Following the recent introduction of significant new planning legislation, our Planning team have outlined a useful guide to the new use class system and a guide to new permitted development rights.
Forsters advises specialist lender and investor in UK residential property, Hilltop Credit Partners on a £15 million loan to developer, Propiteer Group
23 February 2021
News
Banking and Finance Partner, Simon Collins, led the Forsters team to act for new client, Hilltop Credit Partners, to complete a £15 million loan to the Propiteer Group for a development project.
Propiteer will use the funds to refinance existing loans to deliver 100 private flats, including associated underground parking and cycle storage, on a brownfield site close to the River Nene and within walking distance of Peterborough Station and a number of retail centres.
The £120 million Fletton Quay regeneration area is being developed by the Peterborough Investment Partnership to create a vibrant multi-use development close to the city centre.
Jacob Andersen, head of transactions at Hilltop Credit Partners, said: “This project sits well with Hilltop’s appraisal of market conditions at the moment – regional towns are presenting amongst the most compelling cases for investment.”
Simon commented: “Great to get the first one off the blocks for Hilltop. Key takeaway was the great collaboration from all parties in getting the job over the line.”
On the deal, Simon was supported by Banking & Finance Senior Associate, Catriona Stenhouse, and Associate, Simona Cavasio. The Forsters team also included support from Construction Partner, Andrew Parker, and Associate, Caitlin Ervine, as well as Commercial Real Estate Partner, Ben Brayford, Senior Chartered Legal Executive, Lauren Archer, and Associate, Alexandra Townsend-Wheeler.
UK restriction of DAC6 Regulations following Brexit – good news for 2021
22 February 2021
News
The start of 2021 has had its ups and downs. However, the New Year brought some welcome news for lawyers, accountants and other professionals in the UK working on cross-border transactions and other arrangements, and for their clients.
What was the good news?
The good news related to the announcement with effect from 11pm on 31 December 2020 that the reporting requirements under “DAC6” as it applies in the UK are now restricted to cross-border arrangements falling within one specific category of hallmark, Category D, rather than all of Categories A to E listed in DAC6. This change has retrospective effect, so it takes effect from the original implementation of DAC6 into UK law on 1 July 2020.
What is DAC6?
“DAC6” is the European Union’s Directive on Administrative Co-operation in the Field of Taxation (Council Directive 2011/16). It is so-called because there have been five earlier such directives focusing on different fields.
On 1 July 2020, the International Tax Enforcement (Disclosable Arrangement) Regulations 2020 came into force in the UK. These implement the provisions of DAC6, requiring disclosure to the UK’s national tax authorities, Her Majesty’s Revenue and Customs (“HMRC”), of certain cross-border arrangements that potentially facilitate tax evasion or avoidance. Such arrangements are identified in DAC6 (and in the original UK implementing regulations) according to whether they meet certain hallmarks listed in Categories A to E.
So, what has changed?
Following the conclusion of the Free Trade Agreement between the EU and the UK, and with effect from the end of the Brexit transition period on 31 December 2020, the UK amended the DAC6 implementing regulations (the “DAC6 Regulations”, as so amended). The arrangements that require identification are now restricted to those meeting only one category of hallmark. This is Category D, relating to arrangements that seek either:
To undermine reporting obligations under the Common Reporting Standard (CRS).
To obscure the beneficial ownership of any legal arrangement or structure.
The CRS referred to in Hallmark D1 is an OECD initiative that requires jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. In most situations, it should be relatively straightforward to determine whether cross-border arrangements involve an effort to undermine obligations under the CRS.
In contrast, for the purposes of Hallmark D2, obscuring beneficial ownership is defined broadly as arrangements that involve non-transparent legal or beneficial ownership chains which use persons, arrangements or structures:
That do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises.
That are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures.
Where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive (EU) 2015/849 (the European Union’s fourth money laundering directive), are made unidentifiable.
Almost any cross-border nominee arrangement could fall within this definition. However, HMRC’s guidance in its internal manual is helpful in this regard, indicating that where a person is obliged to identify beneficial ownership under anti-money laundering legislation in accordance with FATF (the Financial Action Task Force), and successfully does so, this would generally mean that the test in the third limb of hallmark D2 was not met, as the beneficial owners would not be unidentifiable.
Given the stringent Know Your Client requirements to which UK and EU professionals are subject, it should be uncommon for this test to be met where professional intermediaries are involved. Of course, there may be circumstances under which the test is met nevertheless and, as a result, an arrangement would be reportable.
What constitutes an arrangement?
An “arrangement” for the purposes of the DAC6 Regulations is “any scheme, transaction or series of transactions”. However, this is not exhaustive, and it is generally necessary to look at any arrangement holistically, rather than looking at an arrangement as a series of small steps or separate transactions.
Where a pre-existing arrangement is being extended, this would not normally be viewed as a new arrangement, unless there is some material change.
Is an arrangement cross-border?
Following the end of the Brexit transition period, to be “cross-border” for the purposes of the DAC6 Regulations, an arrangement must concern either more than one “State”, defined as an EU Member State or the UK, or one State and a third country.
What are the requirements of DAC6 generally and the DAC6 Regulations?
Under DAC6, the obligation to report an arrangement to the tax authorities falls primarily upon intermediaries involved in promoting, planning or advising on relevant types of cross-border arrangements. If there is no intermediary involved in a transaction, or the intermediary is prevented from reporting, perhaps as a result of the application of the rules of legal professional privilege, the obligation to report falls on the taxpayer, assuming the taxpayer is resident in the UK or an EU Member State.
For UK intermediaries and UK resident taxpayers, who are subject to the DAC6 Regulations, if a cross-border arrangement does not fall within either of the Category D hallmarks, there is no obligation to report. However, if a taxpayer or an intermediary involved in such an arrangement is resident in an EU member state, they may have an obligation under DAC6 (as implemented in their jurisdiction) to report the arrangement to their own tax authorities if it falls within another category of hallmarks. As this is not a matter of UK law, it falls outside the scope of this article, but such an intermediary or taxpayer would have to determine the position under the law of the relevant member state.
What are the relevant dates for the purposes of the DAC6 Regulations?
DAC6 applies to reportable cross-border arrangements that were entered into on or after 25 June 2018. The original dates for first reports to be made were delayed in many EU countries, including the UK, as a result of the coronavirus pandemic.
In the UK, under the DAC6 Regulations, for arrangements made available for implementation or where the first step was implemented between 1 July and 31 December 2020, the new deadline for a report to be made was 30 January 2021.
Relevant arrangements entered into between 25 June 2018 and 30 June 2020 are reportable by 28 February 2021, and those which became or become reportable on or after 1 January 2021, must be reported within 30 days of the relevant date. This date will be the day after the reportable arrangement is made available, or is ready to be implemented (i.e. the design has been finalised), or when the first step in its implementation has been made. For intermediaries who are service providers, it could also be the day after aid, assistance or advice (including legal advice) is provided in respect of the arrangement.
Going forward
The reporting rules under the DAC6 Regulations are intended to be temporary. The UK Government plans to consult on and implement the OECD’s Mandatory Disclosure Rules as soon as practicable during the course of 2021. This is with a view to replacing DAC6 entirely and transitioning from European to international rules. In the meantime, however, the current reporting rules remain in place.
If you have any queries with regard to the DAC6 rules as they apply in the UK, please contact your usual Forsters’ contact or a member of our Regulatory group.
Nicole Aubin-Parvu is a Knowledge Development Lawyer, Julia Ramsden Gunduz is Counsel and Robert Payne is a Senior Associate in the Private Client team.
Implications of overseas working: Kelly Noel-Smith and Joe Beeston write for Taxation
19 February 2021
Views
Private Client Partner, Kelly Noel-Smith, and Senior Employment Associate, Joe Beeston’s article entitled ‘Implications for employers of overseas working’ has been published in Taxation.
The pandemic has meant that remote working has become the ‘new normal’ for many worldwide, and with that, some employees are choosing to take this opportunity to spend time working in other jurisdictions.
Kelly and Joe explain that there are specific tax and employment issues to consider in these scenarios, and caution that advice should be taken to mitigate any risks.
In their article, Kelly and Joe discuss the following:
Welcome relief? Mitigating double taxation of beneficiaries of US trusts who are both US citizens and tax resident in the UK
15 February 2021
News
US citizens 1 who are UK resident beneficiaries of US trusts may be taxed twice on the trust’s income or capital gains because of the overlapping scope of UK and US taxation. The UK/USA Double Taxation Convention (the Treaty) may not serve as the desired panacea where there is a mismatch in both the timing of tax liabilities and the taxpayer’s identity under the domestic laws of each jurisdiction. This potential liability to double taxation may be an unfair cost of using such trusts to benefit members of transatlantic families. However, as outlined below, there are options for mitigating this exposure so that a UK resident may benefit from a US trust without suffering cross-border double taxation.
Double taxation and US domestic trusts
As noted above, a mismatch in the timing of tax payments and the identity of the taxpayer may affect the ability of the taxpayer(s) to claim treaty relief and can result in double taxation. Set out in the table below are the persons chargeable to tax in each jurisdiction on income and gains arising in US domestic trusts that are not UK resident.
Type of US domestic trust
Taxpayer for US purposes
Taxpayer for UK purposes
Grantor trust
Grantors are taxable on the trust’s income and gains as if they owned the trust’s assets
Beneficiaries2 are only subject to UK tax on the receipt of payments or benefits from the trust
Non-grantor trust (NGT)
The trustees are taxable on the trust’s income and gains as they arise, unless “distributable net income” (DNI) is distributed to a beneficiary (where the liability rests with the beneficiary)
As with grantor trusts, a UK tax liability only arises on receipt of payments or benefits from the trust
In the case of grantor trusts, to the extent that both a grantor (in the US) and a beneficiary (in the UK) are taxable on the same income or gain, the “exchange of notes” to the Treaty regards the beneficiary’s tax liability as being the grantor’s liability. In this way, the Treaty mitigates the mismatch in the taxpayer’s identity, albeit that when determining the grantor’s US tax liability consideration may need to be given to the sourcing of income and gains and the timing of distributions.
In the case of a US citizen who is UK tax resident for UK domestic and Treaty purposes, primary taxing rights rest with the US only in the following instances:
US source dividends up to the 15% US tax allowed under the Treaty.
Income and gains derived from US real estate.
Income and gains effectively connected with US trade or business.
In general, there is no time limit for claiming a credit for any US tax liability against the UK tax where the US has primary taxing rights. By contrast, if those rights rest with the UK, time limits apply in the US to claiming credit for the UK tax against the US tax liability. If the “paid” basis of claiming foreign tax credits applies, the UK tax must be paid either during the calendar year in which the income or gain arises or, with additional planning, by the end of the following year in order to claim a foreign tax credit against the US tax liability on that income or gain.
Managing the exposure to double taxation
A UK resident US citizen could be taxed twice if:
He/she is taxed on the arising basis and he/she receives the distribution.
He/she is a remittance basis taxpayer and the distribution is remitted to the UK.
After the end of the calendar year following that in which the income or gain arose.
Outlined below are some options for managing such exposure.
Trustees lend to beneficiaries
Loans to beneficiaries could be made on interest-free and ‘repayable on demand’ terms. The beneficiary would be treated as receiving a taxable benefit to the extent that the interest paid (if any) was less than interest at HMRC’s official rate (2.25 per cent from 6 April 2020).3 For an additional-rate taxpayer, the maximum effective rate of income tax on the benefit of not having to pay interest on the outstanding loan is currently 1.0125 per cent of the value of the loan per annum.
Give UK beneficiaries a right to the US trust’s income
If the net income of the trust were distributed regularly, say each quarter, to the beneficiary who is UK resident and a US citizen, any UK income tax paid on the income could be claimed as a foreign tax credit in the US, provided the UK tax was paid either in the calendar year in which the income arose or by the end of the subsequent year.4
Using capital payments to match the US trust’s capital gains
Managing a UK resident beneficiary’s exposure to double taxation on a US trust’s capital gains is more challenging, largely due to the complex rules that apply to the UK taxation of income and gains arising to non-UK resident trusts. If the trustees are able to include gains within a trust’s DNI for US tax purposes, consideration could be given to making “capital payments” (distributions and other benefits that are not chargeable to UK income tax) to the beneficiary in the same year that the gains are realised by the US trust. This should align the timing of the tax liability in both jurisdictions, allowing double tax relief to be claimed. However, from a UK perspective, this option is effective only if the US trust has no “relevant income” (which includes “offshore income gains” arising on the disposal of non-UK collective investments without UK reporting status), because benefits are taxable by reference to trust’s relevant income in priority to its realised gains.
However, making annual distributions of the trust’s gains reduces its effectiveness as a vehicle for a family’s succession plan by removing funds from a trust that may fall outside the scope of UK inheritance tax and may be exempt from generation-skipping transfer tax for US purposes.
Conclusion
The beneficiary’s potential liability to double taxation may be managed in the following ways:
For short-term funding needs the beneficiary could borrow from the US trust on interest-free and ‘repayable on demand’ terms.
The trustees could give the beneficiary an entitlement to the US trust’s net income to facilitate the claiming of tax credits in the jurisdiction that does not have primary taxing rights.
Capital payments equal to the trust’s gains realised in a given year could be paid to the beneficiary in the same year, as long as the trust has no accumulated relevant income and the gains can be included within the trust’s DNI for US tax purposes.
Whichever method is adopted, the timing of tax payments in both jurisdictions and the selection of appropriate investments (for example, US mutual funds without UK reporting status are not suitable) must also be carefully monitored.
George Mitchell is a Senior Associate in the Private Client team. He is a UK qualified lawyer and, although he does not advise on US law, the comments in this article on the US tax position are based on years of experience of advising on matters with a US connection.
1.For simplicity this article refers to the position for US citizens, but Green Card holders would generally be in the same position.↩
2.A UK resident settlor is also only taxed on receipt of a benefit provided that the trust is a “protected settlement” (which is beyond the scope of this article).↩
3.This assumes that the characterisation of the payment as a loan is respected by HMRC. This treatment could be challenged, for example, if the beneficiary had no intention to repay the loan and in that scenario the borrowed sum could also be exposed to UK tax.↩
4.In theory difficulties may arise if a person is treated as being taxed on income from a different source in each jurisdiction; a life tenant may be regarded as being entitled to the trust’s net income as of right, or as only having a right to hold the trustees to account for the net income. In practice, where the US has primary taxing rights, HMRC will give a tax credit to a beneficiary even where there is a mismatch in the source of income. ↩
Andrew Parker comments on Government’s ‘Token gesture’ plan to end unsafe cladding
10 February 2021
Views
Construction Partner, Andrew Parker, was quoted in the Law Society Gazette and Property Week following his comments in the wake of the Government’s announcement of a revised plan to end unsafe cladding in residential buildings across England.
Andrew commented: “Today’s announcement amounts to only a token gesture towards the cladding problems. There is no timescale for many of the measures and in some cases only consultation is promised. There are no retrospective measures in place for those affected in the last couple of years. The measures repeatedly refer to cladding only and we are left unsure of what happens in buildings with no ACM cladding but highly unsafe external wall systems. The money that has been pledged has not been put into any sort of context – how many buildings is it assumed it will fix? How will the construction industry be assisted to cope with the extra demand and extra expertise that is needed? Professional indemnity insurance is mentioned in passing but many insurers currently refuse to cover fire related cladding works – how will the all important design and construction of the remedial works receive sufficient insurance cover? Today’s announcement will sadly not reassure the thousands of leaseholders currently trapped in limbo in unsafe flats.”
Andrew’s comments were picked up in the following articles, including the Law Society Gazette, Property Week, Prime Resi, Inside Conveyancing, News on the Block and New Law Journal:
Well, not enough and not fast enough. Whilst the additional £3.5bn in funding represents a much need injection of cash, it misses the mark in many respects.
The new government plan to end unsafe cladding: too little, too late?
10 February 2021
News
Well, not enough and not fast enough. Whilst the additional £3.5 billion in funding represents a much need injection of cash, it misses the mark in many respects.
The Plan
The Housing Secretary, Rt Hon Robert Jenrick MP, has announced a further £3.5 billion to fully fund the remediation of unsafe cladding on residential buildings over 18m, taking the total government fund for cladding remediation to over £5 billion. Leaseholders in low-rise schemes between 11-18m in height will be eligible for a new government loan scheme under which repayments for cladding removal are capped at £50 per month. To fund the measures, a developer levy will be placed on certain high-rise developments and a new tax on the residential property sector will be introduced in 2022.
However, the proposals do not go far enough to address the immediate concerns of leaseholders, building owners and the construction industry.
Limited application
The £5 billion fund is only currently available for residential buildings higher than 18m. This limit is reflective of the measures used within the Building Regulations 2010, however investigations undertaken after the 2017 Grenfell fire tragedy have revealed ACM cladding issues to be widespread. The decision to restrict the funding to 18m+ is now beginning to look like an arbitrary measure in the face of such a large-scale problem.
Non-ACM cladding concerns
The measures only refer to defective cladding, yet in the wake of the Grenfell Tower Inquiry it is clear that the problems with external wall systems extend much further than ACM cladding: insulation, cavity barriers and fire compartmentation have all been identified as areas of concern. Greater clarity is needed on the position of buildings that do not have ACM cladding but are nonetheless shown to have unsafe external wall systems.
Inadequate levels of funding
£5 billion may still not be enough money to cover the extent of the remediation required. The government has not provided an assessment as to how many buildings this fund is estimated to cover.
Notably no measures have been announced to address problems in the existing applications process. The process for applying for remediation funding is complex and frequently requires professional advice which is a cost not covered by the funding.
Continued uncertainty for homeowners
No timescales have been provided for the implementation of the majority of the measures, and several of the measures are still within the consultation phase. No retrospective measures have been introduced to assist those who have been affected over the past two years.
This is of no help to the thousands of leaseholders who are currently unable to re-mortgage or sell their homes and who continue to absorb enormous shocks to their income. The government plan pushes a resolution further down the road and leaves leaseholders in limbo.
Lack of support for the construction industry
The measures pay scant attention to the difficulties faced by the construction industry in meeting the enormous demand for cladding remediation. Increasing numbers of specialist contractors and consultants are being refused Professional Indemnity insurance to cover fire-related cladding works. The announcement makes only a passing reference to this serious practical issue. Without adequate insurance cover, the design and construction of the all-important remedial works face further delays and increased costs. By not addressing these concerns, the government is in danger of losing sight of its ultimate goal of ensuring the safety of residents.
Concluding thoughts
The government’s plan will be considered by many leaseholders as little more than a token gesture towards resolving the matter of dangerous external wall systems. There is clearly still some way to go to providing a satisfactory outcome for the countless people affected by this issue. No doubt Mr Jenrick’s plan will be one of a number of similar measures that will be needed as the full extent of the cladding problem is unearthed.
Alexandra Treacy is a Trainee Solicitor currently sat in our Construction team.
Construction Partner, Andrew Parker, was quoted In the Law Society Gazette and Property Week following his comments in the wake of the Government’s announcement of a revised plan to end unsafe cladding in residential buildings across England.
Breaking Good – Episode Six: Putting the children first – top tips for separated parents navigating the Covid-19 pandemic
5 February 2021
Podcasts and videos
Co-hosts Marcus Brigstocke and Head of Family, Jo Edwards are joined by preeminent family Barrister Matthew Brunsdon-Tully to discuss the challenges facing separated parents during the pandemic and tips on how best to resolve the issues, drawing on experience of the common questions that have arisen.
They share advice for separated parents who are dealing with issues relating to childcare arrangements, home schooling and school holidays, as well as the impact of anticipated longer term trends such one separated parent wanting to move out of the city with the children in search of outside space and how changing work habits may also change/influence child arrangements moving forward.
You can listen to more episodes of Breaking Good and the More Than Law podcast here on our website, as well as subscribe on your favourite podcast services, including:
To continue the conversation on social media, use #ForstersBreakingGood.
Leading divorce and family law experts – How can we help?
Known for the highest quality service and achieving the best results for our clients, our focus is always on the needs of each individual. Our top ranked Family team will take the time to understand each client’s unique personal situations – and we work with them to develop the course of action which best suits them.
We cover the full range of family law matters including pre and post nuptial agreements, separation arrangements, matters involving children, financial issues and divorce for clients both in the UK and overseas. In addition, we are experts in mediation and collaborative law.
Coming to a decision to separate or divorce is difficult and often distressing. For many, the process that lies ahead is a mystery and it is assumed that it will be confrontational and drawn-out. However, there is in fact a wide range of forward-thinking, constructive approaches to resolving the issues flowing from your divorce or separation.
On our latest More Than Law podcast, host Miri Stickland is joined by three members of our Build to Rent group who provide their insights into the sector.
Commercial Real Estate Partner Helen Streeton talks through the types of sites being acquired for BTR schemes, who the key players are as the project progresses and how the funding risk profile differs on a BTR development scheme. Partner Elizabeth Small from our Tax team discusses the importance of focusing on tax structuring at the outset of a BTR development and the potential longer term tax implications when the scheme is operational and Matt Evans, Counsel in our Planning team, walks us through the planning complexities of BTR schemes, including delivery of affordable housing.
“The market for BTR is ever-expanding and not a day goes by in the property press without hearing about further entrants into the market to forward fund a development or acquire a stabilised scheme. When we are looking at site assembly right at the beginning of the process, the key question is what scheme is the developer looking to build, which will often involve tall towers. The developer will be looking at various issues including the footprint of the site, potential rights to lights issues and the extent of the existing infrastructure in place, with the end users likely to be young professionals to whom transport connections are going to be important.”
“With a BTR scheme there are often tight margins which means it is very important to manage the cashflow. This involves making certain that one considers the amount of VAT payable upfront, if any, and the SDLT cost as well. A BTR development can start off with, for example, either a bare site or an existing office block needing redeveloping or perhaps demolishing. It’s going to be critical to understand the different VAT and SDLT costs which attract to those different sites.”
“Private rentals have always provided a significant part of housing in this country but it is only more recently that it has been given a definition and designation within the planning regime and started contributing significantly not only to housing delivery but also capturing affordable housing as part of that provision. Planning authorities will seek to secure that private rental use for an extended period to prevent those units being sold outright, usually via section 106 obligations.”
What the business interruption case means for clients: Anna Mullins writes for FT Adviser
3 February 2021
Views
Property Litigation Senior Associate, Anna Mullins’s article entitled ‘What the business interruption case means for clients’ has been published in the FT Adviser.
In her article, Anna describes the consequences of the Supreme Court ruling over business interruption policies, which was handed down last month. Anna also explains some of the situations where a client might be able to claim for losses.
The article was first published on 02 February 2021 by FT Adviser and can be found here.
Disease Clauses
There will be cover under Disease Clauses provided there was at least one occurrence of COVID-19 within the relevant geographical radius by the date of any government measure. These clauses do not, however, cover interruption caused by cases of illness resulting from Covid-19 that occur outside that area.
It is no defence for insurers to claim that it was not this local occurrence but the pandemic across the UK and world that caused the loss.
Prevention of Access and Hybrid Clauses
The action taken by the government or public authority was sufficient to trigger cover under Prevention of Access clauses, even though it was not backed by legislation, that is, it was guidance only.
By way of example, when the prime minister (on 20 March 2020) instructed named businesses to close “tonight”, that was a clear, mandatory instruction given on behalf of the UK Government. It was an instruction that both the named businesses and the public would have reasonably understood had to be complied with without inquiring into the legal basis or anticipated legal basis for the instruction. The Supreme Court found that such an instruction is capable of being a “restriction imposed”, regardless of whether it was legally capable of being enforced. The Supreme Court did not, however, rule on whether each of the government announcements and regulations were “restrictions imposed”. It directed that this should be left over for agreement or further argument.
Altering the decision of the High Court, the Supreme Court also decided that “inability to use” premises may still be satisfied where a policyholder is unable to use the premises for a discrete business activity or is unable to use a discrete part of the premises for its business activities. An example was given by way of a department store. If the store had to close all parts of the premises except its pharmacy, this would potentially be a case of inability to use a discrete part of its business premises.
Similarly, “prevention of access” may include prevention of access to a discrete part of the premises or to the whole or part of the premises for the purpose of carrying on a discrete part of the policyholder’s business activities.
However, policyholders can only claim for losses relating to that part of the business for which the premises cannot be used/accessed.
Trends clauses and pre-trigger losses
In relation to Trends Clauses, the Supreme Court reminded parties that such clauses were to be construed consistently with the insuring clauses in the policy and, to do so, they should be construed so as not to take away the cover provided by the insuring clauses; to do so would transform the quantification machinery into a form of exclusion.
Adjustments to the amount to be paid out to policyholders should only be made to reflect market circumstances affecting the business that are unconnected with the pandemic, that is, would have happened to the particular business regardless of Covid-19. Any pre-trigger losses caused by the pandemic should not be considered.
Orient-Express Hotels Ltd v Assicurazioni Generali SpA
The Supreme Court found that this case authority was wrongly decided and should be overturned. Cover under an insurance policy is not subject to whether the loss would have been suffered anyway by the overall impact of the event in question.
Next steps
This decision is good news for businesses and anyone affected should take a pro-active approach to review their policies and reassess previously rejected claims.
While we understand that the Supreme Court will shortly issue its declarations and the FCA is due to publish a set of questions and answers for policyholders, next steps for businesses include considering:
If any part of the decision is directly (or indirectly) applicable to your policy wording. We understand that the FCA will soon publish a list of policy types that potentially respond to the pandemic based on data that they are gathering from insurers. Contact your insurance broker as soon as possible and they may be able to give some preliminary advice.
What additional factual evidence will need to be gathered to establish and prove a valid claim. The FCA has published draft guidance for policyholders on how to prove the presence of coronavirus. The consultation period closed on 22 January and we anticipate finalised guidance coming shortly from the FCA. However, for now, policyholders might want to collate any relevant government guidance that was relied on and start gathering accounting information to demonstrate the losses suffered. Further, to assist in proving that Covid-19 existed within the relevant radius (and at the relevant time), policyholders should consider finding details of reported cases of the virus in and around your area, death statistics published by the NHS or publicly available data published by the Office of National Statistics.
There will still inevitably be disputes even after the Supreme Court has offered such clarity on matters. For example, the trends clauses still have to be applied to take into account unrelated trends and query how government financial assistance is to be taken into consideration when losses are calculated. In that regard, the FCA has produced a “Dear CEO” Letter that calls for insurers to consider the appropriateness of deducting such sums from claims.
Policyholders should also be asking for interim payment on policies where the claim has been accepted but elements of the calculation or agreement on the final settlement remain outstanding. Query whether policyholders can also pursue insurers for potential damages for late payment. Whether such claims will be successful remains to be seen.
In any event, the decision will be welcomed by many policyholders and, as there is no right to appeal from the Supreme Court, the question now is what further cases will be brought by the FCA, action groups, or policyholders in relation to other types of policies, such as wedding insurance or building insurance policies covering loss of rent where there is a Notifiable Disease within a certain radius of the premises. It will also be interesting to see whether any current policy wording gets amended on renewal. Watch this space.
Anna Mullins is a Senior Associate in the Property Litigation team.
It is often easy to assume that one only has to pay UK VAT if one lives in the UK but UK VAT is often paid by individuals, trustees and companies who are resident outside the UK but use the services of professionals who are based in the UK. The extent to which VAT is or is not chargeable has changed as a result of Brexit and the end of the transition period on 31 December 2020. Here, we consider the new post-Brexit VAT position.
Of course, over the last few months we’ve seen the attention-grabbing headlines of European travel changes, pet passports and the like, and whilst the news is full of the changes to the movement of goods, there is also a subtle but important change to the VAT treatment of the supply of services. From a UK supplier's perspective an EU customer is now treated much as a customer in the US or some other non-EU country would be treated. In summary that means supplies to business customers, subject to various exceptions, continue not to attract VAT. There is even better news for EU non-business customers in that services from UK professionals will no longer attract VAT (subject, of course, to various exceptions – most noticeably UK land-related services).
Let's consider the position of Mrs Jones, a senior banking executive who has been living in Frankfurt since June 2016 and who owns the following UK assets:
Cash in a UK bank account that may be used to buy a development site in England in the name of either Jones Ltd, a company incorporated, centrally managed and controlled and therefore tax resident in Jersey or Immobilen GmbH (which is German tax resident
A holiday home in the Lake District (entirely used by Mrs Jones and her family)
A portfolio of shares in UK limited property investment companies.
Mrs Jones is tired of subsidising her son and wants to see him married off.
She incurs a number of professional fees in relation to the above and is pleasantly surprised that one of the invoices from her UK tax advisor for submission of her January tax return is not subject to VAT.
A summary of the possible VAT invoices issued: (i) on or before 31 December 2020; and (ii) on or after 1 January 2021, in respect of the professional services Mrs Jones has used, are shown below:
Description of service (all suppliers are based in the UK)
31 December 2020
1 January 2021
Comment
Advice by property consultants to Jones Ltd regarding feasibility of buying property in the UK
No UK VAT
No UK VAT
The general B2B rule is the supply takes place where the customer belongs. Land-related services are an exception to this rule meaning that the place of supply is deemed to be the UK with UK VAT being charged. HMRC guidance indicates that as this doesn’t relate to a specific site the service is not a land-related service and the general B2B rule applies, i.e. no UK VAT.
Advice by architects to Immobilen GmbH regarding feasibility of using a sustainable earth house construction technique in respect of a specific site in Cornwall
UK VAT
UK VAT
B2B rule displaced as the service relates to UK land, i.e. the supply takes place in the UK and so UK VAT is charged.
Property investment portfolio advice to Immobilen GmbH
No UK VAT
No UK VAT
B2B rule applies as the service only indirectly relates to land, but Immobilen GmbH needs to consider the German VAT reverse charge.
Fees charged to Mrs Jones for obtaining planning consent in the Lake District
UK VAT
UK VAT
B2C – the general rule is that the place of supply is where the supplier belongs.
Accounting and tax advice charged to Mrs Jones’ son who lives in the USA
No UK VAT
No UK VAT
The B2C general rule is altered for recipients who belong outside the EU here the service is provided by consultants, lawyers or accountants (and doesn’t relate to UK land).
Accounting and tax advice charged to Mrs Jones
UK VAT
No UK VAT
The B2C general rule from 1 January 2021 has been altered so that for all recipients who belong outside the UK, where those services are supplied by consultants, lawyers, accountants or similar, there is no UK VAT.
Matchmaking services to Mrs Jones in respect of her son
UK VAT
UK VAT
This is a B2C service which is neither a consultancy service nor the provision of information and so continues to be within the normal B2C rules (Gray & Farrer International LLP [2019] UKFTT 684).
Private client customers living in the EU may be more likely to query their UK VAT invoices, so suppliers need to think carefully and ask themselves certain key questions:
Where does my customer belong? Do I have evidence of this?
Who am I supplying? – a private individual or someone in business
What am I supplying? – in light of Gray & Farrer – does it have intellectual gravitas?
The Spear’s 500 guide is distinctive for ranking a wide range of leading advisers and is described as an “indispensable guide to the top private client advisers, wealth managers, lawyers and service providers for HNW individuals”.
The role of directors in ensuring overseas companies are and remain non-UK resident for tax purposes: HMRC v Development Securities PLC and Others
2 February 2021
News
Directors of non-UK incorporated, non-UK tax resident companies which have some connection with the UK (such as UK shareholders) have an important role in ensuring that the company in question does not become UK tax resident.
In the recent case of HMRC v Development Securities PLC and Others, the Court of Appeal held that a Jersey incorporated company with a majority of Jersey-based directors was UK resident. Although the facts of the case were unusual, some useful pointers as to what went wrong for the company and how it could have done better can be gleaned from the judgment.
Background
In broad terms, a non-UK incorporated company is not UK tax resident if its central management and control takes place outside of the UK. The question of how to determine where a company is centrally managed and controlled has been analysed in a series of UK cases stretching back over more than a century. These cases have held that normally a company is resident in the country where its board of directors meets and makes decisions.
The Court of Appeal in the Development Securities case considered the factors that should be taken into account to determine where central management and control takes place if there is a board of directors meeting in Jersey but the company itself is wholly-owned by a UK resident parent company. The decision is particularly relevant to special purpose vehicles that have been set up to carry out limited activities, although it also has wider implications.
The facts and the decision in Development Securities
The facts in Development Securities were unusual in that, as part of a tax planning scheme devised by a firm of accountants, the company was set up in Jersey to enter into options to acquire companies and properties for more than their market value from other group companies. This arrangement would benefit the UK resident parent company (and the wider group) but not the Jersey subsidiary itself. The scheme would only work if the subsidiary was centrally managed and controlled in Jersey (and not the UK) at the relevant time.
The First Tier Tribunal (FTT) held that the subsidiary was UK tax resident, the Upper Tribunal overturned this decision and the Court of Appeal then upheld the FTT’s decision, although admittedly one of the judges in the Court of Appeal set out, in some detail, why he considered elements of the FTT’s reasoning to be incorrect.
What went wrong and how to avoid these problems?
Although the facts of the case were rather extreme, some useful guidance can be gleaned as to how overseas companies with UK shareholders should be managed to ensure that they are and remain non-UK tax resident.
As is always the case, in order to make sure that the company is tax resident outside of the UK, a majority of the directors must be non-UK resident and board meetings must be held outside of the UK; both of these requirements were met by the subsidiary in Development Securities.
Decisions must also be actually made in those board meetings, i.e. outside of the UK, and importantly, the directors need to make their own decisions and not be over influenced by the shareholder. The board minutes in the Development Securities case suggested that the directors had been instructed or ordered by the UK resident parent company to take the decisions and that in effect, the parent company had usurped the board’s decision making powers. Although UK resident shareholders may authorise a board to take decisions it should not instruct or order them to take those decisions.
In addition, the board of directors of the Jersey subsidiary had adopted an approach that was held to be too mechanistic; they were too concerned with checking the legality of what they were doing, rather than giving proper thought to the decisions themselves. As a result, the Court of Appeal held that the directors should have engaged more fully with the decision making process, rather than concentrating on the legality of it and on executing documents to implement the transaction. However, it is worth noting that, although not significant in the Court of Appeal’s decision, Lord Justice Nugee suggested in his judgment that what mattered was whether directors of a company had actually made the decision to take a particular course of action and that “actively engaging” in making that decision may be too high a test.
When the case came to court, the FTT reviewed the board minutes in great detail, pointing out mistakes that the directors had not picked up on. Directors should be aware that if a matter which they are reaching decisions about goes to court the minutes are likely to be subject to a high degree of scrutiny by the tax tribunal. The minutes should demonstrate that decisions were properly thought through and mistakes should be avoided as far as possible. (Although earlier cases have held that as long as directors (rather than a parent company, for example) have made the decision, it does not matter whether the decision was ill-advised or ill-informed – probably a strategy best avoided).
This will not be the end of the story and we will either have to see whether Development Securities goes to the Supreme Court or wait for the next case on what central management and control means, but as matters stand, based on the Development Securities case, directors of non-UK tax resident companies may want to spend a little time reviewing their decision-making and record-keeping processes.
This note reflects our opinion and views as of 02 February 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.
Defective Cladding – Commercial purchasers/building owners need to beware
1 February 2021
News
Since the tragic Grenfell Tower fire on 14 June 2017, it has become clear that many recently constructed or refurbished residential buildings, particularly taller buildings, are unsafe and require urgent and substantial remedial action.
These buildings may look shiny and new but, as Shakespeare said, “All that glitters is not Gold”.
Grenfell Tower had combustible Aluminium Composite Material (“ACM”) panels which allowed the fire to spread. But it was also the entire external wall system, including the insulation and other materials within the external wall, that was combustible and unsafe. It has now become apparent that many buildings have been built with external wall systems with combustible materials and, often, non-existent cavity barriers to stop the spread of fire.
There has been substantial publicity as to the plight of leaseholders facing serious safety issues and hefty service charge bills and a call for Government action to meet all the rectification costs.
Applicability to commercial buildings
But the issue is not limited to residential buildings. It can equally apply to commercial buildings with cladding and there have been particular issues with student accommodation and hotels. Owners of buildings used for residential and commercial purposes can owe substantial statutory and contractual duties as to the health and safety of their occupiers and employees.
And the issue is not limited to cladding or fire safety as it is clear that there has been a far more general failing in relation to defective workmanship, design, and materials.
Importantly, it is clear that defective design, materials and workmanship, and a failure to comply with Building Regulations, can come to light many years after a building was constructed or refurbished, leaving the owners and/or lessees with no prospect of any successful claims against any of the parties responsible.
Any tenant with a full repairing covenant may be liable for the repairs necessary to comply with health and safety and building regulations, but is likely to argue this goes beyond its repairing obligations (particularly if the Lease is for only five years or so).
Even where claims are possible, the responsible party may be insolvent and/or uninsured.
Purchasers/Building Owners beware
In the current economic circumstances, it is even more imperative that prospective purchasers and tenants of properties where major works have been undertaken do exercise full due diligence on their purchase or letting, especially with older buildings where no warranties may be available and any claim against those responsible is likely to be statute-barred.
A claim will ordinarily be statute-barred once six years have elapsed from the breach of contract or when damage first occurred, but it might be 12 years or longer depending on the contract in question and all the circumstances.
Unfortunately, purchasers will often only be offered warranties that are limited in amount or time.
What should purchasers/building owners/lessees under long leases do?
It is recommended that they should:-
Obtain a full survey and, where there is cladding or any other possible structural issue, consider retaining a structural engineer and/or façade engineer.
Make detailed enquiries, and obtain all relevant construction documentation, in relation to the works undertaken and materials used. It is particularly important to obtain as-built plans and compare them to the original plans for the building.
Query/check what tests were undertaken as to products used (such as BS8414 fire safety tests which under the Building Regulations 2010 were required to be undertaken and passed in order for an external wall system which contains combustible materials to be considered compliant with the Regulations).
Consider carefully with their surveyors and consultants all information received.
Establish what certificates, guarantees or reports have been issued and can be relied upon i.e. are not just for the party who commissioned them.
Check the levels of insurance of contractors and designers.
Obtain an assignment of all warranties available and all claims by the vendor/previous building owner in case any claim pre-dates the purchase/letting.
