May 2020 Tax Investigation Round Up

May's round up of the latest tax investigation news and cases:

• IR35 rules declared 'flawed' by House of Lords review
• Opera house loses Upper Tribunal appeal
• Tax haven multi-nationals denied Covid-19 aid

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IR35 rules declared 'flawed' as reforms are called for

A committee report prepared by the House of Lords looking into the scheduled off-payroll working rules (IR35) has identified what it calls ‘inherent flaws and unfairness’ that require an overhaul of the new legislation.

To the relief of thousands of individuals who will be negatively affected by the extended IR35 reforms in both the public sector and private sector, the outbreak of Covid-19 saw the scheduled off-payroll working changes deferred for a year.

More good news for those individuals has now come following a review carried out by the House of Lords economic affairs finance bill sub-committee who reached the conclusion that this extra time should be used to completely overhaul the legislation.

This is in light of concerns raised by the committee’s review suggesting the government has been to quick to create and implement the reforms without sufficient analysis of unintended behavioural consequences that could emerge as a result of the reform.

The report, titled the Taylor Review, is urging the government to accelerate its implementation of the proposed improvements with a view to creating a more level playing field with regards to tax, rights and risk across all the different forms of employment. This would entail a far wider reaching reform, moving from the handling of IR35 in isolation to a comprehensive update to the treatment of workers, employees, employers, contractors and the self-employed.

Although the government has agreed to carry out external research into the matter to assess the impact of the reforms, it is already the case that contractors are being laid off, despite the one-year delay. The chair of the committee welcomed the governments deferral but stressed their enquiry found the new rules “to be riddled with problems, unfairness, and unintended consequences.”

Lord Forsyth went on to express his concerns around the impact that will be had next year when the deferral expires and the reforms can back into force, questioning “how prepared will businesses recovering from the crisis be to take on this extra burden?”.

Ice cream sales tribunal goes against opera house

An Upper Tribunal appeal in relation to the sales of ice cream and champagne at a Royal Opera House venue has gone in favour of HMRC.

Despite being a registered charitable theatre falling under the cultural VAT exemption, the Royal Opera House Covent Garden Foundation was deemed by HMRC to be operating in a way that was ‘not fair and reasonable’ resulting in HMRC exercising powers to override the standard method.

Whilst the opera house has exempt income from ticket sales, it also had taxable income from sponsorship, ice cream and other catering. Based on their own calculations, they recovered a significant portion of VAT on production costs, on the basis that better production was linked to income generated from catering outlets.

HMRC did not share this interpretation of the rules and declared the level of VAT recovery to be ‘unfair’ which resulted in an override of the standard method, reducing the level of VAT recovery. The opera house successfully contested this at a First Tier Tribunal.

Consequently, HMRC escalated the dispute to the Upper Tribunal where the ruling went in favour of HMRC and established that the link between production costs and the catering supplies was indirect.

Teri Bruce of Dains made comment that: “The decision has a direct impact on theatres but may have wider ramifications for any partly exempt business or charity as it gives support to HMRC’s argument that input tax is only recoverable where it has a direct and immediate link to, or is a cost component of, taxable supplies made by a business.”. As of yet, it is unclear if the opera house will be appealing the decision.

Tax haven multi-national denied Covid-19 grants

Multi-national organisations with head offices registered in tax havens have been refused taxpayer funded Covid-19 grants by Poland and Denmark, making them the first countries in the EU to take the stance.

Giant trans-border corporations, the likes of Amazon, Google and Starbucks, are facing reduced financial aid from the two countries who have taken different and unique approaches to supporting their respective economies whilst combating Covid-19 and keeping their populations safe.

In the most part, the multi-nationals impacted by these approaches are not new to the spotlight with regards to the handling of their tax affairs. For years now, they have been grilled by governments throughout the EU in relation to the complex, yet mostly legal, methods they use to funnel and divert profits tax.

In Denmark, the original proposed aid package of c. £47bn for companies whose revenues have been significantly impacted by the outbreak of the virus was subsequently amended to exclude any organisations registered in tax haven countries, with further additions pertaining to agreements to not pay dividends or make share buy-backs in 2020 or 2021.

A spokesperson from Denmark’s finance ministry said: “Companies seeking compensation after the extension of the schemes must pay the tax to which they are liable under international agreements and national rules.”

Poland’s £40bn ‘anti-crisis shield’ finance package is only supporting those companies that pay tax in the country. Speaking in no uncertain terms, Polish prime minister Mateusz Morawiecki said: “Let’s end tax havens which are the bane of modern economies.”

A spokesperson from the Tax Justice Network praised the approaches of both countries, saying they “are right to exclude corporations registered in tax havens from getting bailouts – economies cannot be rebuilt on top of a tax haven trapdoor.”