Tax Talks

The Proskauer Tax Blog

UK Chancellor announces Winter Economy Plan

As the UK braces itself for a second wave of COVID-19 the UK Chancellor has announced the Treasury’s Winter Economy Plan with the aim of protecting jobs and supporting businesses over the coming months.

Despite the measures introduced in the Chancellor’s Summer Statement (reported by us, the UK’s economic recovery “is fragile” amidst the rising number of infections. Key points to note from today’s announcement:

  • A new Job Support Scheme will be introduced from 1 November for six months with the aim of protecting “viable” jobs for those that have had to reduce their hours because of the virus. Further details as follows:
    1. the scheme is less extensive in its scope than the Coronavirus Job Retention Scheme (the furlough scheme) which it replaces as it will only be available for jobs which are “viable” and an employee cannot be on a redundancy notice;
    2. the government will top up the wages of those working at least 33% of their usual hours meaning that (a) employers will pay the wages of staff for the hours they work and (b) for the hours not worked the government and the employer will each pay one third of their equivalent salary;
    3. employees using the scheme will receive at least 77% of their usual wages (subject to the cap on the government’s contribution at £697.92 per month);
    4. the Coronavirus Job Retention Scheme does not have to have previously been used in order for an employee or employer to qualify for the new scheme; and
    5. large business will have to meet a financial assessment test and not make capital distributions, such as dividend payments or share buybacks, whilst accessing the grant.

It is interesting to note that the new Job Support Scheme is considerably less generous than the existing furlough scheme. For example, the existing scheme, in its original form, covered up to 80% of earnings up to a monthly cap of £2,500. Despite those levels being reduced over the final months of the existing furlough rules, the new scheme has a monthly cap of just under £700 by way of Government contribution and its scope is much more limited. The new scheme will represent a very considerable reduction in outflow from HM Treasury from 1 November.

  • The Self-Employment Income Support Scheme has been extended by way of two taxable grants. The first grant will cover 20% of average monthly trading profits over the period from November to the end of January. This will be capped at £1,875 in total. The second grant will cover the period from the start of February to the end of April with the government to announce details at a later date.
  • The reduced rate of VAT (5%) in the hospitality and tourism sectors will continue until 31 March 2021.
  • Under the Enhanced Time to Pay arrangement for self-assessment taxpayers, self-assessment liabilities due in July 2020 will not need to be paid in full until January 2022.
  • The temporary loan schemes (1. Bounce Back Loan Schemes, 2. Coronavirus Business Interruption Loan Scheme, 3. Coronavirus Large Business Interruption Loan Scheme and 4. Future Fund) are extended for new application to 30 November 2020. A new “Pay as you Grow” scheme is introduced under which businesses that borrowed under the Bounce Back Loan Scheme will have the option of repaying over a period of up to ten years.

Today’s announcement comes after the Chancellor’s confirmation that there will be no Autumn Budget this year.

HMRC updates its guidance on the VAT treatment of early termination fees and compensation payments

Following the European Court of Justice’s (ECJ) rulings in Meo and Vodafone Portugal, HMRC has recently updated its VAT manual and published a brief ( stating that payments arising out of early contract termination will now be treated as consideration for a taxable supply therefore subject to VAT. This marks a significant change from HMRC’s previous position that early termination payments described as compensation payments would ordinarily not be subject to VAT.

ECJ rulings

We reported on the so-called Vodafone Portugal case in the June edition of the UK Tax Round-Up ( In that case the ECJ considered that payments made by customers to Vodafone for terminating their contracts before the end of the contractual tie in period constituted consideration for a supply of services within the meaning of Council Directive 2006/112/EC (VAT Directive) so that VAT was payable on such fees. The ECJ held that the amount payable in the event of early termination should be considered an integral part of the price which the customer committed to paying to Vodafone to fulfil its contractual obligations and that the treatment of those termination fees as consideration for a supply accorded with economic reality.

HMRC updates

HMRC’s previous guidance acknowledged the difficulties of determining whether a payment is compensatory or forms part of the consideration for a supply. HMRC drew a distinction between contracts with a “right to terminate” and contracts which do not have such a right. HMRC’s previous position was that generally when customers have to make a payment to withdraw from agreements to receive supplies of goods or services such termination payments are not generally treated as consideration for a supply and were therefore outside the scope of VAT. We noted in the June Round-Up the possibility that HMRC would update its guidance in light of the ECJ’s decision. This week it has. Below are the key updates:

  • Most early termination payments will now be treated as consideration for the supply of goods or services for which the customer has contracted for. Early upgrade fees will be treated in the same way. Therefore these payments will be subject to VAT. This is the case irrespective of whether the contract contained such a “right to terminate” and whether or not the fees are described as “compensation” or “damages”. It is only where there is no direct link between a payment and a supply of goods or services that it might be outside the scope of VAT.
  • Liquidated damages are now treated as consideration for a supply. HMRC’s previous guidance stated that such amounts were outside the scope of VAT. In its updated guidance HMRC acknowledges that although such payments are aimed at compensating they arise from events contemplated under the contract therefore are consideration for what is provided under the contract. Similarly, liquidated damages payments for early termination by lessees under lease agreements for moveable goods (for example vehicle finance leases) were previously treated as outside the scope of VAT (subject to any agreement with the leasing industry that allowed lessors to treat such payments as taxable supplies). These payments are now treated by HMRC as taxable.
  • HMRC’s previous guidance stated that payments for breaches of contract which resulted in automatic termination of the contract or entitled the supplier to terminate the contract were outside the scope of VAT. Such payments are now treated by HMRC as further consideration for a supply.

HMRC’s updates are particularly relevant for businesses which have contracts with customers for minimum commitment periods and customers are subject to termination fees for withdrawal. A business that has failed to account for VAT on such fees should correct such error unless a specific ruling has been obtained from HMRC stating that such fees are outside the scope of VAT. Please get in touch with any member of Proskauer’s UK tax team to discuss how we can assist you with any of these matters.

High Court decision highlights importance of ensuring claims notices include required information

In Dodika Ltd & Ors v United Luck Group Holdings Limited, the High Court (HC) has accepted the sellers’ argument that a notice of a tax claim under a tax covenant served on them by the buyer was invalid because it did not contain the level of information required by the provision in the related share purchase agreement (SPA) governing notices of claim. This meant that the buyer could not pursue the claim because the time period for notification had passed.

The decision appears harsh to the buyer in its outcome but is a salutary reminder that purchasers should consider very carefully both the precise claim notice terms that they agree to when entering into a purchase and then, given those terms, the precise information that should be provided to the seller when a claim is made.

The case related to a $1 billion sale of a group where, under the terms of the SPA, there was a $100 million escrow in respect of possible claims under the warranties and tax covenant given by the sellers. The buyer, prior to the final repayment of amounts from escrow, sent a notice of claim letter to the sellers referring to a transfer pricing investigation being undertaken by the Slovenian tax authority in respect of a group company. Prior to this letter being sent, the sellers had been made aware of the investigation and were kept informed of its progress.

The terms of the notice of claim provision in the SPA required the notice of claim to state “in reasonable detail the matter which gives rise to [the claim]”. The sellers argued that the notice of claim was invalid because it did not include sufficient detail about the matter giving rise to the claim and that the relevant matter was not the tax authority’s investigation itself (which was referenced in the letter) but the underlying facts, circumstances and events that were the subject of the investigation (which were not included in the letter).

The HC agreed with the seller’s argument that “the matter which gives rise to” the claim in this instance was the facts, circumstances and events which were the subject of the tax authority’s investigation and agreed to the seller’s request for summary judgement that the notice of claim letter was invalid. The HC stated that a claim would not be based simply on the existence of the investigation but on the factual reasons why a tax liability accruing before completion has accrued or might accrue. Therefore, the buyer needed to include sufficient detail about those factual matters.

The case looks in detail at the purpose behind notice of claims provisions and how their wording should be construed, concluding that the general purpose is to provide the party claimed against with sufficient knowledge about the underlying facts and circumstances that the claim relates to and that the level of detail and information required to be provided will depend on the wording of the claims notice provision being considered. The reference to “the matter which gives rise to” the claim in this case (being wording seen in many SPA notice of claim provisions) required more than a statement that the tax authority was investigating the group’s transfer pricing position. It required details about the underlying arrangements that were being investigated. The HC also stated that the sellers’ knowledge of the circumstances of the claim was not relevant to whether the notice did or did not satisfy the relevant SPA provision, highlighting that the courts should be expected to be unwilling to diverge from a strict reading of negotiated documents to allow a claim to be pursued.

So, while seemingly very harsh on the buyer in this case, the decision confirms just how important it is for the parties (and particularly the purchaser) to (i) think very carefully about the notice of claim obligations that they agree to and whether the level of information requested by the seller is actually required given its presumed understanding of the affairs of the group it has sold and then (ii) ensure that the provisions of the notice of claim provision are followed strictly and thoroughly, quite possibly by providing more information than might actually be required.

The full transcript can be found here.

Coronavirus: Comparing the Tax Proposals in the HEALS and HEROES Acts

On July 27, 2020, Senate Republicans introduced a series of bills and proposals that have been collectively referred to as the “Health, Economic Assistance, Liability Protection and Schools Act” (the “HEALS Act”).[1] The HEALS Act would enhance and expand certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748), and provide additional forms of relief, including certain tax credits for employers. This blog summarizes the most important tax proposals in the HEALS Act and compares them with the Health and Economic Recovery Omnibus Emergency Solutions Act (the “HEROES Act”)[2] that was introduced by House Democrats on May 12, 2020, and the Jumpstarting Our Business’ Success Credit Act (the “JOBS Credit Act”) that was introduced by a bipartisan group of House representatives on May 8, 2020.[3]

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10 Keys to Proposed Regulations Under Section 4960 (Executive Compensation for Tax-Exempt Organizations and their Affiliates)

Employers that are tax-exempt or have tax-exempt affiliates (for example, a foundation) should pay close attention to a 21% excise tax under Section 4960 of the Internal Revenue Code on certain executive compensation.  Proposed Regulations under Section 4960 are described here.  The discussion includes traps for the unwary.  Please reach out to your Proskauer contact to discuss how these rules affect your organization.

Chancellor’s Summer Statement focuses on hospitality sector

As the UK’s lockdown is relaxed and unemployment figures are expected to continue to rise, the UK Chancellor gave his summer statement announcing measures to stimulate the economy as it recovers from the effects of coronavirus with a clear emphasis on encouraging people to spend money, particularly in the hospitality sector, to try to protect as many jobs as possible.

The UK Chancellor stated the stark fact that in the space of two months during the pandemic the UK’s economy contracted by 25%, which is the same amount as it grew in the previous eighteen years and the IMF expects this to be the deepest global recession since records began. In the Chancellor’s words “the job has only just begun”. The summer statement’s focus was the Chancellor’s plan for jobs: supporting people to find jobs, creating jobs and protecting jobs. Key points to note: Continue Reading

 “Passthrough Deduction” Regulations for RICs Finalized with No Major Changes

On June 24, 2020, the Internal Revenue Service (the “IRS”) and the U.S. Department of Treasury (“Treasury”) issued final regulations (the “Final Regulations”) on the application of the “passthrough deduction” under Section 199A[1] to regulated investment companies (“RICs”) that receive dividends from real estate investment trusts (“REITs”). The Final Regulations broadly allow a “conduit” approach, through which RIC shareholders who would have been able to benefit from the deduction on a dividend directly received from a REIT can take the deduction on their share of such dividend received by the RIC, so long as the shareholders meet the holding period requirements for their shares in the RIC. This confirms the approach of proposed regulations issued in February 2019 (the “Proposed Regulations”), on which RICs and their shareholders were already able to rely. Additionally, the preamble to the Final Regulations (the “Preamble”) notes that the IRS and Treasury continue to decline to extend conduit treatment to qualified publicly traded partnership (“PTP”) income otherwise eligible for the deduction. Please read the remainder of this post for background, a description of the technical provisions of the Final Regulations, and a brief discussion of policy issues discussed in the Preamble.

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