Welcome to the latest edition of our Corporate Tax Update, written by members of RPC's tax team. As this edition is the first of the New Year we hope that you, your family and friends had a restful and enjoyable end to 2021.
This month's update reports on some of the key developments from December 2021.
In this update we look at the publication by the OECD of draft model rules for domestic implementation of the forthcoming global minimum 15% tax rate, together with VAT decisions on recovery of VAT on professional fees in connection with a share sale and VAT treatment of lease break clause payments.
Guidance published on plastic packaging due diligence checks
On 30th December 2021, HMRC published guidance on due diligence checks for the plastic packaging tax (PPT). The PPT is to be introduced from 1 April 2022 and will apply to the production and import of plastic packaging with less than 30% recycled content.
The new guidance can be viewed here.
Lease break clause payment not subject to VAT
On 22nd December 2021, the Court of Session held1 that a payment made by a tenant to its landlord, to exercise an option to end the lease, was not subject to VAT.
The tenant had exercised a break option to terminate its lease. The lease required the tenant to make a payment to the landlord, plus any VAT "properly due" on such amount. The tenant did not include an amount of VAT in its payment and the landlord argued that the lease was not validly terminated as (1) it had opted to tax and (2) HMRC had changed its policy on termination payments, now considered (by HMRC) to be subject to VAT.
The Court of Session held that the lease had been validly terminated as no VAT was in fact properly due on the break clause payment as:
- At the time the break option had been exercised, HMRC had updated its guidance (VAT (Revenue and Customs Brief 12 (2020)) such that the change of policy had been postponed indefinitely.
- HMRC's policy on termination payments, prior to publication of Brief 12, was based on the Lloyds Bank decision2. There had been no further relevant case law on the issue. The ECJ decisions which had influenced HMRC in the run-up to publication of Brief 12 were (in the Court's view) not in point as those ECJ decisions concerned payments that amounted to compensation for failure to complete a minimum contractual term. In this case, the minimum period under the lease had already expired by the time the tenant exercised the break clause.
- The requirement for the tenant to pay to the landlord any VAT "properly due" on the break payment did not provide the landlord with a means to frustrate the exercise of the break option.
The decision can be viewed here.
Global minimum tax rate – OECD publishes Pillar 2 model rules
On 20th December 2021, the OECD published the pillar 2 model rules for domestic implementation of a global minimum 15% tax rate. This follows on from the agreement reached, in October 2021, by 137 jurisdictions as part of the G20/OECD initiative to address concerns arising from the digitalisation of the economy.
By way of background, the OECD is proceeding with a 2-tier (or "pillar") approach to address perceived tax avoidance by multinational groups.
- Pillar 1: is aimed at achieving a so-called 'fairer' distribution of profits and taxing rights between jurisdictions.
- Pillar 2: is aimed at ending the so-called 'race to the bottom' for corporate income tax rates, by introducing a global minimum tax rate.
The stated aim is for Pillar 2 to become effective in 2023.
Pillar 2 is itself comprised of 2 rules:
- The Global anti-Base Erosion (GLOBE) rule. This provides for a 'top-up' tax for a parent with subsidiaries / permanent establishments in low-taxed jurisdictions.
- The Subject To Tax Rule (STTR). This is designed to prevent companies from making tax deductible payments (e.g. interest or royalty payments) that attract low withholding tax rates under an applicable double tax treaty and which are under-taxed in the other jurisdiction to the tax treaty.
The rules published by the OECD on 20th December relate to the GLOBE rule3. The minimum (15%) tax will apply to multinational groups with over €750m annual global revenue for at least 2 of the 4 years preceding the tested year. It has been estimated that it will result in c.$150bn extra tax, globally, each year.
The model rules act as a template for domestic governments to implement the agreed 2-pillar approach. The rules confirm that the 15% 'top-up' tax will generally be charged in the jurisdiction of the ultimate parent company. However, responsibility passes to the next highest intermediate entity in the chain, if for some reason the tax is not collected in the jurisdiction of the ultimate parent.
It has been confirmed that (amongst others) pension funds and (where they are parent entities) investment funds and real estate investment vehicles will not be subject to the Pillar 2 GLOBE rules.
We have been promised further commentary on the new rules early this year, which should include further background and examples. In particular this is expected to address the interaction between these new rules and the US 'GILTI' regime. A more detailed implementation framework (setting out the actual mechanics of the rules) is not expected before the middle of 2022.
Whilst the OECD draft model rules provide some further clarity on the global minimum tax rate, it is clear that the rules will be highly complex. There are 17 pages of new definitions! The further publications promised this year will, inevitably, be even more complex and even more highly-awaited.
The draft model rules can be viewed here.
VAT on Seller's professional fees recoverable – First-tier Tribunal
On 3rd December 2021, the First-tier Tribunal held4 that VAT incurred by a seller on professional fees in connection with the sale of its subsidiary was recoverable as input tax. The Tribunal rejected HMRC's argument that the share sale broke the necessary "direct and immediate" link between the VAT incurred and the seller's taxable activities. In summary:
- A company (Seller) incurred VAT on professional services supplied to it in connection with the sale of its subsidiary (Target).
- HMRC refused Seller's input VAT claim on the grounds that the sale of Target was an exempt supply (for VAT purposes).
- Target owned and operated a luxury hotel. Seller had provided management services to Target (and they formed part of a VAT group).
- Prior to sale of Target, Seller had decided to build a new hotel. To finance this, Seller decided to sell Target and use the sale proceeds.
- Seller incurred professional fees on which £77k of VAT was charged.
- The Tribunal held that the purpose of the sale of Target was to fund Seller's taxable activities (namely the construction and future management of the new hotel).
- Interestingly the Tribunal noted that the professional fees were not incorporated in the price of the Target shares. The professional fees were paid out of the share sale proceeds. The fees could therefore be regarded as a 'cost component' of the Seller's taxable activities (construction of the new hotel) and not a 'cost component' of the exempt share sale. In cases where VAT recovery is a major concern this may be helpful in terms of the drafting of the sale documentation.
The decision can be viewed here.