Recent developments in UK tax disputes
Mark Whitehouse and Simon Wilks PwC Legal and PwC
There have been a number of features of the UK tax dispute landscape over the course of the past year which are worthy of note. In the first instance, the UK's Public Accounts Committee (PAC) has taken a keen interest in tax compliance and tax avoidance. The enquiries of the PAC have included within their remit a number of important issues for large corporate groups. The PAC has summoned large corporate entities to discuss their tax affairs, including corporate groups such as Starbucks, Google and Amazon. The result of this is that this has created an environment in which many large corporate groups find their tax affairs under unusually high scrutiny.
In addition, the settlement agreements of some of the large corporates have come under scrutiny. One of the most widely reported of these was that of Goldman Sachs, whose settlement with HM Revenue & Customs (HMRC) was the subject of a court case by UK Uncut Legal Action Ltd (UK Uncut Legal Action).
UK Uncut Legal Action's concern was that HMRC had agreed to accept approximately £30 million ($45.6 million), including interest, in relation to a tax liability where £40 million was due. UK Uncut Legal Action's challenge took the form of judicial review proceedings which in essence challenged whether HMRC had the power to accept a lesser sum than was due. The court held that HMRC was entitled to make the decision it did, although the judge was critical of HMRC's conduct of the matter.
Issues relating to EU law have been a strong feature of the UK's landscape.
The European Commission's Code of Conduct Group for Business Taxation is concerned with harmful tax competition within the EU, primarily whether new or existing tax measures comply with the EU's Code of Conduct for business taxation. The Code of Conduct group has had the UK's patent box regime on its agenda recently. Whether the UK's patent box regime might amount to a harmful tax measure will be considered further at the September 2013 meeting of the group. The Code of Conduct group is also considering Cyprus' regime for an intellectual property box.
The European Commission has produced a draft directive for a financial transaction tax (FTT) which is proceeding through the stages of EU legislation. The UK has challenged the draft FTT directive on the basis that the procedure for adopting the directive was not properly followed. The UK has filed an action for annulment, pursuant to article 263 of the Treaty on the Functioning of the EU (TFEU), and its grounds for challenge are that the use of the enhanced cooperation procedure is unlawful because it authorises the adoption of a tax with extraterritorial effects, which it considers to be contrary to article 327 TFEU and/or customary international law and/ or that it authorises the adoption of an FTT which imposes costs on non-participating member states, which it says is in breach of article 332 TFEU. The litigation is against the Council of the EU and has case reference C-209/13.
This does not amount to a full substantive challenge to the terms of the draft directive. It is widely considered that the substantive directive can only be challenged once it is no longer in draft form.
EU tax case law developments
There have been significant developments in the corporate tax cases challenging the UK's rules on the basis that they breach EU law.
The main case law developments in this field have been in the areas of dividend taxation and group relief. The Franked Investment Income Group Litigation Order (FII GLO) case, which concerns whether the UK's system of dividend taxation (and related advance corporation tax) were discriminatory under EU law, has generated three judgments since May 2012. A further judgment on similar issues is expected later on this year. Between the two main cases in the area, the taxation of dividends from both subsidiaries and portfolio holdings will be examined, and in relation to portfolio holdings, the regime in respect of life assurance companies will also be considered.
These cases are important particularly because they cover issues in relation to what type of remedy is available in EU tax cases, whether simple or compound interest is due, and limitation periods within which a claim must be made. In addition to these points on remedies, the cases also consider substantive topics such as whether providing a tax credit for tax paid in another country when the dividend is distributed is equivalent to exempting that dividend from tax.
One of the UK's key cases on group relief is currently in the Supreme Court. The case concerns the availability of group relief to corporate groups who have a subsidiary in the EU and wish to surrender the EU subsidiary's losses to a UK parent company. The Supreme Court has handed down its judgment on one of the issues in the case (HMRC v Marks and Spencer plc  UKSC 30), being the point at which a taxpayer must demonstrate that they satisfy the no possibilities test. The taxpayer won on this point, with the Supreme Court holding that the taxpayer must show that they satisfy the no possibilities test on the date on which they make their claim for group relief.
A further hearing and judgment is expected in the Marks & Spencer case before the Supreme Court has finally determined the matter, and the Supreme Court has indicated that it is keen to hear the matter as soon as is practicable.
Exit taxes have been the subject of recent legislation in the UK. Exit taxes are typically considered to be a charge to tax where an entity moves cross border and where the tax charge would not be due but for the cross border movement. These often take the form of deemed disposals when a company departs for another country.
EU law has historically held that exit taxes on individuals are not acceptable but it has only been relatively recent case law which has suggested that corporate exit taxes are to be considered in a similar way. The European Commission recently commenced infringement proceedings in respect of two provisions of the UK tax code which it considered to be exit charges.
The UK amended its legislation on exit taxes in Finance Bill 2013. The amendments focus on deemed disposals for corporate entities in certain circumstances and cover a broader range of taxes than are covered by the European Commission's infringement proceedings.
Code of Governance for Resolving Tax Disputes
Looking forward to the shape of the future landscape of tax controversy in the UK, HMRC has recently made some changes. HMRC issued a Code of Governance for Resolving Tax Disputes which sets out their internal governance arrangements for decisions on how tax disputes should be resolved without recourse to litigation. It is a detailed regime which includes a number of governance hurdles before litigation should be commenced. This document follows the Litigation Settlement Strategy (LSS) which was published in 2007 and refreshed in 2011. The Code of Governance is not designed to replace the LSS but to be part of a comprehensive plan for handling tax controversy in the UK. The Code of Governance states that its aim is to ensure that "the principles of the LSS are applied consistently in practice to the resolution of tax disputes".
On July 2 2013, HMRC released a document called "How we resolve Tax Disputes" which was the first annual report by the recently appointed Tax Assurance Commissioner, Edward Troup. The report outlines the changes made in HMRC following the National Audit Office's report and the PAC's report in 2011. The changes included the introduction of the role of Tax Assurance Commissioner, changes to the decision making model for large and sensitive cases, a systematic review programme, an enhanced role for the current Audit and Risk Committee, a new code of governance on settling tax disputes and an annual report on tax settlement work.