UK and International Tax news
Court of Appeal Hears Judicial Review Appeal
Monday 20th January 2025
The Court of Appeal has recently heard an appeal on whether a diverted profits tax notice was inconsistent with an earlier advance pricing agreement the claimants had entered into for transfer pricing purposes.
In Refinitiv Ltd and others v HMRC [2024] EWCA Civ 1412, the appellants had appealed against the decision of the Upper Tribunal not to allow their judicial review claim in respect of diverted profits tax charging notices issued by HMRC totalling approximately £167m.
The claimants included UK companies in the Thomson Reuters group in relation to valuable IP which was, at the relevant time, held centrally in a Swiss-resident entity – Thomson Reuters Global Resources (TRGR).
HMRC asserted that the UK entities did not receive the compensation for providing those services that they would have done if those enhancement services had been provided at arm’s length.
The claimants argued that the DPT notices were unlawful in public law terms because they used a method of calculating arm’s length pricing of the above services which was inconsistent with the method that HMRC had previously agreed in 2013 in respect of the same services in an advance pricing agreement, which applied a cost-plus basis The APA applied to the period 1 January 2010 to 31 December 2014, and a “roll-back” period of 1 October 2008 to 31 December 2009.
The IP held by TRGR was subsequently disposed of in 2018 for a significant gain. HMRC issued a series of DPT notices, including one for the period 2018, on 20 August 2021. The charges contained in the notices were calculated by reference to what HMRC asserted was the arms’ length compensation for IP services that the claimants should have received for providing their services that enhanced the IP held centrally by the Swiss entity (TRGR) within the group. That arm’s length compensation was calculated, however, using a different profit split method:
For 2018, that entailed apportioning both TRGR’s annual profit and its profit on its disposal of the IP in 2018. This was on the basis that the services that the UK entities had provided, which had enhanced the IP assets over the previous years (including 2008-2014), had contributed to the profits generated by the IP assets and the profits on their disposal.
The claimants argued that HMRC’s DPT notice for 2018 applying the “profit-split” method encroached upon the terms of the earlier APA; which had used “cost-plus” basis in respect of the same subject matter, being the arm’s length compensation for services in the period 1 October 2008 to 31 December 2014.
The central legal question was the interpretation of s.220(1) TIOPA 2010, which dictated the effect of an APA on chargeable periods. The court analysed whether the APA, extended its influence from December 2014 to the 2018 accounting period.
The claimant’s argument hinged on the notion that activities covered by the APA influenced profits in 2018, thereby warranting the APA’s applicability to that period. However, the court found that APAs were inherently time-bound, affecting only the specified chargeable periods unless explicitly renewed. The agreement’s terms clearly delineated its coverage, and there was no statutory basis or contractual provision to extend its scope beyond its termination.
Additionally, the court highlighted the lack of legislative intent to allow APAs to influence future chargeable periods outside their agreed term, especially when they face new tax regimes like DPT introduced after the APA’s termination.
The Court of Appeal upheld the decision of the Upper Tribunal and dismissed the claimants’ appeal. The core finding was that the APA did not extend its scope to the 2018 accounting period. Consequently, the DPT notices issued for 2018 were deemed lawful and not inconsistent with the APA. The judgment emphasized the temporal limitations of APAs and clarified that such agreements do not bind HMRC beyond their specified terms unless renewed.
If you would like more information on this decision, please contact Keith Rushen on 0207 486 2378.
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