ESC disagreement

ESC disagreement

Didn't find your answer?

HMRC are alleging that our client company (owned by the son) is connected with another company (owned by his father). We claim ESC C9 means that the companies are not associated, but HMRC say C9 cannot be used because there is substantial commecial interdependence between the two companies (which in our opinion these clearly is not).

Several letters have gone back and forth with HMRC saying there is substantial commecial interdependence and us saying don't be stupid. Does anybody actually know what happens if we cannot reach agreement?

I know that ESC's are not recognised by the Courts as they have no legal force. Does this mean that we are at the Revenue Inspectors mercy at the end of the day?

Any advice greatly appreciated.
Richard

Replies (6)

Please login or register to join the discussion.

avatar
By User deleted
04th Jan 2007 16:56

Is there any commercial interdependence?
The rent payable is , you say, based on a properly drawn up lease and the rent payable is market rent. In that case there is an argument that the ownership of the property by the father's company is immaterial , as the father's company could sell the property and the son's company would be unaffected.

Devil's advocate [HMIT] argument might say that son's company , if in difficulties, would have an easier time with father's company as landlord so even if not legally, commercially there is interdependence.

Is there evidence of any failure of actual and timely payment of rent, for example?

Even on this worst case analysis, you say the rent payable is modest, so I would follow the suggestion of pursuing the CTM03770 argument

Thanks (0)
avatar
By AnonymousUser
04th Jan 2007 11:18

Grace and favour
It seems that the Revenue have the right to decide the circumstances in which an ESC can apply. As a result, such decisons can only be challenged on the grounds of unreasonable or discriminatory behaviour towards a taxpayer. Is the Inspector being unreasonable in his argument that there is substantial commercial interdependence? One would think that he must have grounds for believing so - what are his reasons? If he is not prepared to state precisely why he considers there to be SCI I would suggest he is acting unreasonably.

Thanks (0)
avatar
By richard.meller
04th Jan 2007 12:32

Thanks
Thank you for the comments. The position is that the son's company rents its trading premises from his fathers company. There is a formal 21 year lease drawn up by solicitors on completely commercial terms. The Revenue admit that the rent paid by the sons company is not substantial in either absolute or relative terms, but they argue that because the company only operates from the rented premises that the company is dependant on the fathers company (i.e. the landlord).

We say that the lease is on arms length & commercial terms (and therefore the terms could easily be replicated by either company) and still has 10 years left to run with no provisions for early termination. Therefore the son could easily relocate his company in the event that the lease would not be renewed and is not therefore dependent on the fathers company.

There is absolutely no tax avoidance or transfer of profits to lower rates of tax involved.

Thanks (0)
avatar
By AnonymousUser
04th Jan 2007 13:08

CTM03770
I would direct the Inspector to that paragraph - asking him to explain why he thinks each company relies upon the other. In particular, though, I would direct him to the closing comments - in cases of doubt he should refer the matter to CT&VAT (Technical) for assistance. Ask him for their views on the matter.

Thanks (0)
avatar
By richard.meller
05th Jan 2007 10:50

CTM03770
We have referred the Inspector to this paragraph in earlier correrspondence, he believes that the last sentence of para 2 which says:

'so essentially you are concerned with whether or not the companies rely on each other in any way.'

means that because the sons company rents its premises from the fathers company that is sufficient for there to be commercial interdependence.

We have also asked him to refer the matter to CT&VAT (Technical) which we believe he has done, and is still pursuing the matter.

I could appreciate that if there was a non commercial arrangement designed to siphen profits that would have been taxed at 32.75% in the sons company to be taxed at 19% in the fathers company, then quite rigthly the companies should be treated as associaetd. It seems clear to me that the substantial commercial interdependence rule is to prevent abuse of the concession, and not to penalise genuine commercial arrangements.

Thanks (0)
avatar
By AnonymousUser
05th Jan 2007 12:16

Rely on each other?
Does the father's company rely on the son's company as a source of income? Perhaps.

Does the son's company rely on the father's company to provide it with trading premises? If rent is charged at market level I would strongly argue not, as has already been suggested. For commercial interpendence to apply, it has to be a 2-way street - it appears not in this case, so I'll be interested to hear what the technical team have to say.

Thanks (0)