Contents

1. The UK: Company in Liquidation – When intention is not everything – Kevin Hindley and Warren Howells

2. The UK: Blackrock Holdco 5 LLC v HMRC: Unallowable Purpose and Transfer Pricing – Miles Dean and Zoe Wyatt

3.  India: Overview of IFSC and AIF regime in India – Sunil Gidwani
4. Private Client Update: Deemed Domicile in the UK – Julian Nelberg, Paul Lloyds and Luke Jenkinson
5. Private Client Case Review: Henkes v HMRC [2020] UKFTT 159 (TC) – Miles Dean and Andrew Parkes

1. The UK: Company in Liquidation – When intention is not everything

We were recently asked to assist a company that had closed due to Covid. The following straightforward question suddenly became quite complicated: “When did you cease to trade?”

Stop right now
All too often, a company stops trading as it is making unsustainable losses. When it does so, the tax system provides a little comfort by allowing any trade losses it makes in its last year of trading to be carried back three years, rather than the usual 12 months and this may well lead to a welcome tax refund.

By contrast, some expenditure incurred after the trade has ceased may no longer be allowable at all. This makes the date the company ceases to trade very important.

In the normal course of events, the date of cessation will be obvious. For example, if it’s a shop, the time the doors are locked on the last customer of the final day, but sometimes a trade pauses rather than ceases. Imagine a company has to move to larger premises and has to leave its old site at the end of April, but the new factory is not ready until the start of July. It is certainly possible that the trade came to a complete halt when the company left the old building, but it is highly unlikely that the trade ceased with a new trade commencing in July if all that happened was a move to larger premises. Never say never though, as whether a trade ceases is fact dependent and it is possible for a company to carry on one trade then move to another site and carry on a completely different trade.

The gap can be quite an extended one. In Kirk and Randall Ltd v Dunn 8 TC 663, for example, the hiatus was 6 years, during which time the company sold its premises, didn’t win a single piece of work and changed the way it conducted its business, but crucially it never stopped trying to win work and eventually did start again.

Contrast this with Marriott v Lane 69 TC 157, a retirement relief case which, from their Business Income Manual, HMRC expects to hold sway for trade losses too. Here, the owners of Torbay Aircraft Museum closed the museum with a view to reopening it on a new site. The museum never actually reopened and the date the business ceased was held to be the date that the temporary shutdown started. This was because the trade, as a question of fact, stopped at that point; that the closure was intended to be temporary didn’t change this date as the museum never opened again.

When
These two cases make for a good contrast. In one, a company finishes its current contracts, but despite trying various avenues can’t persuade anyone to give it work. If it was a shop, it was one that was open every day and had customers come in, but couldn’t entice any to make a purchase, until one great day when someone finally buys a pair of Showaddywaddy deely-boppers. In the other, the shop-keeper closes up and puts a sign in the window, “I’ll reopen when I feel like it” with the full intention of doing so, but goes home, and despite their good intentions, puts their feet up and several years later receives a cheque from a property developer who has turned their shop into flats.

Now, consider the situation in March this year. You have a successful hospitality business, one that has expanded recently and now Covid has taken a flame-thrower to your order book, then the Government shuts your doors. You realise that it will be a while before business picks up, even when you are allowed to open again. Therefore, to get some revenue, you repurpose some of your machinery to make different goods for sale over the internet. This makes a little money but not enough. Costs are mounting, the furlough scheme is winding down and it is becoming clear that customer confidence has taken an even bigger knock than you thought. You investigate whether you can cut costs and obtain enough funding until Covid is beaten and customers want your services again.

Sadly, the figures do not add up and you have to call in an Administrator who will try to get full value for the company’s assets including any trade losses. What you can do with these will depend on when the trade ceased. Was it when the Government closed your premises and you furloughed your staff? That shut down was due to be temporary, but the majority of staff never actually came back to work as they were made redundant and despite you, as the director, trying to secure new customers for next year/season, no bookings were taken before you called it a day.

How about the repurposed machinery, with goods rather than services being sold now? Does it matter if there are two trades or not?

The End
Both questions are fact dependent and on these facts we would suggest that the company ceased its single trade when the Administrator was called in. Although the staff had been on furlough and indeed the majority had been made redundant, the director had been trying to secure new contracts (as with Kirk and Randall), they had not gone home and watched Netflix. To use the shop analogy, although the physical premises were closed, the shop-keeper had been trying to make sales over the internet from their home, but no-one had clicked on the website. Still, the “business” was open for trade even if it was unsuccessful, and it is the activity that is important here, not the result. (In other circumstances, it may be the result rather than the activity that holds sway, hobby trading for instance.)

As regards one trade or two, the repurposed machinery was producing goods for sale rather than items to assist with the services that had been sold, the company had not bought anything new apart from some raw materials, no new people had been taken on, nor was the company reorganised in any way. Further, they didn’t intend to take on Ikea, once the world was back to normal the machines would go back to their old purpose as that was far more profitable. On balance there was one trade.

However, as regards the date of cessation you can see how easily it would be for a different date to be used, which could significantly affect the company and its shareholders. Imagine, if the director here had just gone home and watched Netflix. The date of cessation would, in this case have been March, not October and all of the costs from April to October would be post cessation expenses, and these losses would not have been available to be carried back against the previous trading profits.

If you have any queries regarding the effect of Covid on the taxation of your business, please contact:

Kevin Hindley
Partner
M: +44 7939 468 157
E: kevin.hindley@uk.Andersen.com

Warren Howells
Partner
M: +44 7876 712 951 or
E: warren.howells@uk.Andersen.com

2. The UK: Blackrock Holdco 5 LLC v HMRC: Unallowable Purpose and Transfer Pricing

On 3 November 2020 The First Tier Tribunal (FTT) published its decision in Blackrock Holdco 5 LLC v HMRC. Brief facts of the case are as follows:

• Blackrock Holdco 5 LLC (5LLC), a UK tax resident US LLC, entered into loans of US$4bn with its parent company to fund the acquisition of the US business of Barclays Global Investors (BGI).
• HMRC challenged the use of a UK borrower (5LLC) in a US chain of businesses under the loan relationship rules for unallowable purposes and transfer pricing legislation.
• HMRC argued that the effect of both sets of provisions was to reduce the UK finance cost deductions to nil.

5LLC was used rather than a UK incorporated company as there was concern, amongst other things, over potential changes to the US check the box election. 5LLC borrowed US$4bn from its parent (also a US LLC) and then contributed the funds in the form of equity to another US LLC which acquired the BGI business. Interest on the loan payable by 5LLC amounted to approximately US$200mn p.a., the issue being whether this was deductible for UK tax purposes.

Whilst HMRC were of the view that the UK’s ‘worldwide debt cap’ provisions did not apply (which would limit interest deductions to 10% of the total amount), they argued that the insertion of 5LLC was done to secure a tax advantage. Blackrock argued that the transaction would have gone ahead irrespective of the tax advantage.

The FTT had to consider the following:

Regarding transfer pricing:

1. would the loans have been entered into were the parties independent.

Regarding unallowable purpose:

1. whether a main purpose of LLC5 being a party to the loan relationships was to secure a tax advantage for itself or any other person; and
2. if the answer was yes, what amount of debit is attributable to that purpose.

Transfer Pricing
HMRC argued that it was necessary to consider the group as a whole and whether it would have structured the transaction differently if acting at arm’s length. The FTT rejected this, preferring the “separate entity approach” and the question of whether 5LLC would have been able to borrow the US$4bn, and if so on what terms.

Experts for both sides agreed that 5LLC would have been able to borrow the US$4bn albeit that additional covenants would have been required. HMRC argued that the need for additional covenants meant that the lending would not have been possible whilst Blackrock argued that the covenants simply affected the cost of the borrowing.

The FTT found in favour of Blackrock – that subject to obtaining the covenants a third party lender would have funded the deal.

Unallowable Purpose
The FTT found that one of the main purposes of inserting 5LLC into the arrangements was to secure a tax advantage, but there was also a commercial purpose in making the loan.

Sections 441 and 442 Corporation Taxes Act 2009 prohibit the deduction of interest and other financing costs to the extent that it is, on a just and reasonable apportionment, attributable to the unallowable purpose. Blackrock argued that 5LLC would have issued the loan notes had there been no tax advantage. The FTT accepted this, and that the tax advantage purpose did not increase the interest expense. On a just and reasonable basis therefore, all the interest expense was to be apportioned to the commercial main purpose and was wholly deductible.

The judge held that: ‘Having regard to all the circumstances of the case it is, in my judgment, clear that the securing of a tax advantage is an inevitable and inextricable consequence of the Loan between LLC4 and LLC5.’

Of course the judgment is hugely beneficial to Blackrock, but in the wider context is it right to conclude that because a loan gives rise to a tax deduction (ergo an advantage) there is de facto an unallowable purpose? This aspect of the decision has rightly been widely questioned.

Given the significant sums involved and the far-reaching consequences of the FTT’s decision it is highly likely that HMRC will appeal.

If you think you would be impacted by this and would like to discuss, or if you have any questions on the above, please do not hesitate to contact:

Miles Dean
Head of International Tax
M: +44 7785 770 431 or
E: miles.dean@uk.Andersen.com

Zoe Wyatt
Partner
M: +44 7909 786 144 or
E: zoe.wyatt@uk.Andersen.com

3. India: Overview of IFSC and AIF regime in India

In 2015, the Government of India (GOI) announced the first International Financial Service Center (IFSC) in India, in the state of Gujarat known as “Gujarat International Financial Tec-City” (GIFT City). An IFSC provides a platform to undertake financial services transactions by overseas financial institutions and overseas branches or subsidiaries of Indian financial institutions in foreign currency in India, which at present are carried on outside India.

The banking, capital markets and insurance sectors in the IFSC were, until recently, regulated by respective regulators: the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority of India (IRDAI). The capital market participants present in IFSC are the stock exchanges/commodity exchanges, clearing corporations, alternate investment funds (AIF), mutual funds, portfolio managers, etc., which were regulated by SEBI. Recently, the GOI has set-up a single window regulatory institution – International Financial Services Center Authority (IFSCA), from April 27, 2020, which is expected to accelerate the development of IFSC at GIFT City.

The IFSC Guidelines are framed to facilitate and regulate financial services relating to the securities market in an IFSC and promote India as an iInternational financial hub and fund management industry. In relation to AIFs operating in IFSC, the guidelines deal with matters such as:

• eligible investors;
• permissible investments; and
• criteria for sponsor/manager etc.

AIFs are categorised into three categories, Category I and II are mainly for investment in unlisted securities in India, and Category III is for investments in the listed space. AIFs established in an IFSC can invest in:

• securities issued by companies incorporated in India or a foreign jurisdiction;
• securities listed in an IFSC;
• securities issued by companies incorporated in an IFSC; and
• other permissible investments as per AIF Regulations.

Any entity set up in an IFSC is treated as a non-resident under the Indian exchange control regulations. A Category III IFSC AIF proposing to invest in Indian (onshore) exchanges is considered at par with an offshore fund and hence is required to obtain registration under the relevant SEBI Foreign Portfolio Investors (FPI) regulations to invest in India.

New tax framework for Cat III AIFs in IFSC
The GOI has taken various measures to operationalise the IFSC and has provided various incentives to units set up in the IFSC. In this context, GOI has recently introduced path-breaking changes in the Indian tax regime.

The recent amendments mentioned below, provide for the manner of taxation of Category III IFSC AIFs as well as its investors and bring the tax rates at par with those applicable to an offshore fund investing in India under the FPI route.

Exemption to Category III IFSC AIFs and its investors:
Until now, the exemption was limited to income from the transfer of specified securities listed on a stock exchange located in IFSC. The amendment expands the scope of this exemption to include the following:

• Transfer of Indian securities (other than shares of an Indian company). i.e. transfer of debt securities or derivatives instruments issued by Indian companies that are listed on Indian stock exchanges.
• Any income from securities issued by a non-resident (not having a permanent establishment in India) and where such income otherwise does not accrue or arise in India.
• Any income from a securitisation trust under the heading “profits and gains from business and profession.”
• Transfer of offshore securities traded in IFSC exchanges.

These changes not only seek to bring Category III IFSC AIFs at par with FPIs, but also provide certain additional incentives for investing through IFSC. For example, while capital gains earned by FPIs on the transfer of debt securities or derivatives issued by Indian companies are subject to tax in India, such income has now been made exempt from tax in the case of Category III IFSC AIFs. Also, Category III IFSC AIFs have been exempted from the alternate minimum tax. These incentives are provided in respect to income attributable to units held in AIFs by non-residents.

Further, any income accruing or arising to or received by unit holders from Category III IFSC AIF or on transfer of units in Category III IFSC AIFs are exempted from tax. Accordingly, any distributions made by Category III IFSC AIFs to its unit holders would not be subject to withholding tax in India.

Below we compare the applicable taxes and other applicable provisions of Category III IFSC AIFs vis-à-vis FPIs investing directly into India.

As is evident from above, the tax rates for Category III IFSC AIFs are now at par or more beneficial (in certain cases) as compared to FPIs investing directly into India. Also, the investment manager set-up in IFSC would get 100% corporate tax exemption for 10 consecutive years out of a block of 15 years (from date of approval from the regulator) in respect to income from business carried on in an IFSC.

The competitive tax regime provided for Category III IFSC AIFs should make IFSC very attractive and comparable to other popular fund jurisdictions such as Luxembourg, Cayman, Ireland, Mauritius, Singapore, etc. It is also expected to provide a boost to onshore the fund management industry. Therefore, fund managers should actively consider IFSC India as a favourable jurisdiction for the purpose of fund structuring.

For any questions or for further details, please do not hesitate to contact:

Sunil Gidwani
Director
T: +91 22 6173 7000
E: sunil.gidwani@nangia-andersen.com

4. Private Client Update: Deemed Domicile in the UK

HMRC are increasing their focus on people who are “deemed domiciled in the UK” following the 2017  changes to the domicile rules, and are starting to send “nudge” letters to affected individuals.  This affects individuals who have been resident in the UK for 15 out of the last 20 years.

Deemed Domicile
The Finance (No2) Act 2017 extended the Inheritance Tax concept of deemed domicile to Income Tax and Capital Gains Tax. Prior to the rule change, an individual who was a UK resident (for any period of time) and had a domicile of origin or a domicile of choice overseas could claim the remittance basis; paying a remittance basis charge of up to £90,000 instead of the tax due upon their worldwide income and gains that they left overseas. Under this system you could claim the remittance basis indefinitely, provided paying the £90,000 charge was more beneficial than paying UK tax on your foreign income and gains of course.

From 6 April 2017 – under the new rules – if an individual is not considered UK domiciled under English common law, they will be considered deemed domiciled in the UK for tax purposes if:

• the individual has been a resident in the UK for 15 of the last 20 tax years immediately before the tax year in question; or
• the individual is born in the UK; their domicile of origin is the UK; and is a UK resident for the tax year in question.

Individuals who meet either of these criteria are not allowed to claim the remittance basis of taxation. Instead, they are required to report, and will be taxed in the UK on, their worldwide income and gains.

HMRC ‘Nudge Letters’
Since late 2020, HMRC have started sending out ‘nudge letters’ to agents across the UK, notifying them that HMRC think that the 2017 rule changes may affect their clients.

HMRC are concerned that individuals who are now deemed UK domiciled, may not have declared their worldwide income and gains, as they do not realise the new rules apply to them.

If this has happened, such individuals may have submitted inaccurate tax returns for 2017-18 or later, if they have not declared their worldwide income and gains which are now subject to UK tax.

The nudge letters also remind individuals that they have the responsibility to submit accurate tax returns and the letters refer to the new deemed domicile rules, what an individual affected by the rules is required to disclose on their tax returns and how to determine whether any amendments to a 2017-18 or 2018-19 tax return is required.

The letter also explains what an individual must do if they have omitted any relevant tax liability, but it is not possible to make amendment to their 2018-19 UK tax return.

Penalties
Significant penalties can be imposed if you fail to properly report offshore matters. If you are deemed domiciled in the UK and do not report foreign income and gains, you may fall into an offshore category of penalties. HMRC then have a number of options available, such as:

• individual penalties ranging from the usual 0% to 100%, all the way up to 300% of the tax due on undisclosed income if it arises in countries that do not share information with HMRC;
• penalties of up to 10% of the value of the asset, on top of the penalties on the income or gains;
• “naming and shaming” by publishing your name and address; and
• pursuing criminal prosecution against you for failing to report offshore income and gains.

The penalties are greatly increased if a disclosure to HMRC is “prompted”. This is when you only make the disclosure to HMRC after receiving your own “nudge letter” or if HMRC open an enquiry into your tax affairs before you make a disclosure.

Then there are various other factors that influence the severity of the penalty imposed by HMRC, for example whether the non-compliance was deliberate or a mistake.

A defence to non-compliance and non-disclosure does exist where an individual has a ‘reasonable excuse’. However, this is an objective test that is analysed by looking at the facts of the case and, for offshore matters, what is considered a reasonable excuse is severely limited. This means that the success of any claim can not be guaranteed.

What Does this Mean for Me?
Nudge letters are issued by HMRC when a taxpayer fits a profile of someone who is likely to have made a mistake or deliberate error. An enquiry may then be opened by HMRC if they do not receive an appropriate reply to their “nudge”.

The potential penalties, and interest, on any undeclared income and gains mean it is important to act without delay if you believe you are affected.

If you think this could impact you and would like to discuss this further, or if you would like more information please contact:

Julian Nelberg
Partner
M: +44 7803 502 555
E: julian.nelberg@uk.Andersen.com

Paul Lloyds
Partner
M: +44 7518 810 993
E: paul.lloyds@uk.Andersen.com

Luke Jenkinson
Senior Associate
M: +44 7494 157 948
E: luke.jenkinson@uk.Andersen.com

5. Private Client Case Review: Henkes v HMRC [2020] UKFTT 159 (TC)

A long time ago in a galaxy far, far away the concept of domicile and its importance to tax matters was considered untouchable, sacrosanct if you like. However, a great deal has changed over the past 20 years or so to the way in which non-doms are taxed. There’s been a significant amount of tinkering around the edges that gives the impression that the UK is still a fabulous place to live for the fabulously wealthy, but the truth is the remittance basis ain’t what it was in the good ol’ days. The inexorable withering of the tax benefits available to non-doms (akin to death by a thousand cuts) is aided by seemingly pro-HMRC courts.

The recent First Tier Tribunal (FTT) case Henkes v HMRC [2020] is testament to this and, whilst very fact specific, is nonetheless a salient reminder that one’s domicile is not cast in stone.

The Facts

• Mr Henkes was born in Venezuela and is a Dutch citizen
• He was raised in South America and educated in the USA
• He has been resident in the UK since 1967, except for two short periods of non-residence during which he maintained a UK home, and had strong family connections to the UK.
• He and his wife also had a home in Spain, which they visited regularly with friends and family
• He has a non-UK domicile of origin (not disputed by HMRC)
• He claimed the remittance basis for the 2014/15 and 2015/16 tax years, only paying UK tax on foreing source income and gains to the extent remitted to the UK.
• HMRC raised an enquiry into these two tax years, assetting that Mr Henkes had acquired a domicile of choice in the UK and was therefore liable to worldwide taxation

After two years of assisting HMRC with their enquiry, Mr Henkes applied to the FTT to consider :

1. his application for a closure notice in relation to HMRC’s enquiries; and
2. his appeal against the information notice issued by HMRC.

HMRC’s view was that they could not issue any sort of closure notice without calculating the tax that they claimed was due given Mr Henkes had become (in their opinion) UK domiciled.  Instead, they issued an Information Notice requesting details of Mr Henkes’ foreign income and gains for the 2014/15 and 2015/16 tax years and for good measure also for the 2013/14 tax year, which was not under enquiry.

The FTT found there were two procedural questions to consider:

1. whether the FTT had jurisdiction to determine Mr Henkes’ domicile status; and
2. if it did, should it exercise its discretion to determine Mr Henkes’ domicile status.

The FTT decided it had both the jurisdiction to determine Mr Henkes’ domicile status and that it should exercise its discretion to determine Mr Henkes’ domicile as this was central to the application for a closure notice and the appeal against the information notice.

The FTT went on to find that Mr Henkes had indeed acquired a UK domicile. The following findings are of interest:

• Mr Henkes’ main residence was in the UK, not his Spanish holiday home;
• Mr Henkes had lived in the UK for a lengthy period of time and had strong family ties here;
• Mr Henkes did not have a meaningful connection with another country (although one might argue that citizenship and owning property that one visits is meaningful);
• Mr Henkes did not prove that he would leave the UK at some point in the future
• Mr Henkes had no intention of retiring
• Mrs Henkes was reluctant to leave the UK

It was therefore reasonable for HMRC to:

1. not issue closure notices in relation to its enquiries into the tax returns for 2014/2015 and 2015/2016; and
2. seek information on Mr Henkes’ worldwide assets in relation to these years.

Whilst a case at the FTT is not binding, long term non-doms should take notice. It illustrates the importance of maintaining strong ties with a country other than the UK and that intentions should be in line with actions, particularly husband and wife being aligned in this regard.

If you think this could impact you and would like to discuss this further, or if you would like more information please contact:

Miles Dean
Head of International Tax
M: +44 7785 770 431
E: miles.dean@uk.Andersen.com

Andrew Parkes
National Technical Director
M: +44 7522 229 589
E: andrew.parkes@uk.Andersen.com