Northern Ireland Tax Developments
Author:
Phillip McMaw
Taxation of companies and business
The Marks & Spencer loss relief Group Litigation Order
Preliminary hearings in the case of Marks & Spencer plc v Halsey took place in the European Court of Justice (ECJ) during early February.
M&S is claiming that the UK group relief rules are contrary to the principle of freedom of establishment contained in the EC Treaty as they restrict group relief for losses incurred to UK groups.
M&S wishes to claim group relief for losses incurred by its French, Belgium and German subsidiaries against the profits of its UK business thereby substantially reducing its UK tax liabilities during the periods 1998 to 2001
Having lost a case before the Special Commissioners, M&S succeeded in having the case referred to the ECJ by the High Court.
Following presentation of the evidence to the ECJ, the Advocate General is due to deliver his opinion for the Court's consideration on 7 April.
If M&S ultimately win this case, the impact on the UK Treasury will be significant as large numbers of groups will rush to file amended group relief claims for losses incurred by their EU subsidiaries.
Some have suggested that the Government may move to protect the UK tax base by abolishing group relief entirely.
Tax repayment claims time limited to six years
Following the ECJ ruling in the Hoechst case, which ruled that the imposition of an ACT charge on dividends paid by a UK subsidiary to its overseas parent was contrary to the freedom of establishment principle of the EC Treaty (similar to the M&S case above), many companies have filed tax repayment claims with the UK Revenue. One such company is Deutsche Morgan Grenfell. The company sought to make restitutionary claims going back many years, however, the Court of Appeal has now ruled that claims for repayment of tax are generally limited to six years after the date of the tax payments. This decision highlights the importance of companies considering the relevance of EC law when filing their tax returns and making appropriate 'protective' claims so as to avoid being time-barred. Deutsche Morgan Grenfell are to appeal to the House of Lords.
Further anti-avoidance
The Government has announced its intention to legislate against further avoidance in the following areas:
- Claims to excessive double tax relief
- Use by companies of capital redemption bonds to generate artificial losses
- Exploitation of the capital loss buying rules
It is not clear whether the above is further evidence of the success of the new tax disclosure regime. The legislation is to be included in Finance Bill 2005.
Taxation of individuals and trusts
Gains on Trust assets attributed to individuals
A recent House of Lords decision in the case of Trennery v West has spelt the end to an avoidance planning idea known as the 'flip flop' scheme. The aim of the scheme was to take advantage of the lower capital gains tax rate of 25% applying to the disposal of assets by interest in possession trusts, as compared to 40% payable by individuals.
Whilst the use of the scheme has become much less attractive in recent years, due largely to the introduction of favourable business asset taper relief, the ruling in the case may have ongoing implications for trustees and individuals who have settled assets into offshore trusts as the 40% capital gains tax rate may now apply in a wider range of circumstances.
Revised guidance on restaurant tips
The Inland Revenue has recently published revised guidance on the tax treatment of tips, gratuities and service charges for national insurance contribution and minimum wage purposes. In their original guidance, the Revenue argued that 'interference' by management in any 'tip pooling arrangements' between employees (known as a "tronc") lead to the payments out of the tronc being liable to employer's NIC charges. The new guidance makes it clear that the employer is not 'interfering' with the tronc as long as he is not involved in determining who should receive the tips and how much each employee is to get. In addition, the deduction of monies from the tronc by the employer to cover breakages, credit card charges and similar charges should also not constitute 'interference'. The revised guidance also clarifies the interaction of the employers NIC charge and the national minimum wage ("NMW") legislation in cases where payments out of a tronc are used to 'top up' staff wages to NMW levels.
Indirect tax
Advocate General's opinion on the VAT carousel fraud cases
Under the VAT Carousel fraud scheme, suppliers of fraudulent goods, which formed part of an ultimately circular supply chain, had gone missing without declaring the output tax to Customs. Customs then denied innocent companies caught up in the scheme the ability to reclaim their input tax on the purchase of the goods. Customs argued that since the transactions were fraudulent, there could be no supply, output tax should not have been charged and therefore input tax could not be recovered. In effect Customs sought to pass the burden of fraud detection (and ultimately the cost of the fraud) onto taxpayers. The Advocate General has found in favour of the taxpayer, concluding that each transaction in a supply chain must be considered separately and that fraudulent transactions are still within the scope of VAT. If the ECJ follows the Advocate General's opinion, input tax reclaims should be repaid in full and taxpayers may wish to consider claims for compensation and interest.
And finally
The Treasury has announced that the Chancellor will present his Budget to the House of Commons on Wednesday 16th March. A summary of the major changes introduced by the Budget will be included in the next edition of Tax Notes.