UK: Tax Appeals - Change In Court Procedure, In Force Now

As part of the Woolf reforms to the court procedure rules, some important changes to the tax appeals system came into force on 2 May 2000. They apply to all appeals to the courts on matters of income tax, corporation tax, stamp duty and VAT after that date - ie, they may affect tax disputes which are already in train. The following points are significant.

• The time limit for making an appeal to the High Court from the decision of the General or Special Commissioners or the VAT and Duties Tribunal is unchanged, and remains 56 days.

• Permission to appeal to the High Court is still not needed.

• However, it is now necessary to file a large number of documents when an appeal is lodged - importantly a skeleton argument.

This last is a new requirement and will mean that Counsel may need to be involved much earlier. A respondent to an appeal also has to file a skeleton argument not later than 21 days after receipt of the appellant's argument.

It follows that the timescale for tax litigation has been telescoped. Since victory in litigation often goes to the side which is better prepared, all those involved in tax disputes need to be aware of the practical implications of the Woolf changes.

The Tax Litigation specialists in KLegal, KPMG's associated law firm in the UK, will be happy to assist with any of these matters. Please contact James Bullock or Mark Whitehouse, on 020 7694 2550 and 020 7694 2590 respectively.

The recent changes to the CFC legislation in this year's Finance Bill have meant that existing CFC clearances may now no longer be effective for accounting periods beginning on or after 21 March 2000. All such clearances therefore need to be reviewed to determine whether or not they are affected by these changes.

Of particular concern would be existing clearances for low tax financing structures. These clearances may now no longer be effective due to the change to the '90% income' test requirement, ie 90% of the income of the holding company must now be in the form of non-tax deductible dividends and therefore interest income will now be 'bad' income for the purposes of this test.

As a consequence of the changes, an overseas holding company which finances its subsidiaries with debt will no longer be able to satisfy the exempt activities test and may be forced to follow an 'acceptable distribution policy' to avoid an apportionment. Taken together with the changes to the rules on double tax relief and the abolition of mixing, the payment of an acceptable distribution may result in a substantial additional UK tax cost due to the low underlying tax credit on dividends paid to the UK from this type of structure.

However, exemption may be possible under the motive test to the extent that it can be demonstrated that the main purpose of the structure was not the avoidance of UK tax. Clearance applications relying on the motive test are case specific and require considerable disclosure to the Inland Revenue; however, if the facts support it, an application under the motive test may be beneficial ie, it avoids the need to consider restructuring.

For assistance in reviewing the status of CFCs following the Finance Bill changes, and in making revised clearance applications where appropriate, please speak to your usual KPMG tax contact.

Bibby v Prudential Assurance Co Ltd; Oakes v The Equitable Life Assurance Society, which were recently heard together in the High Court, addressed the recoverability of tax credits on share buybacks for, respectively, a proprietary and a mutual life office. The High Court found in favour of the life offices. The substantive point is specific to the life assurance sector and has been overtaken by later legislation; however, in the course of his judgment Sir Richard Scott V-C made some important comments on statutory interpretation which are applicable to tax disputes generally.

'Ramsay v IRC makes clear that a literal construction of a taxing Act is not necessarily the correct one. The House of Lords in Ramsay was considering artificial tax avoidance schemes designed to make use of taxing provisions for purposes never intended by Parliament. The case signalled an end to some of the excesses that a literal approach to construction had appeared to invite. The warning against a literal construction that would permit the use of a taxing provision for a purpose never intended or contemplated by Parliament was directed at taxpayers, or their advisers, but must, in my judgment, be heeded also by the Revenue. The assessments in the present case have represented, in my view, an attempt to use s95 [Taxes Act 1988] for a purpose never intended or contemplated by Parliament. Such an attempt is no more acceptable from the Revenue than it would be from a taxpayer.'

Two observations may be made on this. Firstly, the life assurance tax regime is notoriously detailed and technical, so the Vice-Chancellor's stress on the overall purpose of the legislation is striking. A similar approach could perhaps be used to resolve apparent anomalies in other intractable parts of tax law - such as FOREX. Secondly, the Vice-Chancellor's approach is reminiscent of Lord Nolan's definition of tax avoidance (for the purposes of s741 Taxes Act 1988) in CIR v Willoughby as 'a course of action designed to conflict with or defeat the evident intention of Parliament'. However, the same reservation must apply to both: the intention of Parliament is, unfortunately, not always evident.

Ramsay has been a powerful weapon in the Inland Revenue's hands for almost twenty years. The Prudential and Equitable Life decision makes it clear that this weapon cuts both ways. For further information, or assistance in wielding this two-edged sword, please speak to your usual KPMG tax contact.

 Press releases - w/e 26.5.00

23 May 2000 - Customs & Excise - Get an extra week to pay your VAT

Businesses paying their VAT electronically from 31 May will have an extra week to submit their VAT returns and pay their VAT.

24 May 2000 - Cabinet Office - Government acts to reduce Revenue and Customs red tape

The Inland Revenue will publish next month plans to simplify the handling of national insurance contributions.

For further information, please speak to your usual KPMG tax contact.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.