Tax Bites – September 2024

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

News

Consultation on draft Pillar Two legislation

The government has published a consultation on draft legislation for the transitional country-by-country reporting safe harbour anti-arbitrage rule, which forms part of the UK's multinational top-up tax under Pillar Two. The deadline for comments is 15 September 2024.

The draft legislation amends Schedule 16, Finance (No 2) Act 2023, to adjust the calculation that determines access to the transitional safe harbour in instances where a member of a group has incurred disqualifying expense. Any such expense is required by the new rule to be added back in computing the aggregate profit or loss of the standard members of a group in a territory, thereby reducing the group's effective tax rate in a territory for the purposes of the safe harbour test. This is intended to make it more difficult for companies to artificially structure transactions in such a way as to benefit from the safe harbour.

HMRC publishes Guidance on digital platform sales

HMRC has published new Guidance on 'Selling goods or services on a digital platform'. The Guidance confirms the details sellers need to provide when registering with digital platforms in order to comply with the OECD Model Reporting Rules for Digital Platforms. The details required depend on whether the seller is an individual or an entity, and platforms are entitled to ask for additional information, for example, to confirm a seller's identity.

The Guidance also confirms that platforms will report sellers' information to HMRC annually, unless the seller makes fewer than 30 sales of goods and receives less than €2,000 (approximately £1,700) in respect of those sales. HMRC can share information with the seller's country's tax authority if they are resident in a different jurisdiction. The Guidance emphasises the importance for sellers on digital platforms of keeping up to date with their tax obligations.

HMRC updates its off-payroll working Guidance

HMRC also updated its 'Deemed employer responsibilities under off-payroll working rules' Guidance. This Guidance helps clients and intermediaries establish whether they are the deemed employer of their contracted workers, for the purposes of IR35. The deemed employer is responsible for calculating and deducting income tax and National Insurance contributions (employer and employee) and paying these to HMRC, as well as any applicable apprenticeship levy.

Following the update, the Guidance now links to HMRC's 'Check employment status for tax' tool. A hirer, agency or worker can enter relevant information into the tool to receive a valid status determination statement that the worker is employed for tax purposes for this work; self-employed for tax purposes for this work; off-payroll working (IR35) rules apply; or off-payroll working (IR35) rules do not apply.

HMRC will stand by all determinations made by the tool (subject to the accuracy of the information entered).       

Additional information added to HMRC's Corporate Intangibles Research and Development manual

HMRC has added various additional information to its Corporate Intangibles Research and Development manual. The additions mostly mirror draft guidance provided earlier this year (see our May edition of Tax Bites), albeit with some simplifications and removals of detail. It will be important reading for any professional who advises on R&D claims. The provisions it discusses apply to accounting periods from 1 April 2024.

Case reports

Upper Tribunal confirms it’s the end of the road for HMRC's 'fishing expedition'

In HMRC v Jonathan Hitchins & Ors [2024] UKUT 00114, the Upper Tribunal (UT) upheld the First-tier Tribunal's (FTT) decision, confirming that it was entitled to have granted the taxpayers' applications, made pursuant to section 28A, Taxes Management Act 1970 (TMA), for a direction requiring HMRC to issue closure notices and bring to an end HMRC's enquiries into the taxpayers' affairs which amounted to a 'fishing expedition'.

One of the keenest areas of contention between HMRC and taxpayers is the length of time enquiries can take before they are finally concluded. As the relevant legislation does not provide a time limit by which HMRC is required to conclude an enquiry, enquiries often become unfocussed and protracted. There will therefore be occasions when a taxpayer decides that an enquiry has gone on for long enough and wishes to bring it to an end. Section 28A, TMA, provides an effective mechanism by which taxpayers can do just that and taxpayers are increasingly choosing to make such an application. Although each case will depend on its own facts, the UT's decision in this case demonstrates that the tax tribunals will not shy away from compelling HMRC to close its enquiries when it is appropriate to do so.

It is also worth noting the UT's comments in this case in relation to preparing grounds of appeal and, in particular, its comments that the grounds should identify the precise nature of the error of law relied upon and why it constitutes an error of law.

You can read our commentary on the decision here

Upper Tribunal confirms that anti-abuse provision in UK/Ireland double tax treaty did not apply

In HMRC v Burlington Loan Management DAC [2024] UKUT 152 (TCC), the UT held that the anti-abuse rule in the UK/Ireland double tax treaty (DTT) did not apply to the assignment of a debt claim against a UK-resident company from a Cayman Islands company to an Irish company. The assignment was a legitimate commercial transaction and not an abuse of the UK/Ireland DTT, with the result that interest on the debt was to be taxed solely in Ireland.

This decision will be welcome news to secondary debt markets. It confirms that the anti-abuse provision in Article 12(5) of the UK/Ireland DTT does not necessarily apply to debt sales simply because the pricing makes an allowance for the fact that potential buyers could benefit from the withholding exemption. It should not be controversial that unconnected buyers and sellers can agree to pay less than 100% of the value of interest if the buyer can benefit from a withholding exemption and the seller cannot, otherwise it would not be profitable for either party to trade with the other party.

This decision confirms, contrary to HMRC’s view, that withholding tax arbitrage is not sufficient, in itself, to constitute treaty abuse. Allocating taxing rights over the interest to the jurisdiction of the buyer is consistent with the purpose of the treaty, which should be considered from the perspective of both treaty partners and not just the perspective of the UK.

You can read our commentary on the decision here

Tribunal allows taxpayer's appeal in part in case concerning deliberate and/or careless errors

In Shaun Harte v HMRC [2024] UKFTT 00493 (TC), the FTT allowed the taxpayer's appeal in part and reduced HMRC's assessments to income tax, penalties and VAT. HMRC identified errors in the taxpayer's 2014/15 self-assessment tax return and sought to apply the  'presumption of continuity' principle to conclude that similar errors were likely to have occurred in tax years 2009/10 to 2015/16.

This decision provides a helpful indication of the FTT's likely approach to HMRC's application of the 'presumption of continuity' principle and the limitations of that principle. In particular, whilst finding that HMRC satisfied the burden which was on it to establish a prima facie case that the discovery assessments which had been issued were valid (applying the extended time limit provisions), it could not be applied to errors that were not deliberate or careless, which would otherwise be time barred. This aspect of the decision will be welcomed by taxpayers.

You can read our commentary on the decision here

And finally...

Join us on 18 September2024 at Tower Bridge House for a masterclass on managing regulatory dawn raids. The conference will include  RPC partners Adam Craggs and Michelle Sloane providing a step-by-step walk through of a dawn raid. They will advise on key preparatory strategies and appropriate immediate responses.

More information on this event can be viewed here.