Northern Ireland Tax Developments August 2005
Author:
Phillip McMaw
General
Second Finance Bill issued on 26 May
The return of a Labour government after the May general election was followed by the publication of a Finance Bill on 26 May 2005. Prior to the dissolution of Parliament before the general election, a Finance Act was passed to deal with essential matters such as tax rates and allowances. Much of the more contentious law, such as the new rules on tax arbitrage, was deferred and has now come round for a second lap with publication of the Bill on 26 May. The expectation is committee readings will take 6 weeks or so and the Bill should become law before summer recess in mid July. Updates on the progress of the Bill are available through the Treasury website.
Taxation of companies and business
Residence of a company – Wood v Holden case
The issue of where a company is resident for tax purposes came before the UK High Court in the case of Wood v Holden and the taxpayers succeeded on appeal.
The circumstances concerned a capital gains tax planning arrangement and the assertion by the Inland Revenue that a Dutch incorporated and tax-resident company was in fact resident in the UK for tax purposes. The Special Commissioners found that the company was UK-resident and comments in their decision seemed to indicate that demonstrating non-UK residence could be more difficult than previously thought.
Certain key points emerge from the High Court judgement:-
1 Only in highly exceptional cases will a company be controlled by someone other than the directors.
2 Once the taxpayers had brought evidence to show that the company was not UK-resident, the burden of proof passed to Revenue to demonstrate that, in fact, the company was UK-resident.
3 Although professional advisers make recommendations and give advice and guidance, they do not supplant the directors as decision-makers.
Provided that directors receive requests and advice – not commands, properly consider decisions and their fiduciary duties and responsibilities, and act accordingly, it would be unusual for the board not to be accepted as exercising central management and control.
Taxation of individuals
Arctic Systems case
The High Court has ruled in favour of Revenue in Jones v Garnett, the well-known case concerning dividends paid by a family company. To recap briefly on the facts, Mr and Mrs Jones each had one share in a company and they both worked for the company. The remuneration paid to Mr Jones was modest given the nature of work carried out and the remuneration paid to Mrs Jones was reasonable. The remainder of the company’s profits was paid out as dividends on a 50/50 basis and Revenue sought to challenge the tax treatment on dividends paid to Mrs Jones, arguing that the settlements legislation effectively deemed these dividends to be taxable in the hands of Mr Jones. The use of the settlements legislation in this way has attracted considerable publicity and professional comment since, although Revenue continue to hold the view that there is nothing new in this.
The High Court has now found for Revenue although Park J added that it did not follow that a husband would be taxed on his wife’s dividends in every family company case. The important distinguishing feature of this case was that Mr Jones had effectively funded a settlement by working for the company for a salary which was materially below the going rate for employees doing the same kind of work.
Reaction to the judgement has been mixed, with some comments forecasting billions in additional tax costs for family companies and others stressing that the case is a decision on quite extreme facts and unlikely to concern that many companies.
Tax Bulletin 76 – share options, goodwill on incorporation, dual contracts investigations
Issue 76 of Tax Bulletin focuses mainly on income tax and PAYE and contains articles on:-
• Self-assessment tax returns
• Employers annual returns for 2004-05
• Share options: internationally mobile employees
• Goodwill and incorporation
• Dual contract arrangements
• Form 42
• Recognised stock exchanges
Indirect taxes
Kretztechnik ECJ ruling
Hardly an issue of Tax Notes seems to pass nowadays without a significant ruling from the ECJ and the Kretztechnik case is considered to have improved the climate for recovery of input VAT in connection with share issue costs.
The company concerned in this case was an Austrian company that listed on the Frankfurt Stock Exchange and incurred professional fees in the process. Austrian VAT authorities take a similar approach to the UK in terms of recovery of input VAT on such costs and refused a deduction on the grounds that share transactions were exempt from VAT.
After taking the case through various courts, the ECJ ultimately ruled that the VAT incurred on costs associated with the issue of shares, forms part of the overhead costs of the business and is therefore recoverable in accordance with the overall VAT recovery rate of the business. The decision means that there is now consistency in the VAT treatment applying to the raising of debt and the VAT treatment applying to equity finance. The decision should also result in a consistent treatment across EU member states and UK companies may now wish to revisit situations in the past where the have raised new capital by way of share issue or debt securities.
And finally…
A landmark ruling from Norway, as the Oslo district court has ruled that performances at the Diamond Go Go bar should benefit from a VAT exemption provided for opera, ballet and theatre performances. The judgement reads “To the court’s knowledge…in certain places, especially abroad, one can see incredibly beautiful artists move gracefully to music, with sensual movements and gradually taking their clothes off, which gives many clients a very nice experience…There are also other kinds of shows that can only be considered banal and vulgar.” Fortunately the Oslo establishment fell into the first category and its admission fees remain theatrically VAT-exempt. Vulgarity in Norway on the other hand is presumably now subject to VAT.