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HMRC internal manual

Company Taxation Manual

Residence: outward company or permanent establishment migration: liabilities arising: deferral of exit charges: background

EU law background

Direct taxation falls within the competence of individual European Union (EU) or European Economic Area (EEA) Member States. However, that competence must be exercised, according to the Court of Justice of the European Union (ECJ), consistently with EU/EEA law. This means that various market freedoms must be observed, notably (for direct tax purposes) the freedoms of establishment and movement of capital.

In particular the right to freedom of establishment under Article 49 of the Treaty on the Functioning of the European Union, and Article 31 of the Agreement on the European Economic Area, has raised issues in relation to the various exit charges mentioned at CTM34130. A succession of ECJ cases (De Lasteyrie du Saillant. N, Cartesio *and more recently *National Grid Indus) led the European Commission to bring infraction proceedings against the UK. In response to the ECJ’s clarification of the relevant principles, FA13/S229 and SCH49 amended TMA70, introducing S59FA and SCH3ZB.

The cases broadly established that

  • the existing exit charges were a restriction on freedom of establishment, because they created a cash-flow disadvantage through triggering an earlier tax payment (in advance of eventual asset disposal, for example) which might discourage the creation of establishments elsewhere in the EU/EEA, but
  • rules might be developed which were nevertheless “justified on grounds connected with the preservation of the allocation of powers of taxation between the Member States”.

A further principle of EU/EEA law is that any such “justified” legislation must be “proportionate”, that is, go no further than is required to give effect to the justification.

The EEA includes the 28 EU States plus Norway, Iceland and Liechtenstein.

Outline of changes

There is no change to

  • the relevant charging provisions (see CTM34130)
  • due dates for payment of the exit charge tax, or
  • interest rules governing tax payments.

But the legislation introduces a statutory right to pay CT after the due date

  • for eligible companies and UK permanent establishments
  • in respect of qualifying corporation tax
  • where there is a formal agreement between the company and HMRC - referred to as an ‘exit charge payment plan’, or ECPP.

In exceptional cases HMRC has the power to require security to be given, for example a bank guarantee, before agreeing to a deferral.  An example of an exceptional case is where there is serious risk to collection of tax taking account of the possibility of recovering tax from another group company, or from  a controlling director, under TCGA92/S190. See CG45970 onwards

These aspects are considered in more detail in the following CTM paragraphs.