Prudential Regulation Authority: the future approach to banking supervision

The Bank of England (the Bank) and the Financial Services Authority (FSA) have today published a joint paper The Bank of England, Prudential Regulation Authority – Our approach to banking supervision setting out the current thinking on how the future Prudential Regulation Authority (PRA) will approach the supervision of banks, building societies, credit unions and investment firms.

Hector Sants, FSA chief executive and PRA chief executive designate, said:

“The PRA's purpose is fundamentally different from that of previous regulatory regimes and will lead to a significantly different model of supervision to that which was in use pre-2007. In designing this new model we have incorporated both the lessons learned from the last financial crisis and those from firm failures of the past.

“The new regulatory model will be based on forward looking judgements and will be underpinned by the fact that the PRA has a single objective to promote the stability of the UK financial system and in consequence will be a very focused organisation. The new supervisory approach will build on the more intensive approach adopted by the FSA since the crisis.”

Andrew Bailey, FSA director of UK banks and building societies and PRA deputy chief executive designate, said:

“Maintaining financial stability is an objective in public policy which we should all value highly. We have seen what happens when we lose it. But achieving and maintaining financial stability does not mean that we have an industry in which no-one can fail.

“In order to deliver its objective of stability of the financial system, the PRA will use a new framework to assess risks to financial stability. This document sets out our thinking so far and aims to foster debate about the design of the PRA.”

The paper will be presented and discussed at a conference in London today for CEOs and senior managers of firms that will come under the PRA’s supervisory control.

Today’s paper outlines:

• the principles underlying the PRA’s approach;
• the scope of the PRA;
• the PRA’s risk assessment framework;
• the PRA’s forward looking, judgement-led approach to supervision;
• the approach to policy-making that will support the judgement-led model; and
• the approach to authorising firms and approving individuals.

The PRA will be responsible for supervising both insurance companies and deposit-takers. A companion paper will be published in June 2011 to cover the PRA’s approach to supervising insurance companies.

Mauritius to Host First International Investment Forum

Mauritius will host the first Mauritius International Investment Forum (MIIF) on 15 and 16 June 2011 at the Intercontinental Resort, Balaclava. Organised by the Board of Investment in the context of its 10th anniversary as a leading Investment Promotion Agency, the forum will be opened by the Prime Minister, Dr Navinchandra Ramgoolam.

This was announced yesterday by the Vice-Prime Minister, Minister of Finance and Economic Development, Mr Pravind Jugnauth, during a press conference held in Port Louis. The MIIF will showcase the various investment opportunities that Mauritius and the regional economies offer to the global investment community as well as the use of Mauritius as a gateway for investing in Africa and Asia, said the Vice-Prime Minister.

The two-day forum will be attended by Chief Executives from leading companies, both local and international, as well as business professionals and investors, with a view to creating a network among the participants. Besides, it will highlight how the Mauritius platform can be instrumental in capitalizing investment opportunities for Chinese and Indian investors in new markets.

Among the main themes on the agenda: Exploring the economic sectors of Mauritius; African renaissance; China: Leading outward investments globally; India: Taking the great leap forward and Europe: Finding new opportunities.

The guest speaker for the forum will be Lord Meghnad Desai from the House of Lords, UK. Other eminent personalities will also address the forum.

Click to register

Conyers lawyers recognised for Islamic Finance Expertise

Conyers lawyers Fawaz Elmalki and Sameer Tegally have been recognised as Islamic Finance leaders by Islamic Finance News, one of the foremost publications in the Islamic Finance industry.

The pair won recognition for expertise in Asset & Fund Management, Corporate & Commercial, and Offshore Finance in the 2011 Islamic Finance News Leaders List.

Fawaz Elmalki is a director in Conyers’ Dubai office and regularly represents Shari’a compliant funds and their sponsors in connection with their formation as well as institutional investors in such funds. He has broad experience in corporate finance and corporate law matters, including joint ventures and offshore structuring of Islamic finance products such as sukuk.

Sameer Tegally is an associate in Conyers’ Mauritius office and focuses on Shari’a compliant funds, Shari’a trusts and offshore Islamic finance, advising major international banks, foreign government agencies and multi-nationals on corporate and financing/investment structures, as well as collaterals involving Mauritius vehicles.

The IFN Leading Lawyers List recognises the best practitioners across various areas in the Islamic finance industry. The list is compiled following a survey of industry professionals including senior management of Islamic Finance issuers, investors, financial institutions and government bodies from around the world.

Conyers’s growing Islamic Finance practice provides Cayman Islands, British Virgin Islands, Bermuda and Mauritius law advice for Shari’a-compliant and Islamic finance transactions including asset and aviation finance, aviation, banking, corporate, investment funds, real estate, and takaful and ratakaful structures and transactions. The Firm regularly advises leading local and international law firms, banks, asset managers and multinational companies on offshore aspects of Islamic finance transactions.

IMD announces the 2011 World Competitiveness Rankings and the results of the “Government Efficiency Gap”

IMD announces data from the 2011 World Competitiveness Yearbook (WCY), which places the US and Hong Kong as the most competitive countries, both slightly ahead of last year’s winner, Singapore. In 2010, the US ranked third, losing the top ranking for the first time in decades.

Also in the rankings, Sweden jumps to 4th place, highlighting the competitiveness of the Nordic model. Germany shines and gains 6 ranks to 10th position thanks to buoyant exports and a more flexible labor market. Qatar, Korea and Turkey continue their ascent in competitiveness. The recession highlighted the “resistant” (Switzerland) and the “resilient” (Taiwan). Only 4 big economies are in the top 20.

“The world of competitiveness becomes more national. ‘World Competitiveness 2.0’ is thus characterized by a greater self-reliance of countries. It increasingly emphasizes re-industrialization, exports, and a more critical look at delocalization,” said IMD Professor Stéphane Garelli, Director ofIMD’s World Competitiveness Center.

“This trend is triggered by the rise in commodity and transport prices and higher labor costs in emerging economies. National champions are favored everywhere and borders re-surface – again!”

IMD also released its first Government Efficiency gap results, which compares a country’s government and business efficiency to determine whether countries have “the government they deserve.”

According to the findings, the overall competitiveness of the US was “rescued” by its business efficiency. In more advanced economies (Japan, Belgium, Ireland, US, Germany, etc.) the government lags behind business in efficiency. Switzerland is the exception. In emerging economies, Brazil and India are struggling, while Russia, South Africa, Chile, Estonia and Indonesia are ahead. A sound ‘balance’ between government and business efficiency can be found in Hong Kong, Singapore and Australia.

“Government spending has reached new highs since the recession: on average 47% of the GDPs in the most advanced economies. 12 European countries are already above the 50% threshold. The 23 biggest spenders are all European governments. How long can it last? In a new world of ‘state capitalism’, government efficiency will become a key determinant to competitiveness. Alas, the time lag between government reforms and economic imperatives keeps on increasing,” Professor Garelli said.

The following table compares how countries rank in Government and Business Efficiency, and shows the gap in their relative competitiveness. Some governments—listed below—heavily trail behind business competitiveness, others pave the way ahead. Do countries always have the government they deserve?

FT: Doing Business in the Isle of Man

The territory has managed to avoid recession and hopes are now pinned on the pace of recovery quickening

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UK cements position as centre of legal excellence

A new Action Plan has been published by the Ministry of Justice and UK Trade and Investment (UKTI), setting out how the country's commercial arbitration, mediation and court services will be promoted to a global audience.

The Action Plan is a key part of the government's Plan for Growth, and aims to encourage overseas commercial clients to make use of UK legal services, with particular emphasis on the potential benefits for businesses.

The plan sets out a series of Government commitments, including creating an online promotional toolkit for trade and investment advisors, and ensuring professional representatives attend official visits where appropriate.

Some of the top reasons to carry out business in the UK, given in the Action Plan, include:

• International dispute resolution continues to grow. The number of disputes resolved through arbitration and mediation in the UK reached 34,541 in 2009, up from 19,384 in 2007

• World-class, streamlined court services for the 21st Century.The Rolls Building, scheduled to open later in the year, will for the first time incorporate onto one site the work carried out by the Commercial Court, the Technology and Construction Court and the Chancery Division.

• English judgments are easily enforceable. The EU Judgments Regulation and European Enforcement Order make these judgments watertight in Europe, but they are also recognised and respected in most other parts of the world

• More international and commercial arbitrations take place in London under English law than in any other city in the world, with 90 per cent of commercial cases handled by London law firms involving an international party

• Our lawyers are regulated through the Legal Services Act 2007 in England and Wales and the Legal Services (Scotland) Act 2010

• An essential partner of the financial services sector. The biggest areas of practice for UK law firms include corporate work, banking and capital markets.

Justice Secretary, Kenneth Clarke, said:

"As Britain's economy emerges from a difficult period, it is vitally important that the country builds on its strengths to support the recovery. There are few areas where Britain is stronger than in the law.

"People turn to us because they know they will find world class, highly specialised practitioners and expert judges in the specialist courts. They understand that a decision from a court in the UK carries a global guarantee of impartiality, integrity and enforceability."

Minister for Trade and Investment, Lord Green, added:

"Today's action plan takes us even further in promoting the UK abroad, with representatives from legal professional bodies due to participate in visits and trade delegations. This will ensure that these professions remain at the core of the UK offer and that we highlight the key role they have to play in our future economic growth."

The Government will be working with TheCityUK, the Law Society of England and Wales and the Bar Council to find a joint approach to encouraging growth. In addition to the Government objectives the Action Plan identifies some key tasks including producing and delivering a strategy to promote the UK as a centre of excellence for dispute resolution and a new leading role for our Legal Services and Dispute Resolution Group.

Khawar Qureshi QC, Chairman, Legal Services and Dispute Resolution Group, said:

"TheCityUK welcomes the Ministry of Justice's Action Plan and the new, leading role for the Legal Services and Dispute Resolution Group. We bring together the institutions and firms providing litigation and arbitration services.

"We will work with our members to deliver an integrated and strategic approach to the overseas agenda. This will include the re-launch the international strategy of our committee."

Thomson Reuters acquires World-Check

Thomson Reuters, the world’s leading source of intelligent information for businesses and professionals, has announced the acquisition of London-based World-Check, a leading global provider of financial crime and corruption prevention information. Terms of the deal were not disclosed.

Financial crime and corruption prevention is one of the fastest-growing areas of regulatory risk. Businesses are facing more risks – and scrutiny – than ever, and governments and regulators around the world are increasing the level of compliance and inspection, particularly around fraud, bribery and sanctions. World-Check provides information that profiles entities and individuals and is used in the due diligence processes of the international business community. More than 5,400 clients in over 150 countries, including 49 of the world's top 50 banks, 200 enforcement and regulatory agencies, and 45 of the world’s top 100 corporations, rely on the World-Check database.

World-Check will be part of the Governance, Risk & Compliance (GRC) business of Thomson Reuters, which provides global financial institutions, corporations and law firms with the information and tools necessary to navigate today’s heightened regulatory landscape. Chief Executive Officer Dan Peak will continue to lead the World-Check executive team, and will report to David Craig, president, GRC.

“Growing our presence in the GRC sector is a key strategic priority for Thomson Reuters, and the addition of World-Check will extend our presence in the important and fast-growing financial crime and corruption prevention segment,” said Craig. Earlier this year, the company introduced Thomson Reuters Accelus – a comprehensive suite of information, software and services for professionals in compliance, audit, legal, mergers and acquisitions, and risk functions in an organization.

“Managing risk across the enterprise is a key concern for our customers,” said Thomas H. Glocer, chief executive officer of Thomson Reuters. “I’m pleased we have secured this excellent opportunity to reinvest some of the proceeds of our recently announced dispositions as we pursue our global growth strategy.”

“World-Check affirms and accelerates our commitment to deliver the information, software and services that help legal, compliance and risk professionals navigate an increasingly complex global risk and regulatory landscape,” said Jim Smith, chief executive officer, Thomson Reuters Professional Division. “World-Check is a leader in this sector, and we’re delighted that they are now part of the Thomson Reuters team.”

“I am really excited about the new opportunities presented by the combination of Thomson Reuters and World-Check, which will enhance our ability to deliver world-class information services to help prevent financial crime and corruption,” said Peak.

World-Check has more than 500 employees based in 11 locations around the world.

Allen & Overy: The regulatory outlook for Exchange Traded Funds

This paper charts the growth of ETFs as an investment product and looks at how regulatory changes such as UCITS IV and MiFID II will present new challenges and opportunities for the ETF sector.

For a copy of the paper please click on the link below:

The impact of UCITS IV and MiFID on ETFs

Revised Laws of Mauritius available Online

The Online Database of the Revised Laws of Mauritius was launched yesterday at the Bar Council by the Attorney-General, Mr. Yatin Varma. The Online Database gives access freely to the Constitution of Mauritius and Orders made under the Constitution, an alphabetical list of all Acts of Parliament, and recent bills which have been introduced before the National Assembly and Acts of Parliament which have been published in the Gazette, with a short summary of what Acts and Bills are all about.

The free dissemination of the Revised Laws of Mauritius over the internet will, no doubt, reinforce the rule of law and the functioning of democracy in our country, said the Attorney-General in his allocution. He pointed out that in order to reinforce the rule of law and further modernise our legal system, the National Assembly recently passed the Revised Laws (Amendment) Act (Act No. 4 of 2001).

Mr. Varma said that legislation must be readily available and understood for increased community awareness and understanding of the law and that better access to legislation is essential in a democracy. He added that in 2003, in Montreal, at an international meeting of providers of free access to legal information, it was declared that public legal information from all countries and international institutions is part of the common heritage of humanity.

The Revised Laws of Mauritius published on the website are a complete set of laws as at September 2009. The next revision to the Revised Laws will be carried out soon and will be published in a Supplement and, thereafter incorporated in the Online Database, which can be accessed free of charge from the website of the Attorney-General's Office.

Mauritius Hosts 5th Asia-Africa Conference on International Tax Development

The 5th Asia-Africa conference of the International Fiscal Association on the theme “International Tax Development - Global and Regional” opened yesterday at the Sofitel Imperial, Mauritius, Flic en Flac, in the presence of the Vice-Prime Minister, Minister of Finance and Economic Development, Mr Pravind Jugnauth.

Some 100 participants, both local and foreign policy makers, are attending the two-day conference. The objective is to discuss and exchange views on the recent developments that have taken place in the domain of international taxation, on the global front and within the region. The policy makers are also exposed to latest developments with regard to taxation.

Speaking at the opening of the conference, the Vice-Prime Minister stressed that Mauritius is revisiting its legislative and institutional frameworks to reinforce financial supervision and strengthen the regime to fight terrorist financing, money laundering and other financial crime. With increasing cross border investments and transactions, taxpayers are generating more of their income abroad and are transferring more money across country borders, he added. On this score, the importance of exchanging information has increased in order to levy accurate tax assessments and fight corruption, money laundering and terrorist financing, he said.

According to Mr Jugnauth, the accelerating process of globalisation of trade and investment has fundamentally changed the relationship among domestic tax systems. Removal of tax barriers to international commerce and investment, base broadening, rate reductions, increasing use of taxation as a means to compete for trade and FDI are some of the global trends that have had a bearing on the Mauritian approach to tax policy, he stated.

Mauritius, in the past three decades, has brought down the maximum income tax rate from 70 to 15 per cent. At present, the rate of tax on corporate and personal income is 15 per cent and the VAT rate is also 15 per cent. For a number of years, Mauritius was among the countries with the highest effective tariff barriers in the world. Mauritius has also rationalised and lowered trade taxes and simplified the tax system, strengthened the role of tax administration and created a wide network of Double Taxation Agreements. The country is also moving towards transforming itself into a duty-free shopping paradise.

Mauritius: The Institute for Judicial and Legal Studies Bill

The object of this Bill is to provide for the establishment of an Institute for Judicial and Legal Studies for the purpose of promoting proficiency and ensuring the maintenance of standards in the Judiciary and among law practitioners and legal officers with a view to enhancing the justice system, in line with the recommendation of the Presidential Commission set up in 1997 to examine and report upon the structure and operation of the judicial system and legal professions of Mauritius, and for matters related thereto.

Mauritius: The Law Practitioners (Amendment) Bill

The main object of this Bill is to amend the Law Practitioners Act, in line with certain recommendations of the Presidential Commission set up in 1997 to examine and report upon the structure and operation of the judicial system and legal professions of Mauritius, so as to –

1. provide for the establishment of a Council for Vocational Legal Education;
2. ensure that prospective law practitioners undergo an adequate period of training and pupillage;
3. make provision for law practitioners and legal officers to follow Continuing Professional Development Programmes;
4. ensure that persons who wish to be considered for appointment as a judicial or legal officer follow an appropriate course;
5. enable a citizen of Mauritius who has obtained a professional qualification as, or equivalent to that of, barrister in another Commonwealth country or the United States to apply for admission to practise in Mauritius as a barrister, and for matters related thereto.

Jersey: Revision to the Island's Strategy to Counter Money Laundering and the Financing of Terrorism

In October 2008, the Anti-Money Laundering and Countering the Financing of Terrorism Strategy Group (the “Strategy Group”*) published its first Island Strategy to Counter Money Laundering and the Financing of Terrorism. This formal document outlined the key money laundering vulnerabilities that the Strategy Group considered were faced in the Island at that time. For each vulnerability that had been identified, there is a goal and, for each goal, a number of actions to achieve that goal.

The Strategy Group undertook to carry out regular reviews of the strategy document, including the vulnerabilities and goals identified in it, to ensure that the document remains current and relevant.

As a result of such a review, the Strategy Group has added a new “goal”, which is to “Raise awareness of the importance of considering the issues involved in dealing with higher risk jurisdictions”. The reasons for this amendment are outlined in the document.

Updates are also given in the revised document on what was work in progress in October 2008: in particular, work on the registration and supervision of non-profit organizations and the introduction of provisions regulating cross-border physical cash transfers of €10,000 or more.

During 2011, it is the intention of the Strategy Group to conduct a comprehensive fresh review of all the money laundering and terrorist financing vulnerabilities faced by the Island.

*The Strategy Group consists of representatives from the Chief Minister’s Department, the Economic Development Department, the Law Officers’ Department, the States of Jersey Police, the States of Jersey Customs and Immigration Service, the Joint Financial Crimes Unit, the Jersey Financial Services Commission and the Jersey Gambling Commission.

FT: Islamic Finance

The niche nature of the sector could be seen as a weakness but increasing populations and oil wealth offer the potential for substantial growth

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UNDP: Tax shake-up could give poor countries head start on anti-poverty track

Reforming how countries manage customs and tax revenues and strengthening anti-corruption and oversight measures could help reduce illicit funds flows, amounting to billions of dollars per year, from least developed countries (LDCs).

Recommendations for customs and tax reform are put forward in a United Nations Development Programme (UNDP)-commissioned paper, “Illicit Financial Flows from the Least Developed Countries: 1990-2008," presented and discussed today at the Fourth UN Conference on the LDCs in Istanbul, Turkey.

“For the Millennium Development Goals to be achieved, not only do countries’ economies need to grow, but also revenue from that growth needs to be invested back into services and infrastructure,” said UNDP Administrator Helen Clark. “Many forms of illicit financial flows divert scarce resources away from development.”

The United States-based non-profit research body, Global Financial Integrity, estimates that developing countries collectively lose as much as US$1 trillion in illicit financial outflows, including through corruption, trade in smuggled goods, and criminal activities such as drug trafficking and counterfeiting.

“That is money which could otherwise be helping to get all children into school, helping all mothers give birth safely, and expanding access to basic healthcare, better nutrition, and clean water and sanitation for all,” added Helen Clark.

According to the UNDP-commissioned paper, approximately 65 percent of illicit financial flows from LDCs are through trade mispricing, when imports are overpriced and exports underpriced on customs documents.

To help curb the loss of these funds, the discussion paper recommends that customs and tax reforms in the LDCs should be accompanied with robust legal institutions and regulatory systems to fight corruption.

Watchdogs should also be empowered to provide adequate oversight over the operations of the financial system including the customs authorities, multinational and domestic companies, and the collection of taxes.

The paper notes that these measures can only become reality if supported by political will both in the LDCs and internationally, where the lost revenues end up.

Given that taxes are the most sustainable source of finance for development, the paper emphasises the need for equitable and fair domestic tax systems that do not unduly burden the poor, and could boost economic growth that benefits more than a privileged few.

The international community also has a critical role to play in improving the systematic exchange of tax information between different governments, related to non-resident individuals and corporations.

UNDP works with partner countries, including LDCs, to enhance their anti-corruption capacities, with the longer term aim of making more resources available for education, health care, and other public investments.

Last year, UNDP offices in more than 100 countries supported national governments through, for example, technical advice to anti-corruption bodies, and building of partnerships with civil society groups to help strengthen government oversight.

In Laos, for example, UNDP helped the government to align its fiscal policy with its poverty reduction objectives, leading to a larger share of government budget being allocated to priority areas such as education, rural infrastructure and environmental conservation.

UNDP is also supporting the Maldives and Vanuatu governments and development partners in strengthening their customs services’ automated clearance processes.

UNDP is a member of the Leading Group on Innovative Financing for Development, an alliance of more than 50 governments and international organizations, which seeks to explore new and effective ways to fund development efforts, including through stemming of illicit finance flows.

The discussion paper focused on 34 of the 48 LDCs for which complete data is available.

HMRC (Appellant) v Tower MCashback LLP 1 and another (Respondents) [2011] UKSC 19

JUSTICES: Lord Hope (Deputy President), Lord Rodger, Lord Walker, Lord Collins, Lord Kerr, Lord Clarke, Lord Dyson

BACKGROUND TO THE APPEAL

This appeal raises two issues of tax law. The first (“the procedural issue”), of general importance to the self-assessment regime, concerns the scope of arguments which may be advanced by HMRC in a taxpayer’s appeal against a closure notice which the HMRC issues to conclude its enquiry into a tax return. The second issue (“the expenditure issue”) concerns the proper approach to determining whether expenditure has been “incurred” for the purposes of the Capital Allowances Act 2001.

The case concerns the tax consequences of the scheme used by MCashback Limited (“MCashback”) to raise finance to enable it to “roll-out” M Rewards, a software package which it had developed and which enabled manufacturers to promote products to customers by offering free mobile phone airtime. On the advice of Tower Group plc (Tower), it was decided to raise funds by selling rights to the software, via software licence agreements (SLAs), to four Limited Liability Partnerships tobe set up as part of the financing scheme. Tower personnel were founder members of the LLPs and negotiated the SLAs with MCashback. The SLAs provided for each LLP to receive a proportion of the clearing fees which manufacturers would pay in respect of each transaction via the M Rewards system. For the purposes of this litigation, the situation of Tower MCashback 2 LLP (LLP2) has been taken as representative of the other LLPs. LLP 2 entered an SLA with MCashback, under which it was to pay £27.5m for a licence of part of the M Rewards system. LLP2 was entitled to 2.5% of the gross clearance fees received from exploitation of M Rewards. LLP2 obtained the funds required to pay the consideration under the SLA (and the associated professional fees) from investors, who became investor members of LLP2. They contributed 25% from their own funds and obtained the remaining 75% from bank borrowing, on uncommercial terms. Janus Holdings Ltd (Janus) lent the required sum to a special purpose vehicle set up by Tower, which made interest-free, non-recourse loans to the investor members. MCashback was obliged to deposit approximately 82% of the consideration due to it in terms of the SLA as indirect security for the investor members’ borrowing from Janus. These sums were placed on security deposit with R&D Investments Ltd (R&D), which R&D in turn deposited with Janus as security for Janus’s loan to the SPV.

LLP2 claimed £27.5m first year capital allowances for the 2004/05 tax year, the amount of consideration set out in the SLA. Because of the way LLPs are taxed, the investor members would take the benefit of these allowances if the claim is successful. One of the conditions for entitlement to capital allowances is that a person “incurs qualifying expenditure”: section 11 Capital Allowances Act 2001. Expenditure is qualifying expenditure if, amongst other things, it is capital expenditure on the provision of plant or machinery, which includes software or rights to software. On 30 June 2005 HMRC issued a notice of enquiry into LLP 2’s partnership return. Attention initially focused on section 45(4) CAA 2001, which withholds first year allowances for expenditure on software rights in certain circumstances. After a lengthy period of enquiry, during which correspondence was exchanged about the application of section 45(4), HMRC issued closure notices (under s28B Taxes Management Act 1970) which stated that, “as previously indicated … the claim for relief under section 45 CAA 2001 is excessive” and amended the partnership return so that the capital allowances claimed, and allowable loss, were “nil”.

The LLPs appealed against the closure notices. Before the Special Commissioner, HMRC abandoned the argument that the claims were disallowed by section 45(4) CAA and sought instead to argue that the full extent of the consideration under the SLAs was not expenditure incurred on software. The Special Commissioner decided the procedural point in favour of the HMRC, allowing them to advance this argument, and, on the expenditure issue, disallowed 75% of LLP2’s claims. On appeal, the High Court allowed the LLPs’ appeals on the procedural issue. It would also have allowed the LLPs’ appeals on the expenditure issue, had the point arisen for decision. The Court of Appeal, by majority, reversed the High Court on the procedural issue (Arden LJ dissenting), but agreed with the High Court on the expenditure issue. HMRC appeals against the determination of the expenditure issue and the LLPs cross-appeal against the determination of the procedural issue.

JUDGMENT

The Supreme Court unanimously allows the HMRC’s appeal and dismisses the LLPs’ cross-appeal. Lord Walker issues the leading judgment and Lord Hope a short, concurring judgment. The other members of the Court agree with both. It therefore holds that the HMRC could advance alternative arguments on the expenditure issue, and that all of the consideration provided for in the SLA was not expenditure incurred on the provision of software. The Court directs that the closure notices be amended to allow only 25% of the first year allowances claimed.

REASONS FOR THE JUDGMENT

Procedural issue

The Special Commissioners are free to entertain legal arguments which played no part in reaching the conclusions set out in the closure notice. The scope and subject matter of the appeal will, however, be defined by the conclusions stated in the closure notice and any amendments made to the return. The Court emphasises that this is not to be taken as encouragement to HMRC to draft every closure notice in wide and uninformative terms. There is, however, a public interest in taxpayers paying the correct amount of tax and it is one of the duties of the Commissioners to have regard to that public interest. Any potential unfairness to the taxpayer can be avoided by proper exercise of case management powers during the appeal: [15] - [18]; [83] – [85].

Expenditure issue

The court considers two previous decisions of the House of Lords: Ensign Tankers (Leasing) Ltd v Stokes [1992] 1 AC 655 and Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51. Both remain good law: [72] It is not enough for HMRC, in attacking a scheme of this sort, simply to point to money going round in a circle: [77] Nor, however, is it the law – as the judge had held – that unless one finds the transaction in this case to be a sham, the only possible conclusion is that the whole of the consideration in the SLA was expenditure incurred on the provision of software. In the context of a complex pre-ordained transaction, the court’s task is to test the facts, realistically viewed, against the statutory test, purposively construed: [67] Entitlement to capital allowances requires there to have been real expenditure for the real purpose of acquiring plant or machinery for use in a trade: [80]. Concerns about the valuation of what is being acquired and the commercial soundness of the transactions are relevant. The fact that rights in the software had been transferred by MCashback to LLP2 demonstrated the reality of some expenditure on acquiring those rights, but did not conclusively show that the whole of consideration in the SLA was expenditure for that purpose. The Special Commissioner found that the market value of the software was “very materially below” £27.5m. He had also held that there was little chance that the members’ loan would be repaid in full within ten years – as much as 60% might be unpaid, and waived, at the end of that period. These findings justified the conclusion that the money which the investor members borrowed was not used, in any meaningful sense, as expenditure in the acquisition of software rights. Instead, it went in a loop back to the lender in order to enable the LLPs to indulge in a tax avoidance scheme: [75]

NOTE

This summary is provided to assist in understanding the Court’s decision. It does not form part of the reasons for that decision. The full opinion of the Court is the only authoritative document.

CoSecs Reunited

CoSecs Reunited is the first global online networking community dedicated to compliance and governance professionals.

Whether you're looking for a social networking group in Sydney or a new job in Bermuda, CoSecs Reunited connects you to people in your profession around the world.

CoSecs Reunited, a service from ICSA Software International, is free to join and will help you:

• keep in touch and up-to-date with your contacts
• set-up and join networking groups and forums
• stay informed about your industry
• find the people and knowledge you need

From company secretaries in London to corporate counsels in New York, CoSecs Reunited has something for everyone.

Key decision makers at top firms confirm London’s unparalleled reputation as the most global of all financial centres

A report released today by the City of London highlights the complex interaction of factors that affect the location decisions of global businesses and their highly-skilled employees.

The ‘Understanding Global Financial Networks’ report, produced by Ipsos MORI, highlights how proximity to clients, quality of business environment (including the stability of tax and regulatory regimes) and availability of skilled talent locally are all central to such decisions.

Based on interviews with 40 high-level financial services professionals – both key decision makers and mobile, highly-skilled employees - working for leading firms such as HSBC, Nomura, DVB Group, Deutsche Bank, KPMG, Clifford Chance, and Lloyds across the globe, this qualitative piece of research examines the various factors that firms and individuals take into account when deciding where they are going to be based.

It also presents an in-depth analysis of how the four leading financial centres - London, New York, Hong Kong and Singapore - are perceived amongst the international business community, looking at their overall reputation and how this has been affected by recent political and economic events.

Stuart Fraser, Policy Chairman at the City of London Corporation, said:

"As a financial centre, London remains the envy of the world – it is certainly the most global centre and, by quite some distance, the one with the greatest international capital flows.

"I know from experience that other financial centres, particularly those in the emerging markets of the Far East, are desperate to replicate this template for success so that they too can attract the top global firms and the top global talent. "But what is it that makes a financial centre attractive?

"With its many natural competitive advantages, London has long been seen as a welcoming business environment but the report suggests that this reputation has come under threat in recent times.

"‘Banker Bashing’, bonus backlashes and a perceived lack of certainty over tax, regulation and immigration have undermined London’s attractiveness to the international business community.

"In an increasingly competitive global marketplace, where capital and talent are highly mobile, it is vital that we pay heed to the way in which location decisions are made so that firms continue to choose to be based in London and continue to provide huge economic benefits for the UK for many years to come.

"But we must also create an environment that will appeal to individuals – a firm’s greatest asset is its workforce and if top performing employees decide they do not want to live in London, then businesses may decide to base themselves elsewhere."

What’s wrong with the international monetary system?

President Johnson stated in 1968: “To the average citizen, the balance of payments, the strength of the US dollar, and the international monetary system are meaningless phrases. They seem to have little relevance to our daily lives. Yet, their consequences touch us all consumer and captain of industry, worker, farmer and financier.”

WHAT ARE WE TO DO by TAN SRI LIN SEE-YAN

Business Annual - Offshore Guide 2011/12

A New Dawn Beckons for International Finance