Back in 2021, HMRC promised to provide further guidance for large business on tax compliance as part of its review of tax administration for large businesses. That programme has now finally borne fruit with the publication of a number of guidelines for compliance (GfC), though you might find the taste of this fruit somewhat bittersweet. On the sweet side, it is obviously advantageous to have HMRC’s views on what it expects from businesses in terms of compliance activities. This, in principle, enables businesses to plan their processes to ensure that they are regarded as low risk by HMRC. However, on the bitter side, the guidelines are detailed, far-reaching, challenging and have a somewhat unexpected focus on documentation of the full process.
We see this as a new and important development within HMRC. Other areas, such as transfer pricing, have long recognised the need to fully document decision making processes as well as contractual and transactional elements within the supply chain. However, the focus on the need for documentation with the GfC8 for VAT appears to be new and it will be important for businesses to take this new focus on board in their processes and planning going forwards.
In this edition, as well as looking at GfC8, we also cover the following recent VAT and indirect tax developments:
- A further (final?) CJEU decision on the extent to which pension funds might (or otherwise) qualify as SIFs
- An important CJEU decision showing the limitations on the scope of the Reemtsma principle
- A case of historic interest only on its technical point (the prompt payment discount rules), but an evergreen lesson in relation to contractual terms.
We also have updates from across our European network, including the Netherlands.
In addition, we produce more detailed reports on the most significant tax developments so if you scroll to the bottom, there's a list of the most important issues we have covered, with links to our more detailed reports.
If you are interested in finding out more about the below or have a specific indirect tax query, please don't hesitate to get in touch.
GfC8: VAT guidance for compliance
The GfC for VAT (GfC8) is the latest in HMRC’s guidelines for compliance. The GfC set out HMRC’s recommended approach and are designed to help taxpayer’s understand HMRC’s expectations when planning, implementing and reviewing the accounting and compliance processes that ensure tax is accurately declared. Ultimately, the aim is to reduce uncertainty for UK businesses by providing greater clarity and transparency of HMRC's compliance expectations, highlighting approaches that can lead to inaccuracies and the need to pay more tax, interest and penalties.
GfC8 refers heavily to the use of business systems and processes for VAT compliance and the controls that businesses might put in place to reduce risks of errors within these processes. HMRC very clearly state that where risks are identified, they expect taxpayers to work towards improving compliance and review those systems and processes more often. As such, those responsible for VAT compliance within an organisation should be intimately familiar with these guidelines going forwards, which are detailed and wide-ranging in relation to the processes and controls that businesses should have in place to meet HMRC’s exacting standards and be regarded as low risk. Indeed, businesses may be surprised at the extent to which the guidelines set out not only those processes and controls that HMRC expect to see, but also the need to fully document them and the decision making processes involved in them.
Read our Insights article here
The Netherlands: pension funds, investment risk and VAT exemption
The question how far the exemption for supplies of investment management to special investment funds (SIFs) might apply to pension funds has a long history. That history is surely now coming to a close and the recent series of cases involving various Dutch pension schemes must be the last, or almost last, word on this topic. Perhaps the Wheels have finally come off …
In the recent joined cases X and others v Inspecteur van de Balastingdienst Maastricht (Joined Cases C-639/22 to C-644/22), the CJEU has held that, for the purpose of determining whether pension funds were comparable to UCITS, members will only bear the requisite investment risk where the pension amounts depend primarily on the performance of the pension investments. Although the final salary pension benefits in these cases could depend, to some extent and indirectly, on investment performance, to the extent that the pensions depended fundamentally on length of employment and final salary, this would mean that the pension funds did not meet the “investment risk” requirement to be comparable to UCITS.
On the other hand, the CJEU held that fiscal neutrality can (essentially) cascade. Accordingly, the Court indicated that it would be necessary for the domestic courts to consider not only whether the pension funds in this case are comparable to UCITS, but also whether they are comparable to other funds, which whilst not themselves UCITS, are regarded by the Netherlands as being SIFs.
Read our Insights article here
Limitations on the Reemtsma principle
The Reemtsma principle is an important exception to the rule that the recipient of a supply cannot look to the tax authorities for recovery of any excess VAT it has paid by mistake to its suppliers. It is limited to situations where it is impossible or excessively difficult for the recipient to recover overpaid amounts from the supplier, but it is still an important exception.
However, in H v Finanzamt M (Case C-83/23), the CJEU has recognised further significant restrictions on the operation of this principle. In particular, the CJEU has held that a tax authority will not be required to refund input VAT to a recipient where it has already refunded the overpaid output VAT to the supplier. In those circumstances, the normal chain of civil refund actions should apply and it is not the role of the Reemtmsa principle to, in effect, change the order of priority of creditors in a liquidation or require the tax authorities to refund the VAT twice.
Read our Insights article here
VAT and prompt payment discounts
From a technical perspective, the decision in TalkTalk Telecom Ltd v HMRC [2024] UKUT284 is entirely of historical interest. The prompt payment discount rules have since been amended to ensure that they no longer allow for the surely unintended interpretation the FTT and Upper Tribunal have given them in this case. The case remains, however, an interesting lesson in the need to consider how transactions are documented and ensure that it matches the intended VAT purpose.
The Upper Tribunal has held that a separate agreement varying the normal terms and conditions for telecom services was not one that provided for a discount for prompt payment:. The arrangements involved a variation or replacement of the terms on which bills were paid and only applied to those customers who accepted the variation. As such, the terms and conditions of payment for other customers were not affected and the consideration for VAT purposes of supplies to them was not reduced by the possibility of a prompt payment discount.
Read our Insights article here
Other issues we have recently covered
Contracts of employment: mutuality and control
The Supreme Court has considered the factors of mutuality and control in determining whether an employment contract exists in connection with the activities of part-time referees in HMRC v Professional Game Match Officials Ltd [2024] UKSC 29. The decision contains important guidance on the application of significant aspects of the legal analysis as to whether an employment contract exists for tax purposes such that income tax and NICs obligations fall on the employer.
New Transfer Pricing guidelines for compliance
HMRC has published guidelines on common risks in transfer pricing compliance setting out what HMRC sees as best practice for compliance and policy design. The guidelines contain a lengthy analysis of areas of risk and what HMRC sees as best practice for compliance and policy design in this area and should be required reading for affected businesses in indicating HMRC's expected benchmark for compliant transfer pricing policies, documentation and activities going forwards. They reflect areas in which we have seen HMRC focus over a number of years, and is an important resource for re-evaluating aspects which may be reviewed by HMRC during enquiries and how these may affect penalty positions.
The FTT has rejected the validity of HMRC's discovery assessment on the basis that there was no evidence that HMRC had actually made a "discovery" in the circumstances of the case: Lowe v HMRC [2024] UKFTT 826. The decision is a useful reminder of the burden on HMRC to demonstrate that a valid discovery had been made and that the tribunal will not simply assume that, because a discovery assessment has been issued, that burden has been met.
HMRC subject to strict requirements of unless order
The FTT has held that, in the case of a breach by HMRC of a mandatory unless order in case management directions, there is no discretion for the tribunal to nevertheless allow HMRC's application to proceed, based on the over-riding objectives to deal with cases fairly and justly: HMRC v Elite Management Consultancy Ltd [2024] UKFTT 567. As such, the decision stands as a stark warning for litigants (including HMRC) to comply with unless orders, even as to procedural requirements.
Judicial review and CPR Part 8 claims
The normal route for a tax appeal to take is via the statutory appeal process for the tax in question or, where the reasonableness or legality of a decision of HMRC is questioned, a claim for judicial review. However, in two recent cases the taxpayers have sought to use the potentially more advantageous route of a CPR Part 8 claim (which can generally be used where there are no significant factual disputes) to resolve the tax disputes in question. In both of these cases, however, the courts have held that this approach is an abuse of process and have struck out the claims.
No FTT jurisdiction for incorrect HMRC advice
Sewell v HMRC [2024] UKFTT 773 is another case involving, effectively, a public law challenge to HMRC’s decision to refuse to refund tax based on incorrect guidance given to the taxpayer. And it is another case in which, despite having great sympathy for the taxpayer, the FTT has held that it does not have the jurisdiction to entertain such an argument. Any such argument should have been brought by judicial review.
UK finance company CFC exemption and EU state aid
The CJEU has allowed the UK's appeal against the decision of the General Court upholding the Commission's state aid objections to the Group Finance Exemption under the UK's CFC rules: UK v European Commission (Case C-555/22). The CJEU held that the Commission and General Court were wrong to view the CFC rules alone as the correct reference framework against which any selective advantage should have been judged. Seen correctly, the CFC rules were an integral part of the UK's broader corporation tax rules and its approach to territoriality. Since the Commission and Court had identified the wrong reference framework, the decision on selectivity could not stand.
Dutch Budget: Pillar 2 proposals
On 17 September 2024, the Dutch Budget Day proposals were published, which include several proposals relating to the Dutch implementation of the Pillar 2 Rules contained in the Dutch Minimum Tax Act 2024 (MTA 2024). These Proposals include significant changes which are both designed to align the rules with further OECD guidance published after the MTA 2024 was enacted and also clarify some of the existing provisions.
CJEU holds Ireland provided illegal State aid to Apple
The CJEU has held that Ireland illegally provided State aid to Apple through tax rulings provided to the Irish branches of Apple entities. The Commission had been correct to consider that the Irish Apple branches had obtained a selective advantage in the form of a different tax treatment as a result of the rulings which were not justified by the nature or the general scheme of the Irish tax system.
Tax Disputes Quarterly – Autumn 2024
Sometimes tax disputes are about substantive questions of tax law. Their importance is narrow and deep: highly relevant to those faced with the same problem. Others are about procedure, and their application is much broader. Recent cases have skewed heavily in favour of procedure – so this month’s list is a guide to what to do, or not do, on issues from reliance on professional advice, HMRC guidance, and bringing different types of litigation to challenge HMRC.
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