Tax Matters

EMMA: Hello and welcome to Tax Matters, our quarterly podcast where we chat about what’s new in UK tax law. I'm Emma Bradley, a partner in TLT’s tax team and I'm joined today by Andrée Parker, a Managing Associate in our tax team.

Over the next ten minutes, we’ll talk you through some of the key tax developments we’ve been keeping an eye on. We’ll cover global mobility, a new tool for close company loans to participators and an update on SDLT for periodic tenancies. We’ll then discuss three recent cases and we’ll end with HMRC updates on the Foreign Permanent Establishment Exemption, the new R&D advance assurance service and the VAT treatment of public funding received by further education institutions. So let’s get straight into it.

ANDRÉE: Our first news item concerns the tax implications of worker mobility. In November last year, the OECD launched a public consultation on the global mobility of individuals to consider the tax challenges that arise from cross-border working. Whilst cross-border working is not new, it has grown significantly in recent years.

The consultation addressed two main areas. The first was personal income tax challenges for individual workers. This included risks of double taxation, no or low taxation, and compliance burdens for businesses such as tracking employee movements and managing multiple filing obligations. The second area considered was corporate income tax issues. In particular, the risk of creating permanent establishments in other jurisdictions, profit attribution, and transfer pricing.

The OECD's Deputy Secretary-General has acknowledged that the rapid expansion of remote work is reshaping where economic activity takes place. By the end of this year, the OECD is expected to present a proposal to the Inclusive Framework on how to address these challenges. Businesses with internationally mobile workforces should monitor developments closely and begin assessing where their current operating models could give rise to additional tax exposure or compliance burdens.

EMMA: Next, HMRC has launched a new tool for close company loans to participators. Where a close company makes a loan to a participator — broadly, a shareholder or loan creditor — in an accounting period, that loan is subject to a corporation tax charge. The company must declare such loans in its tax return, with tax due nine months and one day after the end of the relevant accounting period.

Relief from the charge is available if the loan is repaid, released, or written off within nine months of the end of the accounting period. HMRC's new tool allows officers of the company, participators, or authorised agents to provide information about repaid loans. This should reduce administrative friction but also signals a more structured compliance approach by HMRC. Businesses should ensure participator loans are carefully tracked, repaid on time and accurately reported in tax returns.

ANDRÉE: Our third news item concerns the Renters' Rights Act 2025 and its interaction with Stamp Duty Land Tax on residential leases. The Act came fully into force on 1 May 2026, abolishing fixed-term assured shorthold tenancies. All tenancies are now periodic, meaning tenants can remain in their property until they choose to leave by giving two months' notice.

This has created a concern around SDLT. Because SDLT on the grant of a lease is calculated on the net present value of rent, fixed-term tenancies often fell below the £125,000 SDLT threshold. A periodic tenancy, calculated on the basis that it continues indefinitely, would potentially bring many more tenancies into the SDLT net.

A Written Ministerial Statement has now confirmed the government's intention to legislate in the Finance Bill 2026-27 to deal with this. Assured tenancies under the amended Housing Act 1988 will not give rise to an SDLT charge on the rent element, with retrospective effect from 1 May 2026. This provides welcome certainty for landlords, investors, and those in the private rented sector.

EMMA: Thanks Andrée. Let’s move on to our three case studies. Our first case is an important case involving capital allowances and windfarm development and has been going through the courts for several years.

The decision of the Supreme Court in the Orsted West of Duddon Sands case has finally been released. The issue for the Supreme Court was whether expenditure on environmental, technical, and engineering studies incurred before the construction of offshore windfarms qualified for capital allowances under section 11 of the Capital Allowances Act 2001.

HMRC accepted that allowances were available for the fabrication and installation of the wind turbines and connector cables themselves, but argued the preparatory study costs were too remote. The FTT decided that some of the studies qualified for capital allowances and others did not whereas the Upper Tribunal, agreeing with HMRC, decided that none of the studies qualified. The Court of Appeal disagreed with that decision and so HMRC appealed to the Supreme Court which has ultimately sided with HMRC.

The Supreme Court found that the requirement that the expenditure must be "on the provision of" plant indicates a narrow test and requires a close connection to the plant itself. Costs of studies and surveys that advise on how to choose or design plant do not meet that test.

The decision is significant for businesses undertaking capital-intensive projects. Preparatory and feasibility study costs will not qualify for capital allowances unless they have a sufficiently close connection to the actual provision of plant and machinery. This means that businesses will need to assess the categorisation of early-stage project costs and factor in the limited availability of capital allowances when modelling project viability.

ANDRÉE: The second case study looks at compensation for loss of share options. The High Court considered how to calculate compensation owed to a former employee of GlobalData PLC who was promised he could retain his share options after leaving employment but was subsequently prevented from exercising them.

On termination in September 2014, Global’s CEO confirmed that the taxpayer, Mr Dixon, could retain his options and this was confirmed in a settlement agreement. By entering into the settlement agreement, the taxpayer agreed to work until the end of 2014 and to be bound by restrictive covenants putting him out of the employment market for several months. GlobalData later refused to allow him to exercise his vested share options. They also failed to grant replacement options to him in relation to his unvested options, when other employees received replacement options.

The court upheld Mr Dixon’s proprietary estoppel claim based on the CEO's assurance, Mr Dixon's reliance on it, and the detriment he suffered by entering into the settlement agreement.

On compensation, the court ruled that the compensation for his vested options should reflect the price achieved in a bulk broker sale for other employees at the same time — not a later higher market value. The court also decided that Mr Dixon should be compensated for GlobalData's failure to grant him replacement options.

The key lesson for employers here is that informal assurances around equity incentives made during exit negotiations — particularly when reflected in a settlement agreement —can create binding obligations. Communications about post-termination equity rights must be carefully controlled and decisions accurately recorded.

EMMA: Our last case study, concerns UK withholding tax relief. The Court of Appeal considered whether relief from UK withholding tax on interest under the UK-Ireland double tax treaty was available to Burlington Loan Management DAC, an Irish tax-resident company, or whether the treaty's anti-abuse provision applied.

Burlington had taken an assignment of a debt claim from a Cayman Islands company in liquidation. The UK payer withheld tax at 20% on interest payable to Burlington and paid it to HMRC. Burlington then claimed repayment, relying on Article 12(1) of the UK-Ireland treaty. HMRC argued the anti-abuse provision applied.

The Court of Appeal dismissed HMRC's appeal, finding that "taking advantage" of a treaty article must mean obtaining a benefit contrary to the object and purpose of the treaty. Reducing UK tax revenues is not, in itself, evidence of abuse. On the facts, Burlington was acting as an independent Irish company, at arm's length, in genuine commercial activity.

This provides helpful clarity on treaty anti-abuse provisions, though genuine commercial transactions can still be challenged. This means that businesses should still carefully assess purpose and substance when structuring similar arrangements

ANDRÉE: Thanks Emma. Before we end, let’s cover some recent legislation and guidance. On 21 May, HMRC published a policy paper announcing the government's intention to make the Foreign Permanent Establishment Exemption mandatory for UK-resident companies that conduct part of their business through foreign PEs.

Currently, without an election, foreign PE losses can be offset against UK profits while the foreign PE's profits may fall outside the UK tax net through double taxation relief — a mismatch HMRC intends to close.

Draft legislation will be published in Summer 2026, with the changes taking effect from 1 September 2026 for companies with foreign PEs in the oil and gas sector, and from accounting periods beginning on or after 1 January 2027 for all other companies. Groups with international footprints will need to reassess their structures and use of losses ahead of those dates — particularly those in oil and gas, where the rules apply sooner.

EMMA: HMRC has also published guidance on a targeted advance assurance service allowing eligible SMEs to request clarity on up to two specific complex or high-risk areas of an R&D tax relief claim.

To be eligible, a company must be an SME, must be carrying out or planning R&D in the relevant period, must not yet have claimed R&D relief for that period, and must not already have received assurance on the same areas.

Areas on which assurance can be sought include whether the project qualifies as R&D for tax purposes, whether overseas expenditure qualifies, whether contracted-out R&D qualifies, and whether the company is exempt from the PAYE and NIC cap. Each application is limited to one project and one area.

HMRC aims to process applications within 40 calendar days. Importantly, if assurance is refused, there is no right of appeal, so businesses should prepare applications carefully and be strategic about the issues they raise.

ANDRÉE: Finally on the guidance side, HMRC has issued a briefing following the Court of Appeal's decision in HMRC v Colchester Institute Corporation.

The case concerned the VAT treatment of public monies received by further education institutions to fund the provision of free education. Historically, HMRC treated this as a grant — outside the scope of VAT as non-business income.

The Court of Appeal agreed with Colchester Institute Corporation that funding from the Education Funding Agency and Skills Funding Agency constituted third-party consideration for delivering approved courses to eligible students — making it business income within the scope of VAT.

HMRC has confirmed it will not appeal and is now consulting with stakeholders before publishing updated guidance. Institutions that have not already adopted the third-party consideration position can continue their current treatment until any future change, which will apply only prospectively.

This decision has wider relevance beyond the education sector so businesses that receive third-party or government funding should review whether those arrangements could be treated as taxable supplies.

EMMA: Well, that's it for this edition of Tax Matters. If you'd like to know more about the topics we’ve discussed, the June edition of our Tax Matters briefing is available on our website. If you have any questions about these developments or how they might affect your business, please get in touch with your usual contact in our tax team.

Goodbye from both of us and thanks for listening to Tax Matters.