This month’s Chartered Accountants Tax Case digest looks at a First Tier Tribunal (“FTT”) case that centred on the UK’s substantial shareholdings exemption (“SSE”), a valuable relief which may be available when a company disposes of shares in another company. Ireland has a similar exemption known as the participation exemption, available under section 626B TCA 1997.

The appeal concerned the availability of the SSE and specifically whether SSE is available when the shares in the subsidiary being sold have been owned for less than 12 months and there has not been a group of companies in existence for the 12 months prior to the share disposal.

It is not yet clear if the appellant plans to further appeal the decision of the FTT, which held that the conditions for SSE were not satisfied.

Background

M Holdings Ltd (“MHL”), the appellant, is a private limited company that started its life trading as a stand-alone company, i.e., it was not a member of a corporate group. The company provided services under NHS contracts to hospitals and clinics.

In 2015 the owner of the company, Mr Jeffreys, started to receive interest from potential buyers for his shares. However, MHL had a number of contingent tax liabilities as a result of tax investigations by HMRC which would have made the shares less attractive to buyers. Mr Jeffrey, therefore, decided to take advice as to the most tax-efficient way of structuring the sale of the shares.

The timeline of key events was as follows:-

• June 2015 – MHL incorporated Medinet Clinical Services Limited (“MCS”) as its wholly-owned subsidiary;
• September 2015 – MHL transferred its trade and assets to MCS via a hive down;
• May 2016 – MHL sold the entire issued share capital of MCS to a third-party purchaser, for approximately £55 million (“the share disposal”);
• February 2017 – MHL filed its corporation tax return for the accounting period ended 31 May 2016 which was filed on the basis that the SSE applied to exempt the chargeable gain of approximately £54 million arising on the disposal of its shareholding in MCS;
• February 2018 – HMRC opened an enquiry into the 2016 return; and
• March 2019 – HMRC issued a closure notice to MHL which amended its 2016 return to disallow the availability of SSE on the basis that MHL, when it disposed of the shares, did not satisfy all of the relevant conditions.

The effect of the closure notice and its related amendment was that MHL became liable to corporation tax of approximately £11 million in respect of its 2016 accounting period.

Following an appeal against the closure notice and the amendment and an independent review by HMRC that upheld the decision to disallow the SSE, MHL subsequently appealed to the FTT in 2019.

Decision and arguments

The SSE exempts from corporation tax chargeable gains on the disposal of shares in trading companies where certain conditions are satisfied. The relevant provisions were set out in Section 192A of the Taxation of Chargeable Gains Act 1992 (TCGA), which references paragraphs in Schedule 7AC.

It was common ground between the parties that all of the conditions for SSE relief were met except for the requirement that the shares in the investee company (MCS) must have been held by the investing company (the appellant) throughout a period of 12 months beginning not more than two years before the date of disposal.

MCS was only incorporated and acquired by the appellant in June 2015 and its shares sold in May 2016, giving a total period of ownership of 10 months and 28 days. Accordingly, both parties agreed, that taken in isolation, the disposal did not satisfy the condition in Paragraph 7 of Schedule 7AC.

However, Paragraph 15A of Schedule 7AC relaxes the 12-month holding period if certain conditions are met. Both the appellant and HMRC agreed that the conditions in Paragraph 15A(2) were satisfied and therefore that the deeming provision in Paragraph 15A(3) was in point. However, the issue between the parties was how to construe Paragraph 15A(3).

MHL owned the shares in MCS for less than 12 months and so it did not satisfy Paragraph 7 and was thus reliant on Paragraph 15A to deem its ownership for the purposes of Paragraph 7 to have started 12 months before the disposal, in May 2015 rather than June 2015.

HMRC argued that Paragraph 15A(3) treats MHL as holding the shares in MCS for only such period as the appellant satisfies the condition in Paragraph 15A(2)(d), i.e. for so long as it is a member of a group. As MHL was only a member of a group from June 2015, the date of incorporation of MCS, it did not extend the deemed period of ownership of the MCS shares to before that date to the additional disputed period of 28 May – 28 June 2015 which was required to satisfy Paragraph 7. Accordingly, SSE was not available.

MCL argued that Paragraph 15A(3), on both a plain construction of the provision and also a purposive interpretation, should be construed as only requiring the assets to have been used by a member of the group during the 12-month period, not that there is a group in existence for the whole 12-month period. According, it argued that Paragraph 7 was satisfied.

The FTT agreed with HMRC that on the ordinary meaning of Schedule 7AC, SSE was not available and that Paragraph 15A only extends the period of ownership for the purposes of Paragraph 7 during such time as the relevant asset is used by another company, the appellant in this case, whilst it is a member of the same group.

Whilst the FTT accepted the outcome to be “odd and arbitrary”, it could not be treated as unjust or absurd because the purpose of Paragraph 15A in this context was not sufficiently clear, whether from the legislation, the Explanatory Notes or the Consultation Document which led to the introduction of the Paragraph 15A relaxation in 2011.

Accordingly, there was no justification to depart from the ordinary purposive meaning of the legislation.

Finally, whilst it is possible in appropriate circumstances to read additional wording into legislation, the FTT did not find the intended purpose of the legislation sufficiently clear to do so and MHL’s appeal was therefore dismissed.

The full judgment in this case is available from:- https://www.bailii.org/uk/cases/UKFTT/TC/2021/TC08054.html