May 2010 Archives

Governments of EU Member States always face choices over how they comply with the requirements of EU law.  For example, following the early decision of ICI v Colmer [1998] STC 874, the UK simply removed the requirement of UK residence in the offending part of the group tax relief provisions. When it came to thin cap regimes, the fact that Germany extended its regime to domestic as well as non-resident companies was specifically noted by Geelhoed AG. He expressed some strong views regretting the position which he attributed to a lack of clarity in EU law (Case C-524/04 Test Claimants in the Thin Cap Group Litigation 29^th June 2006, paragraph 68).

The issue of how to react to EU law in the field of taxation is one which the new UK coalition government has to address early in its life. The provisions allowing landlords to be treated as trading in relation to income from letting furnished holiday accommodation in the UK, but not elsewhere, have long been questioned. In 2009, the Government stated an intention to repeal the relevant rules from 2010-11. In the meantime, in a technical note, dated 22^nd April 2009, HMRC indicated that the rules would apply to furnished holiday accommodation elsewhere in the EEA (ie the EU plus, Iceland, Norway and Liechtenstein).

The necessary measures did not make it into the Finance Act 2010.  Now, in The Coalition: our programme for government (p31) the Coalition says:

"We will take measures to fulfil our EU treaty obligations in regard to the taxation of holiday letting that do not penalise UK-based businesses."

It will be interesting to see how it goes about this.  Applying rules to the entirety of the EEA would be one way to approach the matter. The statutory draftsman frequently refers to the EEA in tax matters as a brief look at the Corporation Tax Act 2010, section 112, and the Taxation (International and Other Provisions) Act 2010, section 301, will confirm. 

References to the entirety of the EEA can, however, have some disadvantages from the point of view of governments.  These can be guessed at by looking at the new definition of "charity" in the Finance Act 2010, brought in to accommodate EU law.  A "charity" under this legislation must, amongst other things, satisfy the "jurisdiction condition".  This refers to a body of persons or trust which is subject to the jursidiction of a relevant UK court, or a court exercising its jursidiction under the law of a "relevant territory".  A "relevant territory" which is not a member State is to be specified in regulations (FA 2010 Sched 6, paragraph 2(3)(b)).

A "relevant territory" could, of course, simply be defined as a territory within the EEA. That would necessitate including Liechtenstein.  It appears that there is no enthusiasm for this. James Kessler QC has pointed out that in the Explanatory Notes to the Finance Bill, the Background Note to clause 31, Schedule 7, says, at paragraph 39, that Iceland and Norway will be specified as soon as possible.  The failure to refer to Liechtenstein is, it may be assumed, significant and may give rise to some debate.  Fortunately for the coalition and the legislative draftsman, there is unlikely to be any need to  make specific provision for  lettings of furnished holiday accommodation in Liechtenstein.