CT self-assessed in one entity on profits ruled not to exist as part of a tax arrangement could not be set against a PAYE liability in another entity.
As part of an arrangement to reduce tax, the contractual pay of employees of James H Donald (Darvel) Ltd (Darvel) was partly replaced by dividends from two other companies, J H Donald Company Services Ltd (Services) and J H Donald Retail Ltd (Retail). Both Services and Retail received profit shares under various partnership and joint venture agreements to which Darvel was a party. Darvel, Services and Retail acted on the basis that the arrangements had the tax consequences that they were intended to have. Therefore Retail and Services paid Corporation Tax (CT) on all profits including the partnership profits and submitted self-assessment CT returns on this basis. As these returns were self-assessments, they could not be appealed to the First-tier Tribunal (FTT).
HMRC made assessments on Darvel as the employer of the participants in these arrangements to recover unpaid PAYE tax and NIC on the basis that the total sums received by the participants, including dividends from Services and Retail, represented emoluments of their employment with Darvel. These assessments were upheld on appeal by the FTT and Upper Tribunal (UT), subject to an issue concerning the CT paid by Services and Retail.
Following this decision, Darvel now argued to a separately constituted FTT that the CT that was paid by Retail and Services was paid on the basis that both companies were trading. It followed from the FTT and UT decisions that the companies were not trading and were acting solely as ciphers or agents for Darvel, and could therefore have no CT liability. The CT paid by Retail and Services should be treated as a credit and therefore the tax assessed to Darvel should be limited to the difference between the total of those and the total of the CT assessments.
In response, HMRC argued that the Darvel assessments arose as a result of the failure by that company to meet its obligations as an employer. Services and Retail were not the employers, and the liabilities paid by them arose from CT obligations they had decided that they had incurred. Darvel had no right to claim credit for tax paid by a legally separate company.
The FTT decided that while HMRC had the right to make alternative and inconsistent assessments and on more than one entity, this was not the situation here as HMRC had only raised assessments on Darvel. The FTT had no jurisdiction to consider the self-assessed CT liabilities of Services and Retail. Additionally, while section 32(1) of TMA 1970 provided protection against double taxation, this was not the case here. Darvel’s responsibility to collect PAYE and NIC on payments to employees was not mutually exclusive to self-assessed CT in another entity, and so there was no double taxation on the same income.
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