Tax Break

John Fisher, international tax consultant

Eurotunnel vision

He was too busy womanizing to care.

After arriving in London en route to America, an acquaintance’s grandfather decided to kill time at Speakers’ Corner in Hyde Park. It was 1906, and he, similar to my own grandparents, had fled a pogrom in Russia. Despite having his heart set on New York, he changed his mind when he heard an itinerant speaker slagging off King Edward VII from his soap box. A country that tolerated open criticism of its monarch was a country in which to seek asylum.

Britain has a long and marvelous self-deprecatory tradition of not taking itself, or anyone else, too seriously. Ideologies were for other mad-cap countries to self-destruct with (even the post-war surge in socialism was quickly diluted to something more essentially British). So, when Charles de Gaulle said ‘Non!’ to Britain’s entry into the European Economic Community in 1967, despite Britain having been instrumental in saving his country from speaking German, he knew what he was doing. De Gaulle and his German allies were flying high, out to create something idyllic, and they didn’t need the English bringing them back to earth.

Britain’s next prime minister not taking himself too seriously

Since finally joining Europe in 1973, the British have periodically forced an emergency landing (or, at least, lowered the altitude of such lunacies as the single-currency Euro project), but now that Brexit is in the air, they have also made the mistake of splitting into two ideological camps. Amidst all their own dogfighting, they are missing a lot of the nonsense of Europe.

A recent example should serve the point.

British tax law has an eminently sensible provision permitting the deferral of capital gains tax on the transfer of assets within a UK group. Nothing left the ‘business’ so why prevent the transfer or penalize it with a tax charge? Only when the asset is actually sold outside the group would the tax crystallize taking into account the amount deferred.

Her Majesty’s Revenue and Customs (for, despite General de Gaulle, members of the Union are still responsible for their own fiscal management) held that an asset transfer by a UK company to its Dutch parent company triggered tax, since it was outside a UK group. The assessee said ‘Non!’ and the matter was taken to a First Tier Tribunal (Britain’s lowest tax court). Despite its own evident embarrassment, the court was hit by turbulence, and sided with the assessee.

Why?

One of the fundamentals of the European project is ‘freedom of establishment’. Article 49 of the Consolidated version of the treaty on the functioning of the European Union (yawn!) states:

Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.

Bottom line – the court felt it had to permit the transfer of the asset to the Dutch parent free of tax, knowing full well that there was no system in place to ensure that, when the Dutch company sold the asset outside the group, Britain would receive its share of the booty. While a form of installment payment was considered appropriate – it didn’t seem to meet European legal requirements,  and was ignored.

Their relationship was never going to work

There is no logic in any of this. With pragmatic Britain’s exit from the EU, de Gaulle’s legacy may finally reach its logical conclusion. Sacre bleu!

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