Monthly Tax Review

Gabelle MTR Ltd

A Periodic Update for Professional Advisers

July 2017

(Copy Date 28 June 2017)

1 July 2017

CONTENTS 1. CAPITAL TAXES ..................................... 2 1.1 SDRT exemption ....................................... 2 1.2 Share valuation ......................................... 2 1.3 PPR and permitted area .......................... 3 1.4 Allowable expenses .................................. 4

2. INCOME TAX & NI ................................. 4 2.1 Film scheme fails again ........................... 4 2.2 Employment review ................................. 5 2.3 Ordinary residence ................................... 5 2.4 Employment status .................................. 6 2.5 Wrong enquiry opened ............................ 7

3. BUSINESS DIRECT TAXES ................. 8 3.1 Repayments of VAT taxable ................... 8 3.2 Dividend scheme double charge ........... 8 3.3 IFRS adjustments for EBTs .................... 9 3.4 Rights to dividend payments ................. 9

4. VAT ........................................................... 10 4.1 Transitional periods ............................... 10 4.2 Overpayments chargeable.................... 10 4.3 Coins for vouchers ................................. 11

5. COMPLIANCE & ADMIN .................... 11 5.1 APN invalid, period not ended ............. 11 5.2 Late appeal refused ............................... 12 5.3 Discoveries can go stale ....................... 12 5.4 Worldwide disclosure facility ................ 13 5.5 Non-statutory clearances ..................... 13 5.6 Legitimate expectation .......................... 13 5.7 Reasonable excuse ................................. 13

6. EUROPEAN & INTERNATIONAL ..... 14 6.1 Diver and double taxation .................... 14 6.2 Cross-border taxation, BEPS ............... 14 6.3 Status of Gibraltar .................................. 14

7. RESIDUE ................................................. 15 7.1 Queen’s Speech ...................................... 15 7.2 Professional negligence ......................... 15

2 July 2017

1. CAPITAL TAXES 1.1 SDRT exemption The Upper Tribunal has upheld a decision of the First-tier Tribunal that the exemption from stamp duty reserve tax (SDRT) contained in paragraph 7 Schedule 19 Finance Act 1999 (which has now been repealed) did not apply to a unit holder's redemption of units in a fund where the distribution of securities to the unit holder was not proportionate to, or as nearly as practicable proportionate to, his share in the fund. In this case, which concerned a redemption in specie of all the units held in the Henderson UK Enhanced Equity Trust one unit holder’s interest in the trust represented by value 27.41% of the trust’s property but the securities received in most cases on the redemption represented an interest of 28.68% of the trust’s property. They therefore received an over- allocation of securities of some 1.27% and a corresponding under-allocation of cash The UT accepted that the "hard-edged" "all-or-nothing" interpretation of paragraph 7 operated harshly. However, dismissing the taxpayer's appeal, it stated that this was not inconsistent with the scheme of Schedule 19 because Parliament intended the provisions to be "a self-contained and exhaustive regime for the charging of SDRT" for transactions in units between existing and new unit holders. Further, Schedule 19 was consistent with the previous stamp duty regime, which also contained a hard-edged relief. The UT distinguished M & G Securities Ltd v IRC [1999] STC 315 on the basis there was no ambiguity here. It rejected the taxpayer's argument that the FTT's decision was anomalous or illogical, or that HMRC's interpretation of paragraph 7 resulted in an unworkable result; the taxpayer could have structured the redemption to meet the conditions of paragraph 7 but failed to do so. The UT found that there was no justification for the application of Pepper v Hart [1993] 1 All ER 42 HL to paragraph 7 since Parliament's intention was clear. Therefore, the UT held that there was no basis for reading in the words "to the extent that" because paragraph 7 was intended to operate as a hard-edged relief. Henderson Investment Funds Ltd v Revenue and Customs [2017] UKUT 225, adapted from a report by Practical law tax and available on BAILII at http://tinyurl.com/y7p9q35k

1.2 Share valuation In 2004-05 qualifying investments were eligible for income tax relief when gifted to a charity under S 587B ICTA 1988. Relief was given by reference to the market value. Qualifying investments included shares quoted on the Alternative Investment Market (AIM). On 28 July 2004, Frenkel Topping Group Plc was the subject of a placing of shares and admission to the AIM. Jonathan Netley was one of a number of shareholders who held shares in Frenkel Topping Group Plc and on the same date he gifted shares to St Ann’s Hospice, a registered charity. He claimed that the share value on that date was 48p, the price at which shares were traded on AIM. He claimed relief on this gift in his 2004-05 return using this valuation. The amount of tax relief generated by Mr Netley’s gift of shares was greater than the £10,000 cash he had invested to subscribe for the shares in or about June 2004. More than half of the other shareholders in Frenkel Topping Group Plc gifted shares to various charities on the same date and more shareholders gifted shares to charity later in the 2004-05 tax year. This case was a lead case looking to determine: “What was the market value of the shares in Frenkel Topping Group Plc which the Lead Appellant disposed of by way of gift to charity on 28 July 2004 as at that date for the purposes of section 587B ICTA 1988 (and on what basis and principles should the market value of such shares be determined)?” HMRC argued that the arrangements were designed to allow subscribers to claim income tax relief greater than their cash investments. They contended that the price of 48p per share was in excess of their open market value for tax purposes. Consequently, HMRC amended Jonathan Netley’s return by a closure notice dated 30 September 2010 to reflect their view that the shares were valued at 8p, reducing the tax relief from £15,866 to £2,624. The scheme appears to have been based on an argument that the first day’s trading price on AIM was to be taken as the value of the shares at that point. However, the market in the shares had been deliberately kept illiquid by lock-in arrangements, and the tribunal was not prepared to accept this as the market value.

3 July 2017

Having considered the arguments submitted on valuing shares, the First Tier Tribunal decided that Frenkel Topping Group Plc’s shares should be valued on the basis of the information available to the prudent prospective purchaser. Information as to future prospects would not have been available and so should be ignored. The tribunal gave particular weight to an allotment of shares to another shareholder shortly before flotation, and to the valuations placed on the transfer of the business into a shell company prior to listing, adjusted for the P/E multiples to be expected from an AIM listed company as opposed to one that had no market. Faced with potential valuations between 6.6p and 48p per share, the tribunal found that the value of the shares on 28 July 2004 was 17.5p, the value at which shares were allotted shortly before flotation, saying ‘Share valuation is in many respects an art not a science and in some cases has been described as “intelligent guesswork”. ‘ Jonathan Netley v HMRC [2017} UKFTT 442 available on BAILII at http://tinyurl.com/y7g29de2

1.3 PPR and permitted area In Ritchie the FTT identified the 'permitted area' for the purpose of principal private residence relief (PPR) (TCGA 1992 ss 222–226). The substantive issue was whether PPR applied to the disposal of an entire estate by the Ritchies. The main question was whether the 'permitted area', the area of the gardens and grounds that were required for the Ritchies' occupation and enjoyment of the dwelling house on the land, was greater than 0.5 hectares. One key issue in the case was whether a large shed, used as a garage, workshop and for storage, and with permanent cabling from the main house, was to be treated as part of the house. The shed had predated the house, which Mr & Mrs Ritchie had built themselves on the land they had bought with the shed already on it. The FTT observed that the test for the area of land that is required for the reasonable enjoyment of the dwelling house as a residence is objective. It added that 'required' is to be equated with necessary, not just desirable. The question was, therefore: what amount of garden and grounds is necessary for the enjoyment of the dwelling house (including the shed)? Having found that the shed was part of the dwelling house, the FTT concluded that the approach path to

the shed was part of the permitted area but not land lying on the other side. This added 0.1 hectares to the area. In deciding how to apportion the gain between the permitted and unpermitted areas, the FTT found that all of the land was of equal value to a developer. A subsidiary substantive question was whether the gain made during the period when the house was being built, when it was therefore not their main residence, had to be calculated on a simple time apportionment under TCGA 1992 s 223(2), as suggested by the case of Henke UKSPC [2006] SPC00550. This would have led to a gain far in excess of the total value of the land at the time the Ritchies moved in. With some hesitation, the tribunal judge saw this as an opportunity to use TCGA 1992 S 224(2) to adjust the relief on a fair and reasonable basis because there had been a change in what had been occupied as the residence. The procedural issue was whether the discovery assessment raised by HMRC was valid. The FTT accepted that the HMRC officer had been entitled to raise the assessment when she discovered that the Ritchies had not self-assessed themselves to CGT. However, on appeal, HMRC had to show that the conditions of TMA 1970 s 29 were met and, in order to raise assessments after four years but before the end of six years, carelessness by each of the Ritchies had to be established. The FTT found that the Ritchies' advisers had been careless in advising them that 'no mention of the transaction needed to be made'. As the advisers had been acting on the taxpayers' behalf, this meant that the assessments had been issued on time. Having found that HMRC's calculations were wrong, the FTT proceeded to work out its own computation of the gain and reduced the chargeable gains for each of the taxpayers from £300,000 to £84,000 each after the annual exemption. This tied in with the overall approach of the FTT. The tribunal observed, referring to Tower MCashback [2008] EWHC 2387, that 'a hearing of a tax appeal is not pendulum arbitration' so that it was not bound to choose between the parties' arguments (or calculations). W & H Ritchie v HMRC [2017] UKFTT 449 adapted from a report in Tax Journal and reproduced with permission, and available on BAILii at http://tinyurl.com/y9bbv7xq

4 July 2017

1.4 Allowable expenses The First-tier Tribunal has held that fees incurred challenging the forced sale of property by a bank-appointed receiver were not deductible under section 38 TCGA 1992 in calculating the taxpayers' chargeable gain on the sale of the property. The issues raised were similar to those in James O’Donnell v HMRC [2017] UKFTT 347 reported in last month’s MTR, involving the appointment of receivers by their bank and the costs involved in disputes with them. The appellant brothers owned and rented out properties that were sold by a receiver appointed by the mortgagee bank as a result of an alleged breach by the appellants of the mortgage terms. The appellants sought to deduct legal fees incurred on advice received in relation to action taken against the mortgagee bank to challenge the forced sale, as well as the receiver's fees, in calculating their chargeable gain on the sale of the property. In a useful illustration of the scope of section 38 of TCGA 1992, the tribunal disagreed with the appellants. The legal fees were not expenditure incurred defending the appellants' title to the properties under section 38(1)(b) TCGA 1992. Although preventing a forced sale might enhance the value of a property, the expenditure was not reflected in the asset at the time of disposal (as the challenge on which the expenditure had been incurred was unsuccessful). Moreover, although the appointment of a receiver prevented the appellants exercising ownership rights over the properties, the appellants' title was never in doubt. The requirements of section 38(1)(b) were, therefore, not met. The receiver's fee was not an incidental cost of disposal under section 38(1)(c) TCGA 1992 (the only potentially applicable provision) as it was not wholly and exclusively concerned with the sale (but, rather, reflected time spent by the receiver on other matters such as collecting rent). Further, the fee was not paid to one of the specified professionals in section 38(2) TCGA 1992 as the receiver acted for the bank and not the appellants. Hanif and another [2017] UKFTT 486, reported in Practical Law tax and available on BAILII at http://tinyurl.com/yc2cty9u

2. INCOME TAX & NI

2.1 Film scheme fails again Supplementing an earlier decision, the First-tier Tribunal held that expenditure incurred in acquiring the rights to receive a share of income from a film was capital in nature and could not be written off against income. In the original Ingenious Games LLP case ([2016] UKFTT 521, see MTR September 2016) the FTT had decided that the rights acquired were not stock and should be valued in the accounts for GAAP on the basis of cost less impairment, as fixed intangible assets. That tribunal also held that the vast majority of the income from films would be expected to accrue within five years of it having been made. However, it was accepted that some films (e.g. Gone with the Wind) could make money over many more years, and since Avatar (one of the films concerned) was a ground-breaking 3D movie, it might be one such film, because of the prospect of producing sequels. The case was adjourned for the parties to agree the figures. They were unable to do so, and the case returned to the tribunal. While acknowledging the unfairness of the result, the First-tier Tribunal held that expenditure incurred in acquiring the rights to receive a share of income from a film that were likely to be income-producing for over five years was capital in nature and could not be written off against income by recognising impairment or onerous contract terms through the profit and loss account. As a result, the LLPs were to be taxed on the income without being allowed to deduct the costs they had expended. The tribunal reached its decision by applying the criteria about asset life established in BP Australia v Commissioner of Taxation (Australia) [1966] 1 AC 224, to the facts and concluded:

Although marketed as having an expected life of five years for generating income, the film rights were capable of generating income long after that period.

The expenditure was not made out of revolving capital because receipts were to be paid out to the members, not recycled into the acquisition of new rights, there being a separate LLP for the acquisition of interests in each film.

The LLP did not acquire the rights with a view to disposing of them.

5 July 2017

For these reasons, the expenditure could not be deducted from taxable profits. This decision will come as a bitter blow for the hundreds of investors in LLPs of this type. Instead of creating allowable losses, the scheme has turned a capital investment into taxable income. The initial case showed that for every £3,000 investors put in they expected to get tax relief on £8,000 (so £3,600 if relieved at 45%) and still have £2,000 to offset against future income from the film rights after the other £7,000 of financing was repaid (which would probably mean they never had any taxable profit). Instead, they have paid £3,000, received no loss relief, and will be taxed in full on the income they receive Ingenious Games LLP and others v HMRC [2017] UKFTT 0429 adapted from a report on Practical Law Tax and available on BAILII at http://tinyurl.com/y9bkgdsu

2.2 Employment review The head of Theresa May’s employment review has set out a six-point plan to ensure government policies adapt to modern ways of working. Matthew Taylor, chief executive of the Royal Society for the encouragement of Arts, Manufactures and Commerce, said the review would put fostering “quality work” at its heart in a bid to make employment and the tax system fairer while encouraging entrepreneurship and flexibility. He said the report would recommend a more prominent role for the Low Pay Commission, which advises the government on the National Living Wage and minimum wage. It will call for the independent body to focus on a sectoral approach on pay for areas such as retail and construction as the government shapes its industrial strategy. Speaking at an event organised by the Resolution Foundation think-tank and the Confederation of British Industry, Mr Taylor said the report would focus on:

Creating a “national strategy for work”, with quality at its heart.

Making the tax system fairer to ensure “sound public finances”

Ensuring “a fair balance of rights and responsibilities”, with clear progression routes.

Promoting technology that benefits the workforce while ensuring a “level playing field” with other businesses.

Creating clear, legal distinctions between employees, the self-employed and so-called “workers”, which currently fall between the two categories.

A greater role for the low pay commission

Mr Taylor said the review was still on course to be published in the next “few weeks”, even as uncertainty surrounds the next government. He said he was also conscious of the burdens on businesses that employ staff, and said his recommendations would not pile on more costs. The RSA chief said: “We strongly believe that the best way to achieve better work is not national regulation, but responsible corporate governance, good management and stronger employment relations at organisations. [It’s about] encouraging companies to be more open about labour policies and strengthening employee voices.” Reported in the Daily Telegraph at http://tinyurl.com/ydds9fpo

2.3 Ordinary residence In Mackay the FTT found that the taxpayer had been ordinarily resident in the UK despite being born in Australia and intending to return there. Mr Mackay was born in Australia and had worked in various countries, predominantly in Asia, although his wife and children lived in London. The first issue was whether Mr Mackay had been ordinarily resident in the UK when he had lived there between December 2004 and October 2007. The FTT observed that in determining what is ordinary, settled or regular, at any time in a tax year, the pattern of life or long term intentions were not relevant; but what did matter were the habits and purpose at that particular time. On this basis, the FTT found that Mr Mackay had been ordinarily resident in the UK in the disputed years; in those years, the ordinary course of his life was that he was resident in the UK, his base both for work and domestically. The fact that he may have intended to leave did not alter the analysis. The FTT added that Mr Mackay had been in the UK for a settled purpose; fulfilling the duties of his employment with Instinet Europe. This involved a sufficient degree of continuity, and the period for which Mr Mackay intended to stay in the UK (and

6 July 2017

actually stayed there), about three years, was long enough. The second issue was the payment of £500,000 pursuant to a deed of discontinuance relating to the rights he held under an unapproved unfunded retirement pension deed. It was agreed that the payment constituted general employment related earnings within ITEPA 2003 s 63. The question was which tax year or years the payment should be attributed to. HMRC contended that the payment was attributable to the year it was received, while Mr Mackay contended that it should be spread across the years in which the entitlement to the pension rights accrued. The FTT found that part of the £500,000 was paid in respect of Mr Mackay's renunciation to his right to accrue future enhanced levels of pension, and part was paid for renouncing the vested right to the top up pension to which he would have been entitled on retirement had he resigned on the date of the deed. The proportion paid in respect of the vested right was paid 'for' the years in which that right was earned. Finally, the FTT found that Mr Mackay had not been employed by Instinet Inc, the American holding company as the arrangements were too informal and his employment contract with Instinet Europe envisaged that he would carry out functions for other group companies. Although the concept of ordinary residence is no longer used, this case will probably become the reference when dealing with historic situations. In this context, it is worth noting that, in the FTT's view, ordinary residence should be assessed 'at a particular time' without regard to long term intentions. A Mackay v HMRC [2017] UKFTT 441, reported in Tax Journal and reproduced by permission, and available on BAILII at http://tinyurl.com/y932twxk

2.4 Employment status ContractorUK, a site which supports contractors trying to retain self-employed or non-IR35 status, has a report from Kate Cottrell of IR35 advisory Bauer & Cottrell on the FTT case of Malcolm Tomlinson. The report should be read with the understanding that ContractorUK are a campaigning organization, but it makes some interesting points about the HMRC argument in the case.

Malcolm Tomlinson was a double-glazing salesman engaged by Window Centre (Solihull) Limited off and on for 25 years in a self-employed capacity. HMRC decided that Mr Tomlinson was self-employed, but Mr Tomlinson claimed he was an employee and he appealed to the tribunal. The tribunal found for HMRC. There is a lot of evidence and findings of fact by the tribunal and this piece does not attempt to analyse the details. But the tribunal’s judgment is noteworthy in light of some current IR35 investigation cases that HMRC are taking to the tribunal. It’s even more noteworthy when viewed through the lens of only a “little control” -- and lot of light-heartedness -- in terms of how it relates to HMRC’s new Status tool. Or in fact, how it doesn’t. What HMRC effectively says in the case on Substitution: This is only one factor, and is not decisive and you need to see if Mr Tomlinson is in business on his own account. Mr Tomlinson could not send a substitute. But despite what HMRC says (paraphrased above from the judgement and so in italics here and throughout), its status tool for IR35 in the public sector (the ESS) does not address being in business on your own account. And in reality, in investigation cases, HMRC always claims that being in business of one’s own account is not a relevant pointer away from IR35. What HMRC effectively says in the case on Control: The fact he had to work a rota system in the showroom were tasks that were minimal compared to his main role as a salesman. Showroom duties and completing a holiday planner alongside the other salesmen (some employed) are not evidence of control. There was clearly no control over the way in which Mr Tomlinson carried out his duties, as he was providing his own skilled services, as a salesman. Control in this case is less important and anyway with Mr Tomlinson, very little control was exercised by the engager. Control is never “less important” (page 15 of the judgment). Indeed, in some still fresh IR35 investigation cases a “little control,” as found here in the Tomlinson case, is sufficient for HMRC to claim IR35 applies, and to take cases to the tribunal. What HMRC effectively says in the case on Mutuality of Obligation (MOO): HMRC did not put forward any arguments on this IR35 status factor.

7 July 2017

Usually HMRC claims that doing the work and getting paid is sufficient to demonstrate that there is MOO and therefore an employment relationship. But not here of course. Not when it’s task is trying to prove self-employment! As with the new IR35 tool, they think it’s best to stay silent on the subject of MOO. What HMRC effectively says in the case on Financial Risk: Financial risk does not mean that there has to be the possibility of a meaningful loss. We’re dumb-founded on this point! This is the absolute opposite of what HMRC normally claims. Time and again, we raise the issue of the financial risk of invoicing and the real risk that you (the genuinely self-employed contractor) may not be paid, unlike an employee. The need to purchase business insurances is another example, as is the risk of a contract being terminated early. HMRC consistently equates financial risk with fixed-price work or risking your own capital by buying assets or materials and usually dismisses our contentions claiming they are insignificant. Somewhat in line with this, the new status tool will only give a self-employed or outside IR35 opinion when very significant costs and risks have actually been incurred. In short, the financial-risk-hurdle has been markedly raised. What HMRC effectively says in the case on Employee Benefits: The lack of any employee-type benefits is clear evidence that Mr Tomlinson was not an employee. We’re dumbfounded again! Because for the second time in this case, what the tax authority asserted is the absolute opposite of its normal stance. The best you can usually get from HMRC on this subject is that employee benefits is a neutral point. What HMRC effectively says in the case on Part & Parcel: A customer walking into the showroom would have no way of knowing that Mr Tomlinson was not an employee. HMRC said there was no reason to suppose that a customer would care whether Mr Tomlinson was an employee or whether he was self-employed. This is a real humdinger! Contractors, just try arguing with HMRC that you are not part and parcel of an organisation on the flimsy, arbitrary basis that the organisation’s customers do not care about your status!

HMRC made this point -- that customers couldn’t tell (regardless of whether they cared) if our man was an employee -- despite the following: Mr Tomlinson was trained in the products used by the engager and trained in the use of credit agreements for customers. He had the engaging company’s business cards with his name and engagers email address. All documents given to customers including estimates, credit agreements and contracts were signed by Mr Tomlinson. He had a company laptop and some summer shirts and polo shirts with the company logo on them and his photo appeared in company adverts in local newspapers. So what can contractors take from this case which I, for one, will remember fondly, and not just due to the many head-scratching moments trying to make sense of HMRC’s arguments?! One key point is that there was no written contract in place so much turned on the evidence provided by the various parties. Ultimately, the tribunal found that there were pointers to both employment and self-employment. The case was not at all clear and either conclusion was perfectly possible. It was then decided on the intention of the parties especially, as both parties had operated on that basis for 25 years. Unfortunately for some contractors who might like the look of HMRC’s about-turns, which it seems can be made like the flip of coin, First Tier Tribunal cases do not create case law precedent. And HMRC will no doubt say that each case is judged on its own merits. However, quoting from the case may prove helpful if you have a dispute or an unfavourable status tool result. Malcolm Tomlinson [2017] UKFTT 0489, reported on UK Contractor at http://tinyurl.com/y8xd3r2a and available on GOV.UK at http://tinyurl.com/y9qgfd5b

2.5 Wrong enquiry opened The Court of Appeal has followed obiter dicta of the Upper Tribunal in Cotter v HMRC [2013] UKSC 69 and held that a carried-back loss claim forming part of a taxpayer's self-assessment of a repayment of tax due was "included in the return". Therefore, HMRC was only able to challenge the repayment of tax claimed by the taxpayer by opening an enquiry under section 9A TMA 1970 for the tax year to which the loss was carried back. HMRC had instead opened an enquiry under Sch 1A as a claim not included in a return for 2009/10, the year in which

8 July 2017

the loss relief was applied, and a claim under s 9A for 2010/11, the year in which the loss arose. Although the Court agreed with the UT that the taxpayer's claim to share loss relief fell within the scope of paragraph 2 Schedule 1B TMA 1970 despite there being no express reference to it in the legislation for that relief, the Court disagreed with the UT's view of the effect of the taxpayer's self-assessment and considered that the UT had failed to recognise the distinction between the claim for relief itself, and the self-assessment that had been performed to give effect to that claim for relief. Unlike in Cotter, the taxpayer had not left it to HMRC to calculate the tax that he was due to pay (or as the case was, the repayment that was due to him), but had set out the calculation. HMRC had issued a repayment on the basis of that calculation, even though, on a correct reading of the legislation, it was incorrect: Cotter decided that, under Sch 1B, a claim for year 2 is not carried back to Year 1, it is instead calculated on the basis that it would have been if given in Year 1 but is then actually claimed in Year 2. The Court acknowledged that its decision had the effect of giving the taxpayer a tax flow advantage, but noted that this would have been avoided easily had HMRC taken the obvious course and opened an enquiry under section 9A within the statutory time limit: ‘The purpose of the tax calculation is to calculate the tax due for the year of assessment. The rubric above boxes 13 to 15 refers to the need to make "an adjustment to increase or decrease your tax for 2009-10", because of claims (inter alia) to carry back to 2009/10 certain losses from 2010/11. In this context, although the wording of box 15 itself ("Any 2010-11 repayment you are claiming now") is on any view rather imprecise, it can only sensibly be understood as referring to a carry back of losses from 2010/11 in reduction of the tax actually due for 2009/10. This is what Mr Derry purported to do, and this was the basis on which he calculated the repayment of tax due to him. In those circumstances, I can see no escape from the conclusion that, if HMRC wished to challenge his self-assessment, they had to do so either by amending the 2010 Return or by opening an enquiry into it.’ R (Derry) v HMRC [2017] EWCA Civ435 adapted from a report on Practical Law tax and available on BAILII at http://tinyurl.com/y9yddz36

3. BUSINESS DIRECT TAXES

3.1 Repayments of VAT taxable The Upper Tribunal has dismissed a taxpayer's appeal against the First-tier Tribunal decision that repayments of overpaid VAT and interest thereon are subject to corporation tax. The taxpayer received repayment of overpaid VAT, together with interest. It argued that it should not be liable to corporation tax on these amounts because this would undermine the EU law requirement of an effective remedy. The First-tier tribunal dismissed the taxpayer's appeal. Unsurprisingly, the Upper Tribunal agreed with the First-tier tribunal, finding that there was no breach of EU law because it was incorrect to combine the repayment and tax levied; corporation tax was not a deduction from the repayment, but was instead an independent event. Therefore, where receipt of a repayment and interest resulted in a profit in the recipient's account, this was taxable under normal rules. Applying existing case law, the Upper Tribunal confirmed that there was no basis, whether under the law of restitution, UK or EU law, for special rules to operate to disapply normal tax rules from restitutionary payments. Coin-A-Drink Ltd v HMRC [2017] UKUT 211, reported on Practical Law tax and available on BAILII at http://tinyurl.com/ydb5cdds

3.2 Dividend scheme double charge The First-tier Tribunal has held that corporation tax paid by group members on fictional trading profits under a tax avoidance scheme cannot be credited against an assessment for PAYE and NICs charged on another group member (the employer company) as a result of the failure of the scheme. The scheme, under which employees relinquished salary in return for dividends of a broadly equivalent amount, was the subject of an earlier decision of the Upper Tribunal, in which it found that amounts paid by the employer company to certain individuals were employment income and not dividend income. The tribunal rejected the taxpayer's argument that the corporation tax, based on profits without deduction for salaries, was paid as agent for the employer company and should be credited against the PAYE and NICs assessment. It held that, as only the employer company had appealed, the tribunal

9 July 2017

had no jurisdiction to consider corporation tax self-assessments submitted by other group companies; in the absence of enquiry by HMRC, those companies were entitled (but had failed) to seek to amend them in the usual way. The tribunal acknowledged the resulting inconsistency in the tax affairs of the group as a whole but, quoting Judge Bishopp at the Court of Appeal in Greene King plc & Greene King Acquisitions Ltd v HMRC [2016] EWCA Civ 782), observed that, where taxpayers employ unsuccessful avoidance schemes, they "can [not] legitimately complain if the scheme fails in its purpose and instead results in their paying tax twice". James H Donald (Darvel) Ltd v HMRC [2017] UKFTT 0446 reported on Practical Law Tax and available on BAILII at http://tinyurl.com/y9fs5agc

3.3 IFRS adjustments for EBTs The First-tier Tribunal has held that accounting debits mandated by IFRS 2 in relation to the grant of employee share options were deductible in the employing company’s corporation tax computation. The case relates to the law as it was before amendments made by Finance Act 2013 came into force. The appellants were two employing companies within the Smith & Williamson group. Certain of their employees were granted options to acquire shares in the parent company (Smith & Williamson Holdings Limited (SWHL)). The options were actually granted by an EBT which considered recommendations and requests made by SWHL. The appellants themselves were not involved in granting the options. Many of the options granted by the EBT were never exercised either because exercise conditions were not achieved, or because they were underwater. Under IFRS 2, where share-based payments are made to employees of a company, that company must debit the fair value of the share-based payments to its profit and loss account. This is true even if the employing company does not itself provide the shares. In this case on the grant of an option its fair value was calculated, and debited to the profit and loss account. The charge was spread over the vesting period in accordance with IFRS 2. The First-tier Tribunal had to consider whether such a debit was deductible for corporation tax purposes.

Section 1038 CTA 2009 was amended by Finance Act 2013 but this case was decided under the previous wording. This stated that, where relief is available under Part 12 CTA 2009, no other deduction is allowed in any accounting period for expenses directly related to the provision of shares. The tribunal held that, in relation to shares acquired through options, relief under Part 12 does not become available until the option is exercised but, once that has happened, section 1038 potentially denies relief for earlier periods of account. However, the tribunal did not consider that the IFRS 2 debits were directly related to the provision of shares. Instead, they related to the provision of options, many of which would never be exercised, and which were valued entirely differently from the shares. It is expected that HMRC will appeal because the tribunal's decision allows employers to claim a double deduction in respect of share options: during the vesting period for the IFRS 2 debits and for the eventual option gain under Part 12 of CTA 2009. Other advisers have taken a more conservative interpretation of section 1038, advising clients that it was possible to claim a deduction for an IFRS 2 debit, but only in relation to options which lapsed unexercised where the IFRS 2 debit was not reversed. These claims were also stopped by Finance Act 2013. NCL Investments Limited v HMRC [2017] UKFTT 0495, reported on Practical Law Tax and available on BAILII at http://tinyurl.com/yazausjc

3.4 Rights to dividend payments The First-tier Tribunal has held that expenditure on the acquisition of dividend rights was not tax deductible because the transaction was not in the course of the taxpayer's trade since the taxpayer's purpose was to obtain a tax advantage, BNP Paribas. At the relevant time, section 730(1) ICTA 1988 (now rewritten to section 753(1) CTA 2010) provided that if the owner of shares sold or transferred the right to receive distributions without selling the shares, the distributions were treated as the income of the owner. Section 730(3) ICTA 1988 (which was repealed by Finance Act 2006 for sales on or after 20 January 2006) provided that the proceeds of any

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subsequent sale or other realisation of the right to receive the distribution would not be regarded as the income of the seller. The taxpayer entered into a scheme designed to exploit this section 730 benefit. This involved setting up a special purpose vehicle paying a significant dividend stream, buying the income stream and then selling it on. All transactions were carried out through group companies or SPVs and were funded and hedged so that there was no real financial or commercial risk. The First-tier Tribunal (in a 160 page decision) held that the expenditure on the acquisition of dividend rights was not tax deductible. The purchase and subsequent sale of the rights was not a trading transaction because the taxpayer's purpose was to obtain a tax advantage. The tribunal conducted an extensive review of the facts and case law, finding that an objective assessment of the arrangements was necessary to determine whether the transaction was a trading transaction entered into for commercial purposes or was undertaken to obtain a tax benefit. The commercial elements were nothing more than a veil to lend the transaction some commerciality. If it was wrong on this issue, the tribunal held that the expenditure was, nonetheless, non-deductible because it was not incurred wholly and exclusively for the purposes of the taxpayer's trade. The tribunal held that HMRC could advance an argument that was not included in the closure notice because it was within the scope of the appeal, which was defined by the conclusions in the notice. Accordingly, the tribunal found that the receipt for the sale of the rights by a trader (as opposed to an investor) was taxable in the normal way as part of the profits of the trade and not excluded by section 730(3). This decision illustrates one of the many issues in the continued developing area of anti-avoidance and provides a useful analysis of case law in the area of whether a tax motive results in a transaction failing to be a trading transaction. Resolution of this issue depends on the overall facts and circumstances, and a tax motive may be relevant, regardless of whether the transaction is ambiguous or equivocal. Inserting commercial elements to give a transaction the appearance of trading are likely to be ineffective.

BNP Paribas SA (London Branch) v HMRC [2017] UKFTT 0487, reported on Practical Law tax and available on BAILII at http://tinyurl.com/y9jrh3aa

4. VAT

4.1 Transitional periods The ECJ has confirmed the Advocate General's opinion that the different treatment afforded to pre-1 April 2009 claims for input tax deduction, which could be made for VAT periods ending before 1 May 1997, and claims for overpaid output tax, which could only be made for periods ending before 4 December 1996, did not breach the EU principle of equal treatment. The ECJ held that the equal treatment principle would only be breached if different treatment were afforded to comparable situations and it could not be said that a taxpayer seeking the recovery of overpaid VAT was in a comparable situation to that of a taxpayer claiming input VAT deduction. The right to recover overpaid VAT was a general EU law right under which member states could lay down conditions under which recovery was possible provided that an effective remedy was provided. In contrast, the right to deduct input tax was fundamental to the operation of VAT and enshrined in the VAT Directives. As such, those rights had different origins and objectives and taxpayers enforcing those rights were not in comparable situations. Accordingly, member states were not required to provide identical start dates for the implementation of a new limitation period. While this decision will come as a disappointment to those with pending pre-1 April 2009 output tax claims that include periods ending between 4 December 1996 and 1 May 1997, it is unlikely that it will have enduring importance given that HMRC is unlikely to implement any future changes to limitation periods without giving due consideration to transitional provisions (if EU law continues to be relevant at that time). Compass Contract Services Ltd v HMRC C38/16 reported on Practical law Tax and available on BAILII at http://tinyurl.com/y9znvxqk

4.2 Overpayments chargeable The Upper Tribunal has confirmed the First-tier Tribunal's finding that, for VAT purposes, additional sums paid for parking by motorists without the

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correct change represented taxable consideration for parking services. The tribunal found that Borough Council of King's Lynn and West Norfolk v HMRC [2012] UKFTT 671 (TC) was wrongly decided and that even the existence of a statutory scale of charges did not alter the fact that the total paid, and retained by the car park operator, stemmed from a conscious decision not to park elsewhere. It was the price that the customer was both prepared to pay and actually paid, and there was a direct link between that and the right to park, the minimum charge for which was the official tariff. This decision establishes that the most important question in ascertaining consideration for VAT purposes is whether there is a direct link (under a legal relationship) between the service and the payment, even if this exceeds market value (although a large disparity may indicate the absence of a direct link). This may be contrasted with, for example, keeping separate pots within a gaming machine, with one going to the operator and the other to be paid out as winnings (and never retained by the operator). Taxpayers and advisers should be particularly aware that "consideration", for VAT purposes, does not have the same meaning as for English contract law and so must determine what is actually paid for a service to determine the amount on which VAT is due. National Car Parks Ltd v HMRC [2017] UKUT 247, reported on Practical law Tax and available on BAILII at http://tinyurl.com/y7bwn7fw

4.3 Coins for vouchers The Upper Tribunal has upheld the decision of the First-tier Tribunal that transactions involving customers placing coins into machines at supermarkets in exchange for vouchers of equal value (less a fixed percentage of the coins exchanged) redeemable at the supermarket for cash or goods, were VAT-exempt transactions in securities for money (within item 1 of Group 5 of Schedule 9 to the Value Added Tax Act 1994). The UT considered that the provision of the vouchers was an aim in itself and was not ancillary to a coin counting service. HMRC had failed to take account of the entire contractual arrangements between the taxpayer and customers, which included customers electing to take vouchers or donating the coins’ value to charity. Electing to take vouchers showed that customers were contracting

with the taxpayer to receive vouchers rather than a coin counting service. References to a “coin counting fee” on the machine display screens could not change the objective nature of the transaction. The UT agreed with the FTT that the economic reality of the transaction was that a customer would not pay the taxpayer’s fee simply for a coin counting service. The UT also considered that the FTT was entitled to treat this case as analogous to foreign exchange despite the currency not changing and agreed that the customers’ legal and financial position had changed (the nature of the right embodied in a voucher being entirely different to that embodied in coins). Finally, the UT rejected HMRC’s view that the VAT finance exemption was restricted to situations where the tax base was difficult to determine. It considered that that view (taken from Velvet & Steel Immobilien und Handels GmbH (C-455/05) (see paragraph 24)) should be confined to borderline cases involving transactions that are not clearly within the VAT finance exemption. The UT derived support for its view from Skandinaviska Enskilda Banken AB Momsgrupp v Skatteverket (C-540/09), where the ECJ applied the VAT finance exemption even though there was no difficulty in determining the tax base and despite citing Velvet & Steel. HMRC v Coinstar Ltd 2017 UKUT 256 reported on Practical Law Tax and available on BAILII at v

5. COMPLIANCE & ADMIN

5.1 APN invalid, period not ended The First-tier Tribunal has allowed an appeal against penalties for late (accelerated) partner payments because the payment period (the period before the end of which the payment had to be made to avoid penalties) had not ended. The tribunal rejected HMRC's "nitpicking" argument that the appellant's representations were invalid because they did not state why the amounts shown in the partnership payment notices (PPNs) were incorrect, state the correct amounts and give the appellant's reasoning. The tribunal considered that the thrust of the appellant's representations was clear and there was no legislative basis for HMRC's view of representations. As HMRC had refused to consider the appellant's in time representations, it had not confirmed or amended the accelerated payment and notified the appellant accordingly. As such, the

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payment period had not ended and penalties could not arise. The decision makes clear the extent of a tribunal's jurisdiction in accelerated payment penalty proceedings. The tribunal must be satisfied (HMRC has the burden of proof) that what was given to the appellant was a PPN, the PPN content requirements were met, an amount of the partner payment remained unpaid at the end of the payment period and the appellant was a relevant partner. The tribunal confirmed that it had no jurisdiction to consider whether the conditions for issuing a PPN were met or the amount of the payment. The tribunal's decision highlights the importance of checking validity and also highlights other issues that might affect the validity of PPNs, such as failing to give the name of the officer who issued them. However, despite this decision, the revised versions of the relevant HMRC factsheets issued on 19 June still say that representations can only refer to the conditions for issuing the notice not having been met, or the amount being incorrect. Rai v HMRC [2017] UKFTT 467 reported on Practical Law Tax and available on BAILII at http://tinyurl.com/yafdo2t2

5.2 Late appeal refused According to the taxpayers in Edwards, the reason for their appeal against an SDLT charge being 16 months late was that their original agents went into administration, and as an interim measure they appointed an agent who did not normally deal with appeals to the tax tribunal. When they did appoint a firm which could handle the appeal, it was initially under the impression that an appeal had already been submitted. This cut no ice with the tribunal judge, who said that they had been clearly informed by HMRC that they had 30 days in which to submit an appeal. A significant part of their correspondence with HMRC in the meantime had not been about appealing at all, it had been about reaching a time to pay agreement. It was also clear that the genesis of the assessment in a failed SDLT avoidance scheme had a bearing on the judge’s decision: “Where taxpayers embark on a course of action which involves careful reliance on detailed technical provisions to avoid tax, they cannot reasonably

expect an indulgent attitude to be shown to them when they fail so spectacularly to observe basic time limits in seeking to exercise their rights of appeal when HMRC challenge the effectiveness of the scheme” James & Avril Edwards v HMRC [2017] UKFTT 284 reported on BAILII at http://tinyurl.com/yamhj8d6

5.3 Discoveries can go stale The First-tier Tribunal has confirmed that if an HMRC officer makes a discovery but only issues an assessment after undue delay the assessment will be invalid. What is undue delay will be fact specific; in the present case the assessment was valid. The tribunal was bound by the Upper tribunal's decision in Pattullo v HMRC [2016] UKUT 270 (TCC), which approved the obiter comment made by the Upper Tribunal in Charlton and others v HMRC [2012] UKUT 770 (TCC) that an assessment should be issued within a reasonable period following a discovery by the relevant HMRC officer, unless the officer is awaiting determination of another appeal that is material to the question of liability. The tribunal found that the discovery occurred when the officer determined that the tax avoidance scheme utilised by the taxpayer did not work. As the officer had doubts as to whether the scheme worked, the discovery was made following publication of the Special Commissioner's decision in Astall and another v HMRC [2007] UKSPC SPC00628, which concerned the same scheme. Issue of the assessment five months later was within a reasonable period. Recent cases show that HMRC has significant leeway in issuing discovery assessments, making it difficult for taxpayers to be confident about obtaining finality for their tax affairs. Although this case confirms that not issuing a discovery assessment within a reasonable time of the discovery will invalidate the assessment, it also highlights that (at least in relation to tax schemes) it may be difficult to challenge a discovery assessment issued within a reasonable period of a decision on the validity of the scheme (where a return and details of the scheme may have been filed many years earlier). Beagles v HMRC [2017] UKFTT 0462 reported on Practical Law Tax and available on BAILII at http://tinyurl.com/y7lq8k94

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5.4 Worldwide disclosure facility On 15 June 2017, HMRC announced that taxpayers with particularly complex tax affairs can apply to extend the 90 day deadline for making a disclosure under the Worldwide Disclosure Facility (WDF) by up to 90 days, giving up to 180 days in total. It is not clear, from the guidance, whether this deadline runs from notification of intention to disclose or from receipt of acknowledgement from HMRC that it has received the notification, as both are mentioned. The WDF gives taxpayers the last opportunity to make a disclosure on relatively beneficial terms before HMRC uses the Common Reporting Standard to automatically exchange tax information with other jurisdictions and introduces a tougher penalty regime. The WDF, which was opened by HMRC on 5 September 2016, can be used by anyone with a UK tax liability that relates wholly or partly to an offshore issue. HMRC states in its guidance that, from 30 September 2018, new sanctions under the requirement to correct (RTC) legislation will be introduced. The government included this legislation in the Finance Bill 2017 as published, but it was dropped in the Bill's House of Commons committee stage on 25 April 2017. The proposal would have applied to all taxpayers with offshore interests who have not complied with their UK tax obligations as at 5 April 2017. HMRC guidance reported on Practical Law Tax and available on GOV.UK at http://tinyurl.com/jud3d3q

5.5 Non-statutory clearances HMRC have updated their guidance on non-statutory clearances to include the following: HMRC won’t give clearances or advice in respect of the application of the ‘settlements legislation’ in Chapter 5 Part 5 Income Tax (Trading and Other Income) Act 2005 or the tax consequences of executing non-charitable trust deeds or settlements. The tax consequences of … valuations, and requests for general confirmation of the status of businesses for Business Property Relief are also not included. HMRC guidance available on GOV.UK at http://tinyurl.com/nrpowa9

5.6 Legitimate expectation The High Court has dismissed an application for judicial review of HMRC's decision to disallow double tax relief on overseas dividend income absent a valid claim on the basis that the taxpayer had no legitimate expectation that relief would be granted. The taxpayer omitted to make a relief claim in its 2009 return but argued that it had a legitimate expectation that HMRC would treat the claim as made because HMRC had amended prior years' returns with open accounting periods to reflect the correct tax treatment of overseas dividends, that treatment being determined in a long-running test case between the parties. However, the court found that, even if such a legitimate expectation had existed, it would have been negated by correspondence between the parties, which made it clear that a claim had to be made in accordance with statutory requirements. Further, the taxpayer had actually made claims in previous years (so there was no pattern of accepted behaviour on which to base an assertion of legitimate expectation) and the proceedings in the main litigation concerned only points of principle (availability of relief), not the mechanics of granting relief. Absent a clear, unambiguous and unqualified representation by HMRC, there could be no legitimate expectation. R (The Prudential Assurance Company Ltd) v HMRC [2017] EWHC 1484 reported on Practical Law Tax and available on BAILII at http://tinyurl.com/yb77wg3j

5.7 Reasonable excuse The First-tier Tribunal has held that the defence of reasonable excuse for failure to submit a return by a specified date is only available where the excuse exists before the specified date, and cannot be invoked in respect of a period after the specified date to mitigate the rate at which a penalty is charged. The appellant submitted a corporation tax return for its accounting period ended 31 December 2012 on 11 August 2014, but the return was in an incorrect format. A correct return was not submitted until 1 April 2016. The appellant paid a tax-geared penalty of 10% of the unpaid tax, imposed under paragraph 18(2)(a) Schedule 18 Finance Act 1998 for the failure to file a return within 18 months of the due date.

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However, it appealed against a subsequent penalty of a further 10% of the unpaid tax, imposed under paragraph 18(2)(b) once the return was over 2 years late, on the basis that, from 11 August 2014 until the date the penalty determination was issued, it was unaware that the return submitted was incorrect and, therefore, it had a reasonable excuse under section 118(2). HMRC is likely to apply the decision wherever possible to other "reasonable excuse" cases. However, given that the tribunal's decision on the interaction between paragraph 18(2)(a) and section 118 was somewhat tentative and was contrary to the assumption of both parties, the issue may be subject to further judicial scrutiny. Vanburgh Capital Ltd v HMRC [2017] UKFTT 0483 reported on Practical law Tax and available on BAILII at http://tinyurl.com/y8sgjou2

6. EUROPEAN & INTERNATIONAL

6.1 Diver and double taxation The Upper Tribunal (UT) has overturned the decision of the First-tier Tribunal that the income of a diver, who was resident in South Africa but carried out diving activities on the UK continental shelf, fell within Article 7 (Business Profits) of the UK/South Africa Double Tax Treaty (DTT) by reason of section 15 ITTOIA 2005. The case was on a preliminary issue, so no further facts than this were given. The UT analysed Articles 7 and 14 (Employment) of the DTT to determine which applied to the diver's income. In doing so, it distinguished between "employment" and the "fruits of employment" finding that only the former was relevant in determining the scope of Article 14 of the DTT. Accordingly, section 4(1) ITEPA 2003 was relevant in determining the term "employment", but sections 6 and 7 of ITEPA 2003 and section 15 of ITTOIA 2005 (which deemed divers' income from employment to be trading income for tax purposes) were not relevant as they related to the charge to tax on the fruits of employment. Consequently, the UT found, on the preliminary issue, that, assuming the diver was an employee (which was disputed), his income fell within Article 14 of the DTT. As Article 14 of the DTT gives taxing rights to the country in which an employment is held, HMRC's assessments stand, unless the taxpayer can show that he was not an employee. By way of obiter, the

UT did not exclude the possibility that deemed employment income could inform the meaning of "employment" for the purposes of Article 14 of the DTT. Fowler v HMRC [2016] UKFTT 0234, reported on Practical Law Tax and available on BAILII at http://tinyurl.com/yd78ganz

6.2 Cross-border taxation, BEPS The OECD published further proposed guidance on permanent establishment, where the guidance has changed from being based on examples to setting out high-level principles, and on transfer pricing profit splits, where the guidance is broadly similar to the earlier draft. Meanwhile, the European Council has formally adopted a directive on hybrid mismatches after incorporating some amendments from the European Parliament. Member States have until 31 December 2020 to incorporate it into their domestic legislation. On oecd.org at http://tinyurl.com/yas3hgsp and europa.eu at http://tinyurl.com/y8g23qx8 respectively.

6.3 Status of Gibraltar The ECJ has confirmed that, for the purposes of the freedom to provide services (under Article 56 of the Treaty of the Functioning of the EU (TFEU) (Article 56)), Gibraltar and the UK are a single member state. Accordingly, given that Article 56 applies only to situations involving two member states, it could not be invoked by a Gibraltar enterprise to challenge the UK's remote gambling duty rules. Gibraltar is not part of the UK but is a European territory for the external relations of which the UK is responsible. EU law is applied to Gibraltar, subject to certain derogations (not including Article 56), by Article 355(3) of the TFEU. Other than the different mechanisms for applying Article 56 (by Article 355(3) for Gibraltar and by Article 52 of the Treaty on European Union for the UK), a distinction that the ECJ had previously disregarded in the context of analogous legislation, the ECJ found no factor justifying the conclusion that relations between Gibraltar and the UK were akin to those existing between two member states. Given its single member state ruling, the ECJ considered it unnecessary to determine whether the UK's remote gambling duty rules constituted a

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restriction on the right of freedom to provide services and, if so, whether the restriction was justified. It is reported that the government of Gibraltar has responded positively, suggesting that the ruling "may provide a different, and strengthened, perspective on Gibraltar's position in the Brexit negotiations". The Gibraltar Betting and Gaming Association Ltd v HMRC and HM Treasury (Case C-591/15) reported on Practical law tax and available on BAILII at http://tinyurl.com/ybqj3ueo

7. RESIDUE

7.1 Queen’s Speech The next three Finance Bills have been announced as part of the government's two year parliamentary programme in the Queen's Speech on the state opening of Parliament on 21 June 2017. The next Finance Bill will be introduced in summer 2017 (the Summer 2017 Finance Bill) and will include a range of tax measures, including those to tackle avoidance. The contents of the Summer 2017 Finance Bill have not yet been announced but we expect it to include at least some of the measures withdrawn from the Finance Act 2017 before the general election. It is not yet clear when the Bill is expected to receive Royal Assent (i.e. before or after the Summer Recess). The following two Finance Bills are likely to be introduced in spring 2018 and spring 2019, given the changes to the tax legislative calendar announced in the 2016 Autumn Statement. Also announced in the Queen's Speech for the long Parliamentary session was a National Insurance Contributions (NICs) Bill, implementing certain changes to NICs previously announced in the 2016 Budget and the 2016 Autumn Statement, and making the NICs system simpler and fairer. The Bill will not relate to the discussion of Class 4 (self-employed) NICs in the 2017 Spring Budget. Finally, there will be a Customs Bill, to replace EU customs legislation and modify elements of the indirect taxes system. The aim is to allow the UK to operate a standalone UK customs and indirect taxes

regime on Brexit, regardless of the outcome of the negotiations. The background briefing confirms that the Chancellor will set out levels of tax and spending at future fiscal events and notes that the government wants “to keep taxes as low as possible for ordinary working people”. Queen’s Speech background notes, available on GOV.UK at http://tinyurl.com/y9xqm3md

7.2 Professional negligence In the case of Halsall v Champion Consulting Ltd, the claimants were partners in a solicitors' firm. In around 2003 the defendant tax advisers introduced them to two tax schemes. The first, the "charity shell" scheme, was intended to secure tax relief through Gift Aid. The second was supposed to deliver tax benefits through investment in film rights. Clause 13 of the advisers' terms and conditions stated that any claim against them had to be brought within six years. The claimants contended that the advisers had assured them that the charity shell scheme would work effectively and reduce their tax liability. However, the advisers had failed to advise the claimants that the valuation of the shell upon flotation was critical and there was a significant risk that it would be successfully challenged by HMRC. As to the film scheme, the defendants allegedly advised that the scheme had a 75-80% chance of success and, if it failed, the maximum loss would be the cash invested. Both schemes apparently failed, and the claimants brought proceedings on the basis that the defendants had advised them negligently, and, as a result, they had suffered loss and damage. The High Court held that the defendant tax advisers were negligent with respect to their advice to the claimants to invest in the schemes. This was because no reasonably competent tax adviser could have advised in the terms that the defendants did. Applying the distinction made in SAAMCO v York Montague Ltd [1997] AC 191, the court held that the defendants were providing advice as to a course of action rather than just information, with the corresponding obligation to consider all the potential consequences of that course of action.

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However, the claims were time-barred because the proceedings were instituted more than six years after the damage occurred. The relevant damage occurred when the claimants entered into the tax planning schemes, by purchasing shares and entering into the documentation for the film scheme. Although it was not then inevitable that they would be denied the tax relief, it was at that point that they were tied into a "commercial straitjacket". The claims could not be saved by section 14A of the Limitation Act 1980 since the question was when the claimants knew enough for it to be reasonable to begin to investigate further, and the claimants had acquired such knowledge more than three years before the claims were brought. The court held, obiter, that a six-year time limit for claims in the advisers' standard terms met the requirement of reasonableness in the Unfair Contract Terms Act 1977. Halsall and others v Champion Consulting Ltd and others [2017] EWHC 1079 reported on Practical Law Tax and available on BAILII at http://tinyurl.com/y9vpfyvf

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