Follower Notices and Accelerated Payments
The UK Finance Act 2014, enacted in July 2014, contains new legislation to deal with cases of purported tax avoidance, which marks a radical departure from previous policy in this area.
Until Finance Act 2014, it was generally the case that where a taxpayer contested a direct tax assessment made by a tax authority, the appeal would suspend the need for paying the disputed liability (although interest would continue to run should the taxpayer prove to be unsuccessful). As part of its strategy to combat what it perceives to be unacceptable tax avoidance, the UK government has introduced legislation that reverses this principle in certain cases.
Under the new legislation, the UK tax authorities may issue so-called accelerated payment notices provided certain conditions are satisfied. In particular, notices may be issued where the arrangements giving rise to the tax dispute were earlier disclosed to HMRC under the disclosure of tax avoidance regulations (“DOTAS”). Under those regulations, avoidance arrangements promoters (or scheme users where there is no promoter) are required to notify of tax avoidance arrangements if they meet certain conditions. Once notified, the arrangements are given a scheme number, and a taxpayer entering into the arrangements is required to include the scheme number in his tax return.
HMRC has already issued a large number of accelerated payment notices for arrangements that are being litigated and that were disclosed under DOTAS. There are very limited grounds for appealing an accelerated payment notice once it has been issued. The only grounds for appeal (outside the notice having been issued when the required conditions were not met) are that the amount of tax set out in the accelerated payment notice is incorrect. If the taxpayer believes this is the case, he has a limited amount of time to make representations to HMRC. If no representations are made or if they are dismissed, the amount specified must be paid within 90 days of the issue of the accelerated payment notice or the representations being dismissed.
Finance Act 2014 also contains provisions under which HMRC may issue so-called follower notices. These notices can be issued where a court ruling has been handed down in relation to a particular matter and HMRC believes that the ruling is relevant to an inquiry or appeal. Although on its face the legislation is not limited to marketed avoidance schemes, HMRC has stated that it would apply the legislation mainly in this area. Taxpayers receiving follower notices are not required to settle their case, but they will face specific penalties if they do not.
SDLT and Property Investment Funds
The UK government has announced that it will be looking at whether any changes are needed to current stamp duty land tax (“SDLT”) rules to cater for two specific forms of collective investment scheme designed for investors in the UK market.
HMRC estimates that there is currently £60 billion of real estate in various forms of collective investment schemes, including schemes that are domiciled offshore. The real estate is largely commercial, rather than residential, and is held in a wide variety of vehicles. In addition, insurance companies and pension funds are thought to hold as much as £78 billion of UK real estate, again large commercial in nature.
In response to the demand for tax-efficient investment vehicles, the UK government has created two specific fund structures. Property authorized investment funds (“PAIFs”) are open ended investment companies that are authorized by the UK’s Financial Conduct Authority and that can invest in real estate directly or indirectly though shares in UK real estate investment trusts and similar offshore entities. Authorized contractual schemes were introduced in 2013, and the first such scheme has recently been launched in the market.
HMRC is consulting on the introduction of a seeding relief from SDLT for PAIFs under which the initial transfer of real estate to a PAIF would be exempted from SDLT. A previous similar relief for unauthorized unit trusts was withdrawn in 2006 because it was used as an avoidance mechanism, and HMRC is therefore careful to stress that the relief will be properly targeted.
Authorized contractual schemes are fully transparent and a transfer of an interest in such a scheme is treated in the same way as a transfer of the real estate itself. The government is consulting on the introduction of a relief for transfers of interest in these schemes (including a relief for the initial issue of units). In order to prevent avoidance, a specific charge would be introduced on acquisitions of real estate from connected parties.
Further Reference to CJEU on Card Handling Charges
The First Tier Tax Tribunal has referred certain questions regarding the liability for VAT of card handling charges to the Court of Justice of the European Union (“CJEU”) in the case of Bookit Ltd v The Commissioners For Her Majesty’s Revenue & Customs.
Bookit had previously litigated the VAT treatment of card handling charges in 2006. At that time, the Court of Appeal held that the card handling charges were exempt from VAT and fell within the exclusion for transactions concerning deposit and current account payments, checks, and other negotiable instruments in the Council Directive 2006/112/EC.
The Tribunal found that there were sufficient grounds on which to refer a question to CJEU on whether the card handling fees were exempt or not. In particular, the Tribunal found that it was unclear what factors distinguish the provision of financial information without which a payment would not be made. In a previous CJEU case, those factors had been held not to fall within the exemption, but data handling services, which functionally have the effect of transferring funds, CJEU had accepted were within the exemption. The tribunal dismissed an argument based on abuse of rights raised by the UK tax authorities in relation to the arrangements in the Bookit case.
As is sometimes the case, successive CJEU decisions on card handling charges have created some confusion as to whether the supply concerned is exempt. This is especially the case here because the decision turns on the exact nature of the services provided and the technical aspects of the process of transferring funds. As card handling charges have become extremely common, the reference to CJEU should provide much-needed clarity on the scope of the exemption.
