SSE: When is a group not a group?by
Refusal of a claim for substantial shareholding exemption involved considering the meaning of the word “group” and the fact the subsidiary company was not owned throughout a 12-month period.
M Group Holdings Limited (MGHL) claimed substantial shareholding exemption (SSE) on the disposal of shares in a wholly owned subsidiary, which took place in 2016, realising a gain in excess of £53m. HMRC issued a closure notice refusing the claim, which was upheld by the first tier tribunal (FTT) in 2021. MGHL appealed to the upper tribunal (UT), which has confirmed that SSE was not available on the facts.
The facts are pretty crucial – are they ever not? The owner of MGHL (Peter Jeffreys) was concerned that contingent tax liabilities arising from an investigation into prior years, would hinder a sale of the company. Following specific advice, MGHL incorporated a subsidiary, MCS, on 29 June 2015. The trade and related assets of MGHL were hived down to MCS on 30 September 2015, and MCS was subsequently sold to a third party on 27 May 2016 (11 months after the incorporation of the subsidiary).
SSE exempts the disposal of shares in a trading subsidiary from corporation tax, subject to certain conditions. Contrary to what had been popular opinion, including several articles in tax publications, HMRC argued that the exemption was available only where the transferred assets had been used within a group for the 12 months prior to sale – not when the assets had been used in a single company for that period before being hived down to a newly incorporated subsidiary.
Grounds of appeal
The UT considered three alternative grounds of appeal.
1. The meaning of “group”
The UT disagreed with what it referred to as an “engaging example” from counsel for MGHL of “dividing a class of children into two groups: those who have reached a certain level; and those who have not. [Counsel] submitted that one of the two groups could conceivably consist of only one member. Indeed, on this example, he would say that there could be a group with no members.
“The meaning of ‘group’ in [this context] is that there is more than one company, one of which must hold at least 51% of the shares in a subsidiary company. That is its ordinary and natural meaning. It is also consistent with the context and purpose of the relevant legislative provisions that a group of companies cannot consist of one stand-alone company and must comprise at least two companies.”
2. The meaning of para 15A(3) of Schedule 7AC TCGA 1992
Broadly the rules could only apply where MCS had been owned by MGHL throughout a 12-month period beginning not more than two years before the date of disposal. The company agreed it did not meet this condition, but argued that the period qualified due to the extension in para 15A(3) where the asset was used by a member of the group (MGHL) rather than MCS.
The UT held that on its ordinary and natural meaning that phrase related to use of the asset within a group, and a purposive interpretation was not possible. There might be an anomalous result, and indeed the FTT had referred to an “odd and arbitrary outcome”, but that was not unjust or absurd so as to allow UT to add words into the legislation.
3. The meaning of para 15A(2)(d) of Schedule 7AC TCGA 1992
The company argued that there was an inherent discrimination against a stand-alone company, as shown by the FTT’s conclusion that the existence of a dormant company for the 12-month period would be sufficient to then hive down into either that or a newly incorporated company that could immediately be sold.
Again (and for very similar reasons in B, above) the UT could not agree to a purposive interpretation that would allow the claim other than for disposals within a group.
It is clear that both the FTT and the UT were seemingly perplexed that MGHL had not simply waited a further month before making the disposal. It’s a valid point, and one that advisers will now do well to consider in similar circumstances. I wonder if the advisers here relied on the several commentaries that reflected the popular view that what MGHL had done worked within the rules – and which were specifically disregarded by FTT and UT? It is a valuable reminder that as a profession, we are quite capable of a collective incorrect interpretation of a particular law. An unnecessary £10m corporation tax liability has potentially reduced the value of a subsequent liquidation distribution to Jeffreys by some £8m.
On the other hand, where a hive-down situation is likely to be needed, particularly looking forwards to retirement planning, why not adopt the safer approach of incorporating a dormant subsidiary at least 12 months ahead, and create the group that had not existed for sufficient time in the present case?
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Mark Ward qualified with a large firm in 1989, having previously worked in the tax departments of a small and a medium size firm. He has been lecturing on a wide variety of tax matters for 30 years to qualified practitioners and industry specialists in the UK and overseas.