The (Tax) League of Nations

14 November 2011

This may not come as a huge surprise to tax and finance directors up and down the country, but the UK has continued its slide down the international league table of tax competitiveness, according to a new report from PWC.

The UK is now ranked at number 18, compared to 16th position last year and 11th in 2006.  Looking beyond the headlines however, whilst the UK is undoubtedly heading in the wrong direction, the position is not quite so bleak as it seems at first glance. Ireland (5th), Canada (11th), Denmark (15th) and Switzerland (16th) are ranked above the UK, but the other countries ahead of the UK are generally 'tax havens' or oil based economies. None of the UK's main trading rivals, such as France and Germany, make the top 30.

Tax competitiveness is an imprecise term but there can be no doubt that since tax represents one of the single biggest costs to businesses it has a huge impact on how attractive the UK is as a place to do business. We would go further and suggest that it not just the level of tax which affects competitiveness, but also certainty (or lack of) over how taxes will be applied. This is why there has been so much concern in the business community over the potential introduction of a GAAR (General Anti-Avoidance Rule) to give HMRC wider powers to defeat transactions and arrangements where the main purpose is to secure a tax advantage. A GAAR would give HMRC enormous flexibility to challenge a whole host of entirely ordinary commercial transactions and this is perhaps why most other advanced economies have not opted to go down this route. The GAAR Study Group is expected to report to the government by the end of this month. If a GAAR is introduced it will have to be accompanied by genuine safeguards and opportunities for pre-transaction clearance from HMRC, otherwise the UK will find itself sliding further down the table.



The ECJ have released their eagerly awaited judgment in the long running battle between Rank Group Plc and HMRC over the VAT treatment of gaming machines (see Commissioners for HMRC v Rank Group Plc C-259/10 & C-260/10). In very broad terms, the case concerns whether the UK had infringed the principle of "fiscal neutrality" enshrined in the VAT Directive. The claim has two elements – the Mechanised Cash Bingo ("MCB") claim and the Slot Machines Claim.

The VAT treatment of MCB differed depending on whether games of MCB fell within section 14 or section 21 of the Betting and Gaming Act 1968. Where the stake per game was £0.50 or less and the cash value of the prize was £25 or less, the game fell within section 21 and was exempt from VAT. Other games were played under section 14 and thus attracted VAT. The VAT treatment of slot machines depended on whether the "random number generator" (which determines the result of a game) is incorporated within the machine or linked remotely. From the consumer's point of view there is no difference.

The ECJ held that as far as fiscal neutrality is concerned, it is enough that two supplies are identical or similar from the point of view of the consumer and meet the same needs of the consumer. It is not necessary to establish actual competition between the two supplies in question or to establish a distortion in competition as a result of the difference in treatment. Interestingly, the ECJ also dismissed HMRC's "due diligence" defence. HMRC had contended that the difference in treatment essentially arose because new technology for gaming machines developed after implementation of the national legislation, and sought to argue that provided HMRC had responded with due diligence to the new type of machine there would be no breach of fiscal neutrality. The ECJ rejected this approach and held that the direct effect of the VAT directive does not depend on the existence of a deliberate wrongful act or negligence by the member state.  ECJ did however rule that where HMRC has in practice treated certain supplies as exempt when they were actually taxable under national law, taxpayers cannot then rely on fiscal neutrality to seek repayment of VAT levied on comparable supplies.

Stay connected and subscribe to our latest insights and views 

Subscribe Here