Welcome to the latest edition of our Corporate Tax Update, written by members of RPC's tax team.
This month's update reports on some of the key developments from April 2022. This includes the launch of consultations by the OECD on aspects of the ground-breaking 'pillar 1' global tax reform rules, the making of regulations providing for stamp duties exemptions for certain issues of insurance-linked securities, and the publication of responses to the consultation on corporate re-domiciliation. We also consider the latest decisions (from the Court of Appeal) on IR35 employment status.
IR35 and employment status – two decisions from the Court of Appeal
On 26 April 2022, the Court of Appeal handed down two judgments on the application of the employment status test in the context of IR35 in cases involving radio presenters providing services via personal services companies (PSCs) to broadcasters. The judgments will be disappointing for the taxpayers concerned.
These decisions emphasise that even if the "mutuality of obligation" and "sufficient degree of control" tests are met, this does not itself create an irrebuttable presumption that there is an employment relationship. It is still necessary for the Court or Tribunal to make an overall qualitative assessment of the relationship, which is multi-factorial. The Court held that the key question was whether, judged objectively, the parties intended to create a relationship of employment. That intention, it said, is to be judged by the contract itself and the circumstances in which it was made.
In HMRC v Atholl House Productions Ltd1, the taxpayer was the personal services company of the journalist and broadcaster Kaye Adams. HMRC enquired into the contracts the PSC had with BBC Radio Scotland in the 2015/16 and 2016/17 tax years. The terms of the contracts:
- stated a minimum commitment of 160 programmes a year
- did not require that Ms Adams worked exclusively for the BBC
- gave the BBC a right of first call on Ms Adams' services, and
- gave the BBC a right to consent before Ms Adams could appear in other broadcast media intended for a UK or Irish audience
The Upper Tribunal had found in favour of the taxpayer, finding that despite the terms of the written agreements it was likely that the BBC would have been flexible if Ms Adams had wanted to pursue other commitments. The Upper Tribunal also decided it would be possible for Ms Adams to carry on business on her own account even if the BBC was her material income source, as otherwise many independent contractors would be considered employees. Ms Adams' economic dependence had to be considered in the context of her career overall and not restricted to the tax years under enquiry.
The Court allowed HMRC's appeal, accepting that the reasoning leading to the Upper Tribunal's decision had been flawed. The Tribunal, in the Court's view, had incorrectly focussed on the activities undertaken by Mr Adams in her different roles rather than the capacity in which they were performed. The case has been remitted to the Upper Tribunal
In Kickabout Productions Ltd v HMRC2 , the facts of the case concerned Paul Hawksbee, a radio presenter on Talksport radio, who had presented a radio show on Talksport, with a co-presenter, for eighteen years. For the three years under appeal (2012/13 to 2014/15), 90% of Mr Hawksbee's total income derived from this work carried out through Kickabout Productions Ltd (KPL), a personal service company established by Mr Hawksbee to provide his services. Payments were made by Talksport to KPL for the provision of Mr Hawksbee’s services. This was the only radio presenting work Mr Hawksbee had been involved in during this period. He and his co-presenter were free to decide on the format and content of the show, subject to constraints largely dictated by OFCOM's regulatory requirements.
There were two contracts in place between KPL and Talksport for the relevant period. Under each, KPL was required to make Mr Hawksbee available to present at least 222 shows each year.
The Court of Appeal upheld the Upper Tribunal decision that the relationship under the hypothetical contracts between Talksport and Mr Hawksbee was one of employment.
Insurance-linked securities – stamp duties exemption
On 25 April 2022, the Securitisation Companies and Qualifying Transformer Vehicles (Exemptions from Stamp Duties) Regulations 2022 (SI 2022/464) were made. The Regulations introduce bespoke stamp duty and SDRT exemptions for insurance-linked securities (ILS), with effect (broadly) from 17 May 2022.
The new statutory exemption should remove any uncertainty as to whether the stamp duty "loan capital" exemption should apply to ILS, at least for ILS that take the form of bonds. Relying on that exemption, before the introduction of the new ILS-specific exemption, could be in doubt in cases where ILS carry a right to interest that is (i) dependent on the results of a business or (ii) in excess of a "reasonable return" on the nominal amount of the capital.
However the Regulations:
- do not cover situations where ILS carry rights of conversion into, or acquisition of, other securities (other than, in either case, ILS issued by the same insurance SPV that would themselves be exempt from stamp duties).
- do not apply to insurance SPVs that fail to be eligible for the UK corporation tax exemption under the bespoke tax rules for ILS issuers.
- do not provide any stamp duties exemptions for ILS that take the form of shares.
The Regulations can be viewed here.
OECD 'Pillar 1' consultations
Two consultations were launched by the Organisation for Economic Co-operation and Development (OECD) in April. Each forms part of the 'pillar 1' aspect of the proposals for global tax reform, first announced in Summer 2021 and subsequently agreed by 137 members of the OECD, designed to address challenges arising from the digitalisation of the economy. The current tax rules have been dismissed as no longer being fit for purpose, in particular in a world where business is increasingly digitalised such that it is no longer necessary for multinationals to have a physical presence in the jurisdictions in which they do business.
By way of recap, pilar 1 concerns the reform of the international tax regime so that certain multinational companies will be required to pay tax where they do business3.
Pillar 1 'scope' consultation
The first consultation, launched on 4 April 2022, seeks views on draft rules that specify the groups and entities within the scope of the new jurisdictional taxing right that lies at the heart of the pillar 1 proposals. Broadly, the draft rules are aimed at capturing only the largest and most profitable businesses. Under the proposals, global firms with at least:
- a 10% profit margin, and
- total revenues above EUR20bn
would have 20% of any profit above the 10% margin reallocated and subjected to tax in the countries in which they operate.
The draft rules provide that the 10% profit threshold would need to be met (i) in the period of assessment, (ii) in 2 of the 4 previous periods, and (iii) on average across all 5 periods.
Whether the EUR20bn test should also be subject to equivalent past period and average tests (rather than just for the period of assessment) remains an open issue – views are specifically sought on this. Also an open item is whether these tests should be a permanent feature of the scope rules or, in the alternative, as an entry test (so that once a group first becomes subject to the new rules it remains so as long as the profit margin and revenue thresholds are met in respect of the period of assessment only).
The draft rules also include an anti-abuse provision to deter the artificial fragmentation of groups with a view to falling outside the new rules.
The consultation can be viewed here.
Extractive activity exclusion consultation
A second consultation was launched on 14 April 2022. This consultation looks at the exclusion, from amounts to be subject to the new pillar 1 taxing right, of profits from so-called "Extractive Activities".
To fall within this exclusion, groups must meet both (i) a product test (in that they must derive revenue from the sale of certain 'extractive' products) and (ii) an activities test (the group must carry out defined exploration, development or extractive activities).
The consultation states that the intent of the exclusion is to achieve the policy goal of excluding the economic rents generated from location-specific extractive resources, that should be taxed only in the source jurisdiction.
Extractive products, as defined in the draft rules, would very broadly include any solid, liquid or gas extracted from the earth's crust (including minerals and hydrocarbons). There are also detailed proposed definitions as to what should constitute exploration, development, and extraction.
The consultation can be viewed here.
Corporate re-domiciliation consultation – responses published
On 12 April 2022, a summary of responses to the government's consultation on a proposed UK corporate re-domiciliation regime was published. Under the proposals, a foreign-incorporated company would be able to change their place of incorporation to the UK, whilst maintaining their corporate legal identity.
On the tax side responses covered a number of areas, including:
- whether companies re-domiciling into the UK, and companies re-domiciling out from the UK (on the assumption that the regime would be a 2-way one), should be treated as automatically UK tax resident (for companies moving to the UK) and automatically ceasing to be UK tax resident (for companies moving out of the UK).
- whether existing UK tax rules would be sufficient to prevent, in certain circumstances, companies moving to the UK under any new regime only in order to be able to set foreign losses against UK profits.
- whether re-basing of assets of companies redomiciling into the UK would be required for chargeable gains purposes.
- the personal tax treatment of shareholders and directors in companies moving to the UK under any new regime (with a particular focus on inheritance tax treatment and tax treatment of 'non-doms').
- Stamp taxes and VAT treatment.
The summary of responses can be viewed here.