Update: corporate tax

HMRC have clarified the VAT position on deposits paid in 'golden brick' arrangements (VAT brief 36/09).

When a builder is constructing houses for a registered social landlord (RSL) such as a housing association, there can be a VAT loss. The builder will want to sell the land as early as possible for cash flow purposes, and an early purchase may be better for the RSL in terms of drawing down grants. However, if the builder waives exemption from VAT on the land and charges VAT at standard rate on the sale, the RSL will not be able to recover the VAT as it will be making exempt supplies. On the other hand, if the builder makes an exempt sale, the builder will not be able to recover VAT on its expenditure.

The golden brick route is a long-standing arrangement designed to get around this problem. The parties enter a contract for sale and then the builder starts construction. When construction reaches the golden brick level '“ essentially when it is above foundation level '“ the sale completes. The builder is then selling a part-constructed residential property which will be zero rated, resulting in no VAT loss for either party.

The issue that has arisen is how a deposit paid on entering the contract will be treated. A deposit will not give rise to a VAT point if it is held as stakeholder. However, increasingly, builders want the deposit to be held as agent so that they can have access to it. This results in there being a VAT supply at the time the deposit is paid. The question is, does that supply fall within the golden brick provisions, given that at this stage the building probably has not reached the golden brick level?

The VAT brief confirms that golden brick treatment can apply to the deposit even though at that stage construction has not proceeded to the golden brick level. However, the contract must make clear that what will be transferred at completion will be a partly completed building, beyond the golden brick stage, and that the seller is the 'person constructing' for VAT purposes.

If at completion, what is transferred is not a partly completed building, or the other requirements for zero rating have not been satisfied, the VAT treatment of the deposit may need to be revisited.

This is good news for developers as it removes an obstacle to them having access to the deposit, which is particularly important given the squeeze on cash flow at the moment. For advisers, it will be necessary when drafting agreements to bear in mind the HMRC requirement that the agreements make clear that the golden brick requirements will be met at completion if this type of arrangement is intended.

Acquisition of property by charities

Changes to the VAT treatment of the acquisition of property by charities are announced in VAT information sheet 08/09.

The construction or acquisition of a building which is to be used solely for a 'relevant charitable purpose' (RCP) is zero rated for VAT purposes. However, RCP excludes business use and as, broadly speaking, anything that involves charging can be a business for VAT purposes even if the charge is below cost price, problems can arise where there is to be a small business element in the use of the building.

ESC 3.29 therefore provided that zero rating could still be available if the building was to be used for a RCP on at least a 90 per cent basis. The 90 per cent test had to be met on one of three measures: time, floor space or headcount. In practice, the test could be hard to satisfy, especially when the activities of the charity were not clearly separated.

ESC 3.29 is now being withdrawn, subject to transitional provisions. Instead, HMRC has now said that it will interpret 'solely' to mean used at least 95 per cent for a RCP calculated on a 'fair and equitable basis'.

The transitional provisions allow advantage still to be taken of ESC 3.29 where, in the case of construction, a start to construction has been made before 30 June 2010 and it is intended to proceed to completion of the building without interruption and, in the case of a sale, where a 'meaningful deposit' has been paid before 30 June 2010.

Charities may need to review their position if intending to purchase a new building or renew an existing lease to see whether they can take advantage of the new rules. Although the increase from 90 to 95 per cent will exclude some charities, the greater flexibility of the 'fair and reasonable' approach may benefit others. Obviously, where a charity would benefit under ESC 3.29 but will not fall under the new rules, it should be considered whether use can be made of the transitional provisions.

Costs incurred on the sale of shares

Finally, on VAT, another ECJ decision raises as many questions as it answers.

Case C-29/08 Skatteverket v AB SKF dealt with the vexed question of VAT recovery on costs incurred on the sale of shares in a company by its holding company. The first question in this situation is whether the sale of shares by the holding company amounts to an economic activity for VAT purposes. It is clear that the mere sale of shares does not by itself necessarily amount to an economic activity. However, where, as in this case, the holding company was actively involved in the affairs of the company by supplying administrative, accounting and marketing services, a sale of shares could fall within the economic activities of the holding company.

As the sale of shares is exempt for VAT purposes, the conventional '“ or at least the Revenue '“ view is that that is an end to the matter, the holding company has made an exempt supply and therefore cannot recover VAT on costs incurred in connection with the exempt supply.

This case suggests two ways around this. First, the court suggested that the transfer of shares could amount the transfer of a going concern (TOGC) in the same way as the sale of the assets of the company. If the sale was a TOGC, it would be outside the scope of VAT and the costs would fall into general overhead expenses. However, as the court did not have the necessary facts to determine the issue in this case, the wording of the court on this issue is not as clear as one might have liked.

Secondly, the court held that if the sale of shares was not a TOGC, one had to look at whether the costs incurred were costs of the exempt supply or costs of the business of the holding company as a whole. The case was referred back to the national court to decide this.

This is a complex case but the message is clear '“ there are opportunities for arguing for the recovery of VAT on at least some of the costs incurred on the sale of shares. It is, however, likely that the Revenue is not going to change its basic position that all VAT is irrecoverable without substantial argument.

Legal professional privilege

Legal professional privilege, especially legal advice privilege, has for long been a bit of a bugbear for tax accountants. Why should lawyers giving tax advice have privilege and therefore not subject to Revenue information notices when tax accountants giving the same advice did not?

The latest challenge to this was R (on the application of Prudential PLC & Anor) v Special Commissioner of Income Tax [2009] EWHC 2494 (Admin). The High Court upheld the current position '“ that solicitors do have legal advice privilege and accountants do not. The court did, however, have some sympathy for the accountants' position but could not come to any other decision on the current law. Somewhat worryingly for solicitors, the court suggested that the way around the problem was not to extend legal advice privilege to tax accountants, but to take away legal advice privilege from tax lawyers.

Astall and Edwards v HMRC [2009] EWCA Civ 1010 is the latest case on tax avoidance schemes which develops WT Ramsay Limited v IRC (1982) AC 300 HL.

Ramsay established the principle that where there is a pre-ordained series of transactions in which steps have been inserted that serve no commercial purpose other than the avoidance of tax, for tax purposes those steps can be ignored and the overall transaction will be taxed as if those steps had not occurred.

One method used by tax planners to try to avoid the application of the Ramsay doctrine is to focus on the pre-ordained aspect. A tax scheme may therefore provide that one step in the overall scheme may only be taken if some objective condition is met. That condition is often related to movements in a market index, exchange rates or something similar. The aim is to set a condition which has sufficient chance of not being satisfied so as to be able the taxpayer to argue with the Revenue that the relevant step was not pre-ordained as there was a realistic chance of the condition not being met. However, the condition should not be more onerous than absolutely necessary as that is likely to make the scheme unworkable too often.

This was the position in Astall. Central to a tax avoidance scheme was the transfer by the taxpayer of some newly created loan notes. If the transactions were viewed as a single transaction, the required tax benefit would not be achieved. Therefore, a condition was inserted that the taxpayer could only transfer the loan notes if the sterling/dollar exchange rate fell within a certain range. There was an 85 per cent chance of that condition being met.

The taxpayer argued that because there was some uncertainty (15 per cent) that all the steps in the scheme would be completed, the court should not ignore the individual steps. However, the Court of Appeal held that no account should be taken of artificially contrived possibilities. The condition that had been inserted was irrelevant to the transaction; it was not a commercial requirement of the transaction and therefore could be ignored.

As mentioned above, this type of condition is a feature of various tax avoidance schemes. Advisers had thought that by introducing a real element of uncertainty into the structure, the Ramsay doctrine could be avoided. This case throws doubt on that; it appears that the degree of risk is irrelevant if the condition is artificially imposed and serves no commercial purpose.

A parliamentary debate?

When HMRC tried to impose penalties on Mr Bell for failing to file tax returns (IK Bell v HMRC [2009] UKFTT 270 (TC) (13 October 2009)), not for Mr Bell the old 'the dog ate the return' type of excuse. No, Mr Bell went all out on this one. He appealed the penalties on the basis that Parliament had illegally ceded sovereignty when passing the European Communities Act 1972. Accordingly, he was no longer obliged to comply with any Act of Parliament. He lost.