Corporate tax update – February 2023
Welcome to the latest edition of our Corporate Tax Update, written by members of RPC's tax team.
This month's update reports on some of the key developments from January 2023. This includes a summary of a recent decision on VAT recovery on transaction costs, government proposals for the reform of the UK R&D tax relief regime and changes to the way in which HMRC responds to VAT options to tax.
VAT on transaction costs – First-tier Tribunal decision in Ince Gordon Dadds
On 16 January 2023, the First-tier Tribunal held1 that input tax incurred by the taxpayer on fundraising costs was not recoverable as the funds were raised in order to purchase entities that would become additional customers of the taxpayer.
The input tax was incurred in connection with a 'reverse takeover', whereby Work Group plc (WG) acquired the shares of Ince Gordon Dadds plc (IGD), in order for IGD to become listed – through WG – on AIM. At the same time as the listing, WG raised £20m from new shareholders and joined the existing IGD VAT group.
The tribunal accepted that the supplies in question were made to WG, that WG had intended to join the IGD VAT group and that the costs incurred by WG had been for the purposes of raising the £20m of new funds.
However, the tribunal disagreed with and rejected the taxpayer's claims that:
- there was any evidence that WG intended the funds raised to be used for working capital. Rather, the tribunal held that the purpose of raising the funds was to finance further acquisitions.
- the addition of WG to the IGD VAT group meant that the required link between (1) the costs incurred and (2) the taxable activities of the VAT group was automatically established. As a matter of fact, the tribunal held that as the funds were raised for future acquisitions there was no such link; nor could the costs be characterised as general overheads for VAT recovery purposes.
The decision demonstrates the need, when looking at VAT recovery in the context of share acquisitions, to ensure that (1) the documentation clearly sets out the purpose of the acquisition, (2) if necessary, there will be a taxable activity of the party incurring the costs (for example through providing services to the target for consideration), and (3) if additional funds are being raised, there is a link between those funds and a taxable activity of the target (group).
The decision can be viewed here.
Regulations to replace DAC6-based rules in UK from 28 March 2023
On 16 January 2023, the International Tax Enforcement (Disclosable Arrangements) Regulations 2023 (Regulations) were made. The Regulations replace, from 28 March 2023, the UK legislation implementing the 'DAC6' rules. This has been expected ever since, following the end of the Brexit transition period, the UK government announced that DAC6 would apply in the UK only in limited circumstances (for an earlier update covering this, see here).
The primary effect of DAC6 is to require "intermediaries" to review, monitor and, potentially, to report to HMRC certain arrangements which both (1) are "cross-border" in nature and (2) meet certain specified "hallmarks". We considered the features of the 'DAC6' regime in a previous blog.
The Regulations are modelled on the OECD's mandatory disclosure rules for CRS avoidance arrangements and opaque offshore structures. It is expected that much of the existing HMRC guidance addressing the (much reduced scope) DAC6 as it applies in the UK will continue to apply to the new OECD-based disclosable arrangement regime.
R&D tax relief reform - consultation published
On 13 January 2023, HM Treasury published a consultation proposing the merger of the existing two R&D tax relief regimes (the SME scheme and the research and development expenditure credit (RDEC) scheme) into a single R&D scheme.
If the proposal goes ahead, the new single scheme will be in place from 1 April 2024.
The consultation seeks views on both the merits of the proposal and its design, which is to adopt a new 'above the line' RDEC-like R&D credit on the basis that:
- The existing SME scheme is prone to error and to fraud.
- Moving from two schemes to one would help to meet the general aim of simplification of the tax system.
- A 'threshold' under any new merged R&D scheme (such that a taxpayer would need to incur at least £x of qualifying R&D expenditure) may serve to keep administrative costs down and better guard against error and fraud.
The consultation can be viewed here.
VAT option to tax – HMRC no longer sending notification receipt letters
On 11 January 2023, HMRC announced that, from 1 February 2023, they will no longer issue VAT option to tax notification receipt letters.
The option to tax receipt letter from HMRC had been useful in evidential terms. For example, a seller might ask for it in the context of confirming a buyer's VAT position on a transfer of a business as a going concern.
Taxpayers opting to tax a property are best advised to notify HMRC of the option by email (to get the email auto-response that is still provided) and to keep a copy of their own email to HMRC.
Also, from 1 February, HMRC will no longer respond to requests from taxpayers as to whether they have opted to tax any particular property, unless the option date is over 6 years ago or the requesting party is an insolvency practitioner.
HMRC's announcement can be viewed here.
1In Ince Gordon Dadds LLP v HMRC  UKFTT 44 (TC).