FII GLO

I was having a bit of a think on the practical implications of the High Court decision in

Prudential Assurance Co Ltd & anr v Commissioners for HMRC EWHC 3249 (Ch).

 

As the likelihood is that the High Court decision will be appealed there's an argument for not worrying about this until the Court of Appeal and Supreme Court have had their say. But I think there are some points that might need to be considered now.

 

1.  Documentation

Assuming for the moment that the High Court approach of providing relief for underlying tax but at the higher of the treaty rate or the nominal rate is upheld then being able to produce the relevant paperwork to support the appropriate nominal rate of tax will be important.  It is clear from the High Court judgement that Prudential were able to analyse their foreign income by country for each year of claim. It might be an idea for companies that have submitted claims for foreign dividends to be exempt to ensure that they can lay their hands on a similar analysis.  If its not possible to do this then a visit to the archives might be in order.

2.  Time Limits

The ECJ has now issued its judgement on the issue of whether FA 2004 section 320 is  consistent with EU law.  The judgement is that FA 2004 section 320 cannot be allowed to reduce the period of a mistake claim.  This link to Simmons and Simmons (You will have to sign up for their service) indicates that companies only have until 16th January 2014 to issue protective High Court claims before statutory changes bar claims.

Time Limits  

 

Might this allow companies to make claims for exemption for foreign dividends (or relief from underlying tax at nominal rates for periods where they had previously thought they were time barred from making claims?

 

3.  Recognition in accounts

 

With year end almost upon us companies will need to consider whether to recognise the High court decision in their 2013 accounts.  As far as I can see there are limited grounds for recognising the benefit.  IAS 37 prohibits the recognition of contingent assets that are defined as follows:   "contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain."

 

There is similar wording in UK GAAP.

 

Given the likelihood that HMRC will appeal the High Court decision and continue to claim that credit relief should be provided at the underlying rate but without the nominal relief provision included in the High Court judgement I don't think its possible to claim that there is no contingent element to the reclaim.  

 

There is however, a requirement to disclose contingents assets (by way of a note) where recovery is probable.  

 

4. Recognition in Policyholder Benefits  

The issue here is whether to recognise the benefit of claims for exemption for foreign dividends in the policyholder value of unit linked and with profit funds.  This is of course an issue that has existed since the start of the FII GLO but the High Court decision has brought in into focus.  From a theoretical view I think the correct position is that some credit should be given to policyholders.  That is the chances of overall success in the litigation must be greater than 0% so there is an asset.  That asset should be recognised in policyholder funds to ensure inter generational equity for policyholders.  

 

Having said that there are practical reasons to not recognise; most importantly recognising the value of exemption in policyholder assets and then clawing that value back in the event of a future court decision is likely to cause a terrible stink.

 

5.  Collective Investments 

 

I am struggling to see how investment in a foreign collective such a Luxembourg SICAV would fit in to the High Court decision. Luxembourg does tax corporate profits but not return accruing to a SICAV.  So is the nominal rate 0% or the Luxembourg CT rate?  Assuming for the moment that the 0% rate is the nominal rate (No idea is this is the right answer just an assumption) then underlying credit rules do allow you to go down a chain of holdings in calculating underlying tax.Link to HMRC manual.

 

But this just takes us back to point 1 what documentation do you need to evidence the nominal underlying tax on the dividends received by the SICAV?