Tax Bites - December 2022

Welcome to the latest edition of RPC's Tax Bites - providing monthly bite-sized updates from the tax world.

News

HMRC updates its guidance on umbrella company engagement

HMRC has updated its guidance on the engagement of workers through umbrella companies. The guidance has been updated to include detailed sections on how umbrella companies operate in practice, umbrella workers' employment rights, the process for payments, and pay calculations. This is a valuable source of reference for all those who are either currently employed through an umbrella company or are contemplating entering into such an arrangement.

HMRC appears to be increasingly focussing on umbrella companies. This update follows the publication of Spotlight 60 which discusses HMRC's view of certain tax avoidance arrangements used by umbrella companies. This was discussed in the October edition of Tax Bites which you can read here.

Public Accounts Committee calls for evidence on UK's Digital Services Tax

The UK's Public Accounts Committee (PAC) has issued a call for evidence on the Digital Services Tax (DST). The tax was introduced in April 2020, and imposes a 2% tax on the revenues of large digital businesses that do business in the UK, such as search engines, social media companies and digital marketplaces.

The government is planning to replace the tax when the OECD's digital tax reforms have been agreed. As a result, the PAC is gathering evidence from senior officials at HMRC and the Treasury on the original purpose of DST and HMRC's approach to its implementation.

UK signs multilateral agreement on CRS and offshore structures

The UK government has signed the multilateral competent authority agreement (MCAA) on Common Reporting Standard (CRS) avoidance arrangements and opaque offshore structures, for the automatic exchange of information about arrangements that attempt to either circumvent the CRS or prevent the identification of beneficial owners of entities and trusts. The MCAA was also signed by 15 other jurisdictions.

The MCAA is drawn from the OECD's Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures, which was originally published in 2018. The rules are intended to provide tax authorities with guidance on CRS avoidance arrangements in order to more effectively combat such arrangements. The signing of this MCAA will enable domestic tax authorities to enforce compliance from both taxpayers and any intermediaries who are involved in such arrangements.

UK signs multilateral agreement to exchange information on income earned through digital platforms

The MCAA also enables the automatic exchange of information about income earned through digital platforms. In 2020, the OECD published the Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy (the Model Rules). The Model Rules were published as it was considered that the rapid proliferation of online platforms in both the sharing and gig economies posed challenges for tax authorities. The Model Rules are intended to enable the collection of information on transactions and income derived from such platforms. The signing of the MCAA further underlines the significance of cross-border collaboration on such matters between tax authorities.

Case reports

Tribunal allows unilateral credit for US withholding tax

In Aozora GMAC Investments Ltd v HMRC [2022] UKUT 258 (TCC), the Upper Tribunal (UT) upheld the decision of the First-tier Tribunal (FTT) that section 793A(3), Income and Corporation Taxes Act 1988, did not prevent a UK taxpayer obtaining unilateral relief from UK tax in respect of US withholding tax despite failing to qualify for treaty relief due to the 'limitation on benefits' (LOB) clause in the US/UK double tax treaty.

The UT concluded that the circumstances in which section 793A(3) operated to deny credit were 'specified or described' in the relevant provision of a treaty. The LOB clause in the DTT was not a provision in which the denial of credit was specified or described. Instead, it had the effect of not obliging either party to grant treaty credits to a non-qualified person who did not meet the conditions set out in Article 23(3) or (4). The UT noted, in particular, that the US government had the discretion to allow relief. The proper interpretation of the LOB was that, to the extent that the DTT conferred benefits on residents, it was confined to qualified persons and others who satisfied the conditions set out in Article 23(3) or (4).

While the US was an early adopter of LOB clauses in its double tax treaties, they are becoming increasingly commonplace as a result of BEPS action 6 and the drive to prevent 'treaty shopping'. Although this decision cannot be directly read across to other treaties with LOB clauses, the narrow interpretation of section 793A(3) adopted by the UT (and in particular its note of caution regarding the consequences of adopting a broader interpretation) is welcome.

You can read our commentary on the decision here.

Tribunal dismisses HMRC's appeal and confirms that a tender support vessel was not a 'relevant asset' for the purposes of the oil contractor activities rules

In Dolphin Drilling Ltd v HMRC [2022] UKUT 00212 (TCC), the UT dismissed HMRC's appeal and confirmed that a tender support vessel providing tender assisted drilling services was not a 'relevant asset' and therefore the tax deductions claimed by the company under the oil contractor activities rules contained in Part 8ZA, Corporation Tax Act 2010, were allowed.

HMRC's main argument was that a use which was 'important' could not be incidental, or in the alternative, a use which was 'essential' could not be incidental. As there was no definition of 'incidental', or 'more than incidental', in the context of the exemption, the UT was of the view that these words should carry their ordinary meaning.

Although this decision will be of particular interest to those working in the oil and gas industry, the discussion at paragraphs 63–89 of the UT decision provides useful guidance on the meaning of the word 'incidental', which is a term used in other instances throughout the tax system. HMRC has applied for permission to appeal to the Court of Appeal and assuming permission is granted, it will be interesting to see whether that court disagrees with the FTT and UT.

You can read our commentary on the decision here.

Tribunal allows taxpayer's appeal and confirms its holding in another company constituted a 'structural asset'

In Guardian Assurance Ltd v HMRC [2022] UKFTT 234 (TC), the FTT allowed the taxpayer's appeal against HMRC's decision that its majority stake in another insurance company was not a 'structural asset' for the purposes of section 137, Finance Act 2012.

The FTT was not persuaded by HMRC's argument that the shareholding was 'at risk' in the business and that any investment income should therefore be treated as trading income. Nor did it find HMRC's arguments, that Guardian's policyholders benefitted more than its shareholders from the asset, helpful in determining whether the asset was structural.

The FTT confirmed that a 'structural asset', for the purpose of section 137, means an asset that is held as part of the relevant insurance company’s trading structure. The decision provides a degree of certainty that such an asset will comprise fixed as opposed to circulating capital, although not all fixed capital assets will constitute 'structural' assets. Helpfully, the FTT identified a number of factors which it considered important in determining whether an asset was 'structural', such as the length of holding and the nature of the business.

You can read our commentary on the decision here.

And finally...

We will shortly be launching a number of new and exciting tools and apps designed to aid tax professionals and their clients. Watch this space…