Case update: broad scope of ‘transactions in securities’ anti-avoidance rules
A recent judgment from the First-tier Tribunal considers the wide-ranging scope of the transactions in securities (TiS) anti-avoidance rules.
Whilst the taxpayers were ultimately successful in their appeal, due to HMRC raising assessments outside the statutory time limit, Oscroft and others v HMRC offers a timely reminder that HMRC will, and does, use the TiS rules to challenge perceived income tax advantages in share transactions.
The case focuses on the scope of the TiS rules before the 2016 changes (which sought to clarify perceived weaknesses in the rules) and demonstrates just how widely these rules were drawn both before and after the changes.
What are the transactions in securities rules?
The TiS rules for income tax are a broad anti-avoidance regime applying to transactions involving securities such as shares or loan notes. Their purpose is to prevent arrangements that seek to convert what would otherwise be taxed as income into a capital amount taxed more favourably (or not subject to tax).
In general, the rules may apply where a person receives consideration connected with the assets of a close company, or under a transaction involving more than one close company, where the main purpose or one of the main purposes of the transaction is to obtain an income tax advantage.
The Oscroft case – the TiS facts
The taxpayers were four shareholders in a holding company. In 2011, a share-for-share exchange had created a merger reserve of approximately £1.8 million, which the company was not legally able to distribute as a dividend.
During February 2016, the following steps took place:
- The holding company declared a bonus issue of £1.8 million in new shares, set against the merger reserve.
- The newly issued shares were immediately cancelled via a capital reduction. Each shareholder was granted a loan account in return.
- The holding company borrowed cash from its trading subsidiary and used this to repay the shareholder loan accounts.
These steps allowed the shareholders to extract £1.8 million from the company and, in the absence of the TiS rules, this would be subject to capital gains tax rather than income tax. The holding company could only legally distribute around £700,000 but borrowed money from its subsidiary to repay the shareholder loan accounts in full.
In April 2021, HMRC issued counteraction notices applying the TiS rules, and subjecting the £1.8 million to income tax rather than capital gains tax. No tax clearance had been obtained by the shareholders in advance of the transactions being undertaken.
The Oscroft case – the arguments
At the tribunal, the taxpayers did not dispute that the technical requirements of the TiS legislation were met, rather, they disputed the amount of the adjustment made.
Broadly, the taxpayer argued that the legislation could only apply to payments made out of the assets available to the close company in question – being the holding company – and that this did not allow HMRC to look through at the assets available to its wholly owned subsidiary. This would limit the taxable figure to the holding company’s £700,000 in reserves.
In making their arguments the taxpayers were seeking to exploit a perceived weakness in the rules which restricted “relevant consideration” to consideration representing “assets which are available for distribution by way of dividend by the company [i.e. the close company itself]” or “is received in respect of future receipts of the company”. The taxpayers sought to argue that this could not include the reserves of subsidiaries.
HMRC contended that the rules should be interpreted in a broader manner and that, as the holding company had full control over its subsidiary, the subsidiary’s distributable reserves should also be treated as available for distribution or, alternatively, that the consideration received by the taxpayers was “received in respect of future receipts”. Therefore, the full £1.8 million would fall within the TiS charge.
The tribunal agreed with HMRC, noting that the term “available to” was “wide enough to encompass assets which the company controls such that it can, in effect, ‘gather in’ those assets as it chooses”. Therefore, as the holding company could compel the subsidiary to pay a distribution, those reserves were available to it.
As a result, the tribunal was not strictly required to consider the future receipts argument. However, the tribunal nonetheless found that the payment was received in respect of future receipts and HMRC would also have been successful on their secondary argument.
The TiS rules were changed in 2016 such that there is now an explicit provision which provides that assets available for distribution will always include assets available from a controlled subsidiary. This case indicates that this legislative change was possibly superfluous and highlights the wide interpretation in HMRC’s favour afforded to the TiS rules by the tribunal.
Procedural completeness – where HMRC failed
Despite a clear win on the substantive tax point, HMRC ultimately lost the case on procedural grounds. While the transaction in question took place in February and March 2016, HMRC did not raise assessments until April 2021, being more than four years after the end of the 2015/16 tax year. At the time, the statutory time limit for assessments provided that “nothing in this section authorises the making of an assessment later than 6 years after the tax year to which the income tax advantage relates.”
HMRC argued that this gave them a standalone power to bring assessments under the TiS rules at any point within this six-year limit. However, the taxpayer (with whom the tribunal agreed) argued that this provision effectively provided a ‘backstop’ and was not a standalone six-year limit and counteraction remained subject to the normal four-year limit. The point is now largely academic as the legislative changes in 2016 subsequently made it explicit that the TiS rules contain a standalone assessment power.
Moore Kingston Smith comment
Whilst the specific case considers legislation which has mostly been changed since the date of the relevant transactions, this is an important case to show how tribunals will generally take a wide purposive view of anti-avoidance legislation to counteract tax planning by taxpayers.
The case also continues to highlight the wide powers that HMRC has to issue counteraction notices under the TiS rules. Any taxpayers undertaking transactions in the securities of close companies should carefully consider the application of these rules and, where relevant, consider obtaining HMRC clearance in advance of potentially relevant transactions.
If you have any questions or think you may be affected by this issue, please contact us.
