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Do the anti-phoenixing rules apply?

Does the fourth condition bite?

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A client runs a successful trading company that has four branches, all run via the one company, which is 100% owned by a holdco.  They have been made an offer for the trading company, but for legal reasons (in connection with the monopolies commission I understand) the buyer is only able to acquire three of the four branches.  The current deal is that the buyer will take on the three branches if the existing owners of the company 'agree' to retain the fourth branch and run it themselves.

The specifics of how this will achieved have yet to be ironed out, but it is likely it will involved hiving off the trade of the fourth branch in to a separate vehicle so the remainder can be sold.  There is also some debate ongoing as to whether a share sale or a trade and assets sale will occur - the buyer is easy either way apparently.

We are looking at the tax implications of both scenarios, but whatever happens, there will be some cash in the tradeco to go up to the holdco.  They will then need to either draw down on the funds as dividends or liquidate via an MVL.  If they go with MVL of the holdco and retain the fourth branch, do they caught under the fourth condition of the phoenixing rules?

Or, could it be argued that the deal is being done for commercial reasons and if they wish to sell, they have to retain the fourth branch?

While I would like to think this argument might have some legs, I can also see that once hived off  from the tradeco, the fourth branch could simply be sold as a separate concern, and that doing so would then resolve the fourth condition issue.  I'm not aware of any conditions in the sale agreement that would require them to retain the fourth branch and as mentioned above, the current plan is that they simply retain the fourth branch.  Whether this is a pre-requisite of the deal remains to be seen.

Any thoughts?

Replies (10)

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By Matrix
13th Jun 2022 20:21

Is the main or one of the main purposes of the MVL the avoidance of tax?

What is the commercial rationale for liquidating Holdco?

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By The Dullard
13th Jun 2022 21:17

Well, the seller should obviously prefer a share sale, shouldn't they? SSE, 2nd subsidiary exemption will apply.

Surely, the route is existing company hives the three branches to be sold down to one or more new subsidiaries, retaining the branch to be retained in the existing company. Then sell the subs with SSE. No holding company, no passing up of cash, no MVL.

What is the commercial rationale for even having Holdco?

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By Tax Dragon
14th Jun 2022 05:46

What's the problem with moving branch 4 and cash up to existing HoldCo and selling existing sub? (This is not tax advice, just going for simplicity - you don't need a new entity then at all.)

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By ianthetaxman
14th Jun 2022 07:17

Thanks Dullard and TD.

The holdco was put in place as a risk prevention measure - the trade is very profitable and there is a large cash surplus, but the nature of their business can be risk-laden, so a holdco was put in place to allow cash to be moved up and away from tradeco.

Thanks for the alternate suggestions - hive off the three branches in to subs or hive up the fourth to holdco. In the case of creating new subs, would the twelve month clock for SSE be an issue or would you look through this?

In both cases, the end result will still be a pot of cash in a company, and it's then about how to get it out. TBH, there is an IFA who is pushing for the MVL to get all the cash out, as they say there are more and better tax efficient investment opportunities if the cash is held personally rather than in a company shell. They believe the CGT cost on the MVL (likely to be well in excess of £1m) will be outweighed by the income/savings they can generate if held personally.

I am sceptical about this, and the period they would need to invest over for this to become the case, hence the initial query about the anti-phoenix rules.

Matrix - there is no avoidance of tax motive here, just a business wanting a sale, but wouldn't HMRC argue that any tax saving achieved over an alternative route was avoiding tax i.e. they could strip out the sale proceeds as a dividend and pay 39.35% on it all. The MVL to get all the cash out would normally work fine here, but ceasing the existing trade of the group while leaving them still trading in the same nature of business is where I was concerned.

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By ianthetaxman
14th Jun 2022 07:13

Thanks Dullard and TD.

The holdco was put in place as a risk prevention measure - the trade is very profitable and there is a large cash surplus, but the nature of their business can be risk-laden, so a holdco was put in place to allow cash to be moved up and away from tradeco.

Thanks for the alternate suggestions - hive off the three branches in to subs or hive up the fourth to holdco. In the case of creating new subs, would the twelve month clock for SSE be an issue or would you look through this?

In both cases, the end result will still be a pot of cash in a company, and it's then about how to get it out. TBH, there is an IFA who is pushing for the MVL to get all the cash out, as they say there are more and better tax efficient investment opportunities if the cash is held personally rather than in a company shell. They believe the CGT cost on the MVL (likely to be well in excess of £1m) will be outweighed by the income/savings they can generate if held personally.

I am sceptical about this, and the period they would need to invest over for this to become the case, hence the initial query about the anti-phoenix rules.

Matrix - there is no avoidance of tax motive here, just a business wanting a sale, but wouldn't HMRC argue that any tax saving achieved over an alternative route was avoiding tax i.e. they could strip out the sale proceeds as a dividend and pay 39.35% on it all. The MVL to get all the cash out would normally work fine here, but ceasing the existing trade of the group while leaving them still trading in the same nature of business is where I was concerned.

The client wishes to gain access to the entire sale proceeds, and any route that results in the cash being left in the

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Replying to ianthetaxman:
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By The Dullard
14th Jun 2022 11:47

Sorry, I'd missed that Topco was already there.

Basically, you're only liquidating Topco to get the cash out. Subsequently, Tradeco4 will continue to generate more cash that will need to be protected from the risks of the trade, so you will need a new Topco, having liquidated the old one.

It was established in Snell that once you have a commercial transaction, if there are alternative ways of carrying out that transaction, it is perfectly legitimate to choose one that, whilst perhaps more contrived, reduces the tax payable.

However, I think you fall at the first hurdle. Whilst it is not a requirement of condition D that the transaction has a commercial motive, the lack of commercial motive for the liquidation would seem to indicate avoidance, to my mind.

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By Tax Dragon
14th Jun 2022 12:56

You presumably also have to avoid being snared by TiS.

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By DJKL
14th Jun 2022 13:15

Is there any way to sell the unwanted outlet/division first to a third party

Could it first be sold to an "unconnected" entity?

Can one create an unconnected entity that works e.g would say a family SAAS holding the shares in the Newco work or via other family members who are not considered connected? I have no idea and am merely prompting looking to see if the continuance, tax wise, of one branch can somehow be cured?

Given£1m CGT mentioned I suspect I would be hot-tailing it to the Pros from Dover.

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Replying to DJKL:
By ianthetaxman
14th Jun 2022 14:48

Thanks for the input. There are minor children and parents but I would need a deeper dive to check about remoter family who are not connected, and how the client felt about the risks of them being involved. I've only heard about the concept of a family SAAS, not seen them in action or the requirements/costs involved but yes, there is a reasonable amount at stake here, so might be worth it.

Broadly speaking the purchase price was to be £7.5m but now looks more like £8.5m with some deferred consideration thrown in for good measure, so whatever we do with the fourth branch, the main issue is ensuring that if the MVL route is chosen, the pay out doesn't become taxed as income.

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By Taxguy96
15th Jun 2022 16:53

Would a demerger be possible such that branch 4 is retained outside of the group in a different corporate structure? The shareholders could then sell Topco as a neat package containing the 3 branches earmarked for sale an added benefit would be that they get CGT rates of tax on the disposal, another advantage is that clearance can be obtained for the proposal.

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