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UK COUNCILS FACE RACE AGAINST TIME TO FIND ALTERNATIVE CLASSROOMS FOLLOWING EMERGENCY SCHOOL CLOSURES
What is happening?
Ministers recently announced the emergency closure of over 150 school buildings made from lightweight concrete susceptible to collapse. The government has been accused of failing to combat a problem it has been aware of since 2018. Hospitals and courts have also been impacted by reinforced autoclaved aerated concrete, a lightweight material used between the 1950s and mid-1990s.
Labour has called for an audit into the government’s handling of the RAAC crisis, which raised alarm bells once it emerged that concrete thought to be in a non-critical condition was, in fact, dangerous.
The UK government has now committed to covering the costs of hiring temporary classrooms and moving students after local authorities and unions put pressure on local budgets. Southend-on-Sea City Council stated it had closed the main building of Kingsdown School for special-needs children in accordance with government advice and that ‘vital equipment’ needed by some students to commence their studies was in the closed building.
Headteachers are currently having difficult conversations with parents about why the schools are closed instead of welcoming students back to class.
The risks of RAAC have been well-known for over two decades. The UK public spending watchdog noted that a government programme to rebuild 500 schools with RAAC building materials was behind schedule. This belated decision has created anger among parents, teaching unions and opposition parties.
If the alternative classrooms are not found in time, it will strain parents who may have to take time off of work to look after their children. Furthermore, this is likely to disturb a child’s education as it means they cannot hit the ground running at the start of the school year.
Problems with RAAC extend to the public sector estate. In May, it was announced that five hospitals would need to be rebuilt to protect safety. This shows that the issue is widespread and not limited to schools.
The current crisis could have a couple of legal implications. Firstly, if schools are shut for months, parents may need to take time off work to look after their children. This means that they would lose earnings for taking time off. These parents may, therefore, look for lawyers to help them claim a loss of earnings during the period in which they weren’t working.
Similarly, parents may pay for nannies to look after their children while they work. If so, these parents will look for lawyers to provide legal advice on how to claim back expenses spent on nannies from the Department of Education.
Secondly, rebuilding the schools will create a demand for property lawyers. The lawyers will be needed to ensure that the new concrete quality adheres to regulations and is fit for purpose. Furthermore, they may also be required to conduct standard property legal procedures. These include negotiating the terms and conditions of real estate transactions and facilitating the transfer of titles.
Article written by Tina Khorram
THE UNALLOWABLE PURPOSE RULE
HMRC updated its unallowable purpose guidance in May 2023, especially following a slew of litigation based on the use and scope of its unallowable purpose rule. Although tax avoidance is a persisting discussion for many, familiarity with the unallowable purpose rule remains at an all-time low.
The unallowable purpose rule
This measure is an anti-avoidance legislation situated under ss. 441 and 442 of the Corporation Tax Act 2009 (CTA 2009). The law invalidates debits on a loan relationship on justified and reasonable bases so long as said relationship or any related transactions involve an unallowable purpose.
A loan relationship arises when a company is a debtor or creditor concerning money debt. A transfer of funds discharges a money debt, and an unallowable purpose is typically a transaction external to a company’s usual transactions, for example, a purpose that is personally beneficial to a director.
Under this rule, there are two specific exclusions concerning transactions for a business:
- Tax avoidance purposes, whether they are the primary intention or otherwise ancillary to another.
- Any part of a business’s activities which is not chargeable to corporate tax. For clarity, corporation tax is payable by companies on any chargeable gains made from the sale or disposal of assets.
Additionally, the rule allows for the restriction ‘of the deductibility of interest for UK corporation tax purposes’, especially in instances whereby the primary impetus of a borrower (privy to an underlying loan transaction) is to procure UK tax deductions.
Societal impact of tax avoidance
HMRC estimated that almost £400 million in tax was lost in 2020/2021 owing to tax avoidance schemes and further estimated a loss of £800 million through evasive conduct, such as personal expense write-offs and the underreporting of income. Thus, corporate tax avoidance has a devastating impact on the economy and, as such, is a prevalent issue in society.
The UK is a welfare state, and tax avoidance schemes deprive the government of much-needed resources to fund public services, which means they must either reduce expenditure on such services or increase the rate of public taxes. Such measures often lend to greater disparities between the rich and poor, thereby abetting further marginalisation of the disadvantaged.
Further, tax avoidance exposes individuals and corporations to costs often more significant than the purported tax advantages. For instance, those who engage in such activities may likely have undisclosed priority over their victims further down the ‘chain’, with the possibility of protracted litigation and the added uncertainty of outcomes for all involved.
Therefore, whilst the exclusions instigated by the rule may seem obvious to some, there has been increasing uncertainty about their precise scope; for example, are these exclusions applicable to financing arrangements for acquisitions or a business? If so, to what extent do they apply? And, to what extent would the government act in halting corporate tax evasion practices whilst ensuring any legislative measure does not inhibit foreign investments and acquisitions?
Legal impact of the augmented rule
The HMRC responded to such uncertainty by updating its Corporate Finance Manual to mitigate the dubiety surrounding the rule’s applicability. For one, the HMRC has shed some clarity on the circumstances during which the limitation will apply to ‘restrict UK tax deductions for interest’, such as when it is expected directors are cognisant of all ‘group purposes’, which is pertinent in decision-making processes concerning acquisitions.
Also, the test for establishing whether the rule applies to a particular transaction has now been confirmed as fact-based. However, preceding the confirmation it does apply, there must be a careful examination of presentable evidence.
Such steps demonstrate HMRC is insistent on achieving fair results for all whilst remaining determined to halt evasive practices. Conversely, the amount of new and ongoing litigation concerning this subject matter suggests there is still room for improvement despite the resulting case law initiating the development and amendment of the rule.
All that being said, further amendments to HMRC’s guidance are possible. These possibilities are pending the outcomes of powerhouse cases on the rule, such as that of HMRC v BlackRock HoldCo 5 LLC , the latter a UK tax-resident US company, and JTI Acquisitions Company (2011) Limited v HMRC .