Key Tax Cases -Summer Round Up

What payment should I accept?

The UK courts and tribunals have released a number of notable judgements in recent weeks. The cases should serve as useful precedents for the importance of clear drafting when it comes to tax.

Dodika v United Luck Group Holdings Ltd [2020] EWHC 2101.

This case centred on the interpretation of tax clauses in a share purchase agreement (“SPA’s”).
In this case, the High Court held that buyers had not validly given notice of a tax covenant claim in respect of a transfer pricing issue that was under investigation by the Slovenian authorities. Despite the notice giving enough detail as to the nature of the claim, it was deemed to have failed to give reasonable detail ‘of the matter which gave rise to such Claim’ as required by the SPA. It was construed that this phrase was referring to the ‘factual basis’ that was established during the tax investigation, which may result in a tax liability. Therefore, simply disclosing the existence of the investigation was not sufficient.

It was concluded that the buyers did not comply with the relevant provisions of the SPA, and as the buyers had no reasonable prospect of succeeding in trial, the court issued a summary judgment to allow theescrow funds to be released to the sellers.

Axa SA v Genworth Financial International Holdings LLC and others [2020] EWHC 2024.

The second notable casealso centred on the interpretation of tax clauses in aSPA, this time, in respect of losses resulting from the mis-selling of payment protection insurance.

The primary issue considered by the High Court centred on the interpretation of the tax gross-up clause which applies on the receipt of payment under the SPA. The decision focussed on the interpretation of the phrase ‘subject to Taxation in the hands of the receiving party’. The concept that the theoretical tax liability should apply, on the basis of the jurisdictions headline rate, was rejected. The gross-up should therefore compensate the recipient only to the extent that the payment was subject to an enforceable obligation to pay tax. It was also noted that if the parties had wished the gross-up to apply ‘upfront’ under the SPA, before any tax was actually due, this should have been expressed in ‘clear and distinct terms’.

In HMRC v Kickabout Productions Ltd [2020] UKUT 216.

The facts of this case were whether Mr Hawksbee, a radio broadcaster, of Talksport was an employee for the purposes of the IR35 legislation. This case is timely reminder of the difficulties in establishing whether a contractor is actually an employee, and whilst the implementation of IR35 has been postponed until April 2021 in the wake of the pandemic, it is remains a case worth noting.
The case centred around a hypothetical employment contract between Mr Hawksbee and Talksport. Mr Hawksbee hosted a three hour show daily for Talksport and had therefore established a personal service company called Kickabout Productions (“KPL”) through which he was paid. The tribunal therefore had to determine whether the payments made by Talksport to KPL were liable to PAYE and NICs because they fell within IR35 legislation.

It was determined, on the basis that Talksport was not obliged to provide KPL with any work, that there was no ‘mutuality of obligation’ and so that the hypothetical contract between Mr Hawksbee and Talksportcould not be construed as an employment contract. However,the tribunal did find that Talksport had engaged KPL to provide the services of Mr Hawksbee as the presenter of a three-hour radio at set times for a period of two years. This constituted ‘a binding commitment by Talksport to provide at least some work’ so that mutuality of obligations could in fact be established. AsTalksport did have control over the performance of his work and that other factors ‘were consistent’ with employment, it was eventually held that Mr Hawksbee would have been an employee under the hypothetical contract.

J Charman v HMRC [2020] UKUT 253
The final case considered two important issues; when is an employment-related share option granted, if exercise is contingent on continued employment; and what is the treatment of shares received on an exchange.

The Decision determined a number of questions concerning Mr Charman’s tax residence and his liability to UK taxation on salary, bonuses, restricted shares and share options. With permission of theFirst-tier Tribunal (‘FTT’), HMRC appeal against the FTT’s decision as to when certain share options were granted, and Mr Charman appeals against the FTT’s decision as to whether certain restricted shares were acquired as a director or employee.

The question of whether a right to acquire shares arose at the time when share options were granted or only when it vested, was considered, and it was eventually held that it was when share options are granted. Secondly, on the issue of whether shares issued on share-for-share exchange were acquired “as a director or employee” where original shares were so acquired, it was determined that this was the case.