Other news in brief

The Upper Tribunal (UT) has overturned the decision of the First-tier Tribunal (FTT) in Centrica Overseas Holdings Ltd v HMRC. The FTT had previously held that advisers' fees incurred by an intermediate UK holding company (COHL) in the Centrica Plc group, in relation to a potential disposal of the assets of a subsidiary (Oxxio) were not deductible expenses of management for COHL on the basis that the management decision, to make the disposal, was taken by its parent entity Centrica plc. The judgment of the FTT noted that “in order to obtain relief, group companies must be conscious of the need for the ‘corporate plumbing’ to be properly installed and must ensure that the relevant investment company manages its own investment business”. In this case, the decision to make the disposal had been made by Centrica plc’s Board and, while Centrica plc and COHL shared some individual directors, there was no evidence such as board minutes that the management decision had been specifically discussed or approved at COHL board level. The UT held that the FTT was wrong to conclude that COHL was not managing its investment business as the findings of fact by the FTT showed that the directors of COHL had participated in the decision-making in their capacity as heads of group functions and that this should be considered management of the investment business on behalf of COHL with the informal approval of its directors. The UT considered three further issues: (i) did the disputed expenditure amount to expenses of management, or was it (or some of it) expenses of the disposal of Oxxio assets?; (ii) could the Deutsche Bank professional fees amount to expenses of management if they were in the nature of success fees?; and (iii) was the disputed expenditure capital in nature such that it fell to be disallowed? On these additional points the UT also held in favour of the taxpayer as it was satisfied that:

(i) The FTT was entitled to conclude that the Deutsche Bank fees and the PwC fees prior to 22 February 2011 were expenses of management. The UT remitted the taxpayer’s appeal on the deductibility of the De Brauw fees back to the FTT to determine as the FTT decision did not make clear findings as to which of De Brauw’s legal fees were expenses of management;

(ii) The FTT was right to find that in substance, the Deutsche Bank fees were for services which enabled COHL to decide whether and how to dispose of the Oxxio business. The fact that the fixed fee was only payable on completion of the transaction did not change the nature of the expense so as to make it part of the cost of disposal; and

(iii) The FTT was right to conclude that the Deutsche Bank and PwC expenses were not capital in nature. To the extent that the De Brauw fees were expenses of management (which has been remitted back to the FTT to determine) because they informed decision-making in relation to the disposal of the Oxxio business, the view of the UT was that they were revenue in nature and the FTT was wrong to hold otherwise.

On 20 September 2021 the EU General Court will hold a hearing on the joined appeals filed by the UK Government and a taxpayer against the European Commission’s decision of 2 April 2019, which found that the finance company exemption in the UK’s controlled foreign company (CFC) rules was partly contrary to EU State Aid rules. An annulment application was made by the UK Government against the EC’s decision on 12 June 2019 in which the UK Government put forward several arguments against the decision. Once the EU General Court’s judgment has been handed down, which may take several months, this may be subject to further appeal to the EU Court of Justice.

In Vermilion Holdings Ltd v HMRC, an individual originally held an option to subscribe for shares which HMRC accepted was not ‘employment-related’. As part of a refinancing, that option was released for the grant of a less favourable replacement option. The individual was employed by the issuing company at that time. At the First-tier Tribunal (where they lost) HMRC argued that as the individual was an employee when the replacement option was granted, the rule that deems options granted by a person’s employer to be ‘employment-related securities options’ – regardless of the actual reason for the grant – meant the option should be taxed as employment income on exercise. On appeal to the Upper Tribunal (where they won), HMRC argued instead that the replacement option was, as a matter of fact, granted by reason of the individual’s employment and so ‘employment-related’. The Court of Session (Inner House) has allowed the taxpayer’s appeal, holding that the replacement option was not as a matter of fact granted by reason of employment, and that the relevant deeming rule is limited where its application to the facts would result in an outcome that is “anomalous, absurd and unjust”. The facts in this case appear particularly favourable to the taxpayer, and another rule that can also deem securities options to be employment-related was not in point. This decision might therefore be of narrow application. That said, as it overturns the previously held view of how the deeming rule applies, HMRC may well appeal to the Supreme Court. The law in this area might therefore not be settled. In the meantime, when shares or a share option are made available by an employer, it will now be important to consider the full facts, including whether the employer was acting ‘as employer’ or in a different capacity.

The Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales, along with other professional bodies, have written a letter to Jesse Norman MP (the Financial Secretary to the Treasury) about the proposed reform of the basis period rules and their interaction with the introduction of Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) from April 2023. The basis period reform proposes fundamental changes to the way individuals with trading income (including partnerships) will be taxed by moving from the existing 'current year basis' to a 'tax year basis'. This would change the underlying profits or losses subject to tax from the 2022/23 tax year onwards and bring forward the time at which tax on such profit is due for payment. The professional bodies’ letter states “We support tax simplification and the modernisation of the tax system through a further move to digital, but sufficient time must be allowed for this to happen at a manageable pace. The timetable being proposed will place enormous pressure on businesses and their advisers as well as on HMRC. Mistakes will be costly and this risks undermining trust in the tax system. These reforms are being implemented too quickly. We are greatly concerned that the current timetable puts the integrity of the tax system at risk.”

KPMG UK is launching a new tax practice in London to support US expatriates in the UK and across Europe as the potential for US tax reform accelerates. The new practice, which KPMG plans to scale up rapidly in the next year, will focus on advising high-net-worth and ultra-high-net-worth individuals and families with US tax obligations. “President Biden is introducing significant changes to the US tax system, so there has never been a greater need for tax guidance for the UK’s American community,” said Greg Limb, KPMG UK partner and global head of KPMG’s Family Office & Private Client practice. “Establishing a dedicated practice in London has become critical to meeting the demand from American citizens who need to ensure they comply with the ever-changing tax laws.”