This edition has a strong international flavour, with publication of the final reports of the OECD’s BEPS project and the State aid decisions in relation to Fiat and Starbucks.

The impact of BEPS can also been seen in the proposed changes to the UK’s patent box regime, the details of which have been published for consultation.

The EU theme continues in the guidance on the VAT treatment of services relating to land and measures to counter the “windfall” benefit of that interest that HMRC must pay on successful restitution claims resulting from the UK tax rules being found to breach EU law.

HMRC may have more disputes on its hands after a tax tribunal decision that widens the scope for appealing certain HMRC decisions.

The ongoing saga of what happens to VAT reclaim rights when a company leaves a VAT group continues. And another tax saga nears conclusion with HMRC’s successful appeal in the Rangers EBT case.

OECD proposes limiting interest deductions to percentage of EBITDA

On 5 October the OECD published the final reports of the Base Erosion and Profit Shifting (BEPS) project.

A key proposal is to restrict interest deductions to a fixed ratio of between 10 and 30% of EBITDA. Countries may combine this fixed ratio with a higher group ratio that will allow highly leveraged groups to deduct more.

The UK published a consultation on implementation on 22 October and it is likely it will implement the proposals in some form.

The rules are likely to affect wholly domestic groups as well as multi-nationals.

Transfer pricing state aid decisions

The European Commission announced its long-awaited decision in investigations into whether tax rulings in favour of Fiat Finance and Trade (FFT) and Starbucks in Luxembourg and the Netherlands respectively, amounted to unlawful “State aid”. As anticipated, the Commission decided that the rulings conferred a “selective advantage” on FTT and Starbucks that is illegal under EU State aid rules. Both companies must repay around €20 – 30 million in back taxes.

However, Starbucks has already announced its decision to appeal and it is expected that FTT will do the same. The appeals are likely to take at least two years, meaning that it will be some time before there is a clear EU position on transfer pricing rulings.

Whilst stressing that tax rulings are in principle perfectly legal and that any further investigations will be assessed on their own merits, the Commission does intend to continue enquiries into tax ruling practices in all EU member states.

Inevitably these decisions raise concerns for companies whose past rulings may now be open to fresh scrutiny. Consequently, directors may consider that further legal and strategic advice, independent of those responsible for obtaining the rulings, may be needed to satisfy unsettled shareholders and other stakeholders.

Patent box consultation

HMRC and HM Treasury have published a consultation on changes to the UK’s preferential patent box regime. After pressure from Germany in particular the UK agreed to amend its rules to better link its benefits to the level of R&D expenditure. This is consistent with the BEPS objective of aligning taxing rights with the economic activity that generates them.

The consultation closes on 4 December and legislation is expected in next year’s Finance Act (to have effect from July 2016).

VAT: EU Commission guidance on services relating to land

The place where services are supplied can affect their VAT treatment. Services connected with land are generally supplied where the land is situated so the business providing those services must register and account for VAT in that country. Customers who use those services will be charged local VAT.

From 1 January 2017 new rules will clarify whether a service is connected with land. The European Commission has published guidance on how these new rules will operate. It will be of particular interest to those who supply and receive professional services relating to land in an EU country.

Penal tax rate on restitution interest

Companies that successfully make restitution claims for tax paid under a mistake of law (e.g. because the European Court has ruled UK law to be in breach of EU law) will be pay a special 45% rate of corporation tax on that interest. This is designed to reflect the tax rates prevailing over the period and counter the benefits of compound interest not being taxed as it accrues.

The measure applies with effect from 21 October. It does not affect statutory interest paid by HMRC.

Tribunal widens scope for appealing HMRC decisions

Following the Upper Tribunal decision in Vasiliki Raftopoulou, it may be possible to appeal a wider range of HMRC decisions.

The Tribunal held that a provision allowing taxpayers to do something outside the usual time limits where they have a “reasonable excuse” applies to voluntary matters, such as reclaiming overpaid tax, as well as those things that taxpayers are obliged to do, such as filing a tax return. It will be up to the tribunal to decide whether a taxpayer has a reasonable excuse.

This means it may be possible to appeal HMRC’s refusal to allow a claim simply because it is out of time.

The Upper Tribunal also held that:

  • for HMRC to open an enquiry into a claim it just needs to scrutinise it. It does not necessarily need to ask for extra information; and
  • an HMRC notice of enquiry and the notice closing that enquiry can be in same letter.

These points are significant because usually a taxpayer can only appeal an HMRC decision where HMRC has opened an enquiry and closed it.

Another case on VAT reclaims after leaving a VAT group

For the fourth time in two years the tribunal has had to consider what happens to a right to reclaim overpaid VAT after a company leaves a VAT group. Previous tribunals have reached different conclusions, which are being appealed.

In Gala Leisure Limited the First-tier tribunal held that the right to reclaim overpaid VAT from HMRC remains with the representative member of the VAT group, not the member of the group that made the relevant supplies. The right to reclaim could only pass to that member if it was impossible for the representative member to reclaim the VAT (e.g. because it had been liquidated).

The taxpayer has been given permission to appeal and it is hoped that this case will be joined with the earlier cases. In the meantime, where:

  • a right to reclaim VAT has arisen in respect of a supplies made by a VAT group; and
  • the member that made those supplies has left the VAT group

both the representative member of the VAT group and the former member should make protective claims to reclaim the VAT as soon as possible.

HMRC wins Rangers EBT appeal

HMRC has won its appeal to the Scottish Court of Session in respect of an employee benefit trust (EBT) scheme used for Rangers football club.

The scheme involved monies being paid into a family trust structure and loaned to the employee rather than being paid to the employee as salary. The aim was to avoid income tax and NICs.

The Court allowed HMRC’s appeal on the ground that the payment into the trust was a redirection of taxable earnings. The employer was, therefore, liable for PAYE income tax and NICs on the payments into the EBTs.

Employers that have used EBTs in similar circumstances should urgently review their arrangements to determine the impact of this decision.