats and claimed relief under section 162 of the Taxation of Chargeable Gains Act (TCGA) 1992 when she incorporated the letting business. HMRC sought to deny relief, claiming the property was an investment and not a business. The First Tier Tribunal (FTT) agreed with HMRC but Mrs Ramsay appealed, claiming that the property was an actively managed business; she and her husband spent around 20 hours a week on maintenance and other management activities.

The Upper Tribunal found that the FTT had made an error of law; it had been unduly influenced by the distinction between a trade and an investment business for the purposes of taxing income, which was irrelevant to the availability of incorporation relief.

The relevant distinction was rather between active management of an investment business; and merely holding investments passively. Thus, Mrs Ramsay's active management ensured the lettings constituted a business and the consequent availability of incorporation relief.

In the second case, HMRC successfully argued before the FTT that business property relief (BPR) should not apply in The Trustees of David Zetland Settlement v HMRC [2013] UKFTT 284 (TC), because the business in question was excluded under section 105(3) of the Inheritance Tax Act 1984, as it consisted 'wholly or mainly of… making or holding investments'.

While this case also primarily concerned a property business, the judge concluded that the services provided by the landlord, that were not investment related, were not sufficient to tip the balance in favour of BPR.

Finally, the FTT decided in favour of HMRC in McCaughern & Anor v Revenue & Customs [2013] UKFTT 294 (TC), denying Mr and Mrs McCaughern business asset taper relief (BATR) on the disposal of two residential properties which they had rented out. The properties had been bought to supplement their pension investments and were intended to be held for the long-term, so were held to be investments, rather than a business.

The difference between this case and the first is the level of activity involved; the Ramsays actively managed their investment, whereas the McCaugherns merely held investments passively.

Although BATR no longer exists, the case has broader application to the definition of a business for tax purposes, in particular for entrepreneurs' relief.

Amortisation of goodwill

In Blenheims Estate and Asset Management Ltd v HMRC [2013] UKFTT 290 (TC), the FTT considered the availability of a deduction for amortisation and impairment charges relating to goodwill.

HMRC argued that the company acquired the goodwill from a company that was a 'related party' at the time of the acquisition and accordingly, paragraph 118(1)(b) of Schedule 29 to the Finance Act (FA) 2002 prevented the company from claiming a deduction.

The company argued that when the acquisition is viewed in conjunction with other transactions entered into on the same day, and if the relevant provisions on the amortisation of goodwill are construed purposively, then it did not acquire the goodwill in question from a 'related party' and should be entitled to the deduction. The FTT found in favour of HMRC.

Mehjoo case raises warning signals for tax advisers in £1.4m decision

A landmark judgment in the case of Mehjoo v Harben Barker (A Firm) & Anor [2013] EWHC 1500 (QB) will have implications for tax advisers.

The High Court has ruled in this professional negligence case that Mr Mehjoo is entitled to damages against his former accountants, Harben Barker, who failed to refer him to a non-dom specialist.

Mr Mehjoo, who was born in Iran, built up a clothing business which he merged with a friend's business in 2003. The shares in the merged business were sold in April 2005. Mr Mehjoo's share of the sale was just over £8.5m, with a capital gains tax (CGT) liability of 10% of that figure.

He claimed that since his accountants did not realise that he was (or was likely to be) non-domiciled, they failed to take the necessary action to enable him to eliminate or reduce his CGT liability.

By his accountants not picking up on this important point Mr Mehjoo did not receive specialist non-dom advice. As such he claimed that he was unable to receive and, therefore, accept advice to use a Bearer Warrant Scheme (BWS), which would have reduced his CGT liability to nil.

He claimed that because he did not receive this advice he entered into a Capital Redemption Plan (CRP), which subsequently failed, leaving him to pay the 10% CGT, associated interest and penalties, plus the £200,000 cost of joining the CRP.

Comment: At the heart of this case is a sad story of an accountant who went out of his way to help a client and friend with his tax affairs for many years; he forgot one tax issue along the way (albeit a key one) and now his firm has been successfully sued for £1.4m.

Some commentators infer from this case that accountants have a duty to advise clients about tax avoidance schemes. But in this case the accountant did not even need to be aware of the scheme, just that non-doms are taxed differently.

In my opinion the ruling simply means that accountants should seek specialist advice when dealing with areas of the tax legislation that they are not sufficiently equipped to deal with. This brings with it a separate challenge for accountants of recognising their limitations.

Given the change in the tax avoidance landscape since 2005 a similar case is unlikely to be successfully brought against an accountant who does not offer any of the current crop of so-called aggressive tax avoidance schemes.

In this case, the judge found BWP 'to be based on clear statutory provisions and has no artificial or contrived feature about it' and that based on evidence from David Kilshaw (KPMG partner and accountancy expert for Mr Mehjoo) he 'would expect any reasonably competent accountant holding himself out as having expertise in advising non-UK domiciles to recommend this planning'. I doubt the same could be said of many of the more recent schemes.

Availability of APR in Hanson case

The case of HMRC v Joseph Nicholas Hanson (as Trustee of the William Hanson 1957 Settlement) [2013] UKUT 224 (TCC) considered the availability of agricultural property relief (APR) on a farmhouse, focusing on what level of 'nexus' (or link) between a farm building and the agricultural land is required for APR to apply. The Upper Tribunal upheld the FTT's decision that the nexus is only occupation and not occupation and ownership as HMRC had argued.

Deductibility of contributions to EBT

In Scotts Atlantic Management Ltd & Ors v Revenue & Customs [2013] UKFTT 299 (TC), the FTT considered whether the value contributed to an employee benefit trust (EBT) was deductible for corporation tax (CT) purposes, while at the same time not attracting a PAYE liability.

The FTT disallowed the CT deduction for several reasons, primarily because the contributions had a duality of purpose, being both to motivate employees and to secure a CT deduction by contrived means.

Designated exchange

With effect from 25 April 2013, HMRC has designated the market known as the ICAP Securities & Derivatives Exchange Ltd as a 'recognised stock exchange' for tax purposes (under section 1005 of the Income Tax Act 2007). Singapore Exchange Securities Trading (SGX-ST) has been recognised as a recognised foreign exchange for the purposes of stamp duty and stamp duty reserve tax relief within the meaning of section 80B(3) FA 1986. This will enable members to apply for intermediary status and obtain relief from stamp duty and stamp duty reserve tax, when purchasing UK shares on the SGX-ST platform.

EU action on tax transparency

EU member states have agreed to European-level action and signed a joint statement pressing for much greater levels of automatic exchange of tax information internationally. The joint statement presses for the development of a new global standard for automatic exchange of information to tackle tax evasion, based on the US Foreign Account Tax Compliance Act (FATCA) legislation.

Belgium, the Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK have all signed the statement.

EU finance ministers have also agreed the mandate for the European Commission to negotiate tax transparency agreements with Switzerland, Liechtenstein, Monaco, Andorra and San Marino.

High court rules in favour of HMRC in Goldman Sachs case

HMRC has won its High Court case, in which it had been accused of illegally letting investment bank Goldman Sachs off part of its tax bill ([2013] EWHC 1283).

The campaign group UK Uncut Legal Action had claimed that the taxpayer had been cheated of £20m as a result of HMRC reaching an out-of-court settlement with the bank. The judge ruled that the deal was 'not a glorious episode in the history of the Revenue' but said it was not unlawful.

As a judicial review, the case considered only the legality of the procedures HMRC followed; it did not provide a judgment on the underlying tax affairs.

Share options and income losses

Price & Ors v HMRC [2013] UKFTT 297 (TC) concerned a planning arrangement designed to create losses to set against taxable income. Myers, one of the participants had been assigned an option to acquire shares in Stony Heating Ltd (SHL). He exercised the option, paying £6m and SHL issued the shares. A few days later, he sold the shares for £552, claiming a base cost of £6m and a resulting capital loss of just under £6m.

He then claimed that, because SHL was a qualifying trading company, s574 of the Income and Corporation Taxes Act 1988 translated that capital loss into an income loss available to set against other taxable income.

However, the participants did not make the kind of economic loss associated with selling shares costing £6m for only £552. Rather, they owed the exercise price to a discretionary trust of which they were the principal beneficiary, and whose assets consisted mainly of that debt.

The FTT therefore found that the loss available to set against income was limited to the difference between the shares' £600 redemption value and the sale price of £552.

Capital redemption policies raised in abbeyland case

Abbeyland expected a significant capital gain to accrue on the sale of one of its properties. The company entered into planning using a capital redemption policy with the aim of realising a significant capital loss that could be set against this gain. HMRC disallowed the loss on the transaction and Abbeyland appealed.

In Abbeyland Ltd v HMRC [2013] UKFTT 287 (TC), the FTT found the planning to be similar to that used by the taxpayer in Drummond [2009] STC 2206 and decided that s. 37(1) TCGA 1992 does not exclude the surrender proceeds from the computation of the chargeable gain arising on the disposal of the bonds. Abbeyland's appeal was dismissed.

Taskforces target holiday industry

HMRC has announced the launch of further specific taskforce activity. The latest taskforces will see specialist teams investigating the East Anglia holiday industry and the Northern Ireland restaurant trade, which are both seen by HMRC as high-risk.

HMRC powers to secure debts from tax authorities

HMRC brought a claim against two taxpaying companies, seeking relief under sections 423–425 of the Insolvency Act 1986 in order to satisfy a tax debt owed to the South African Revenue Services (SARS).

The companies appealed (Revenue & Customs Commissioners v Ben Nevis (Holdings) Ltd and another company [2013] EWCA Civ 578) on the basis that the double tax convention (DTC) between the UK and South Africa was not in force at the time the liabilities to SARS accrued.

The Court of Appeal dismissed the appeal as the DTC and s. 173 FA 2006 allowed assistance in respect of tax liabilities incurred before the DTC came into force.

Lindsey Wicks, senior manager, tax, Grant Thornton LLP

Meg Wilson, tax writer, CCH