This year’s Budget announced a consultation into one of the most significant corporate tax exemptions; the substantial shareholding exemption (SSE). The SSE was introduced in 2002 and exempts capital gains and losses realised on the sale of certain shareholdings by companies. It most commonly applies where trading groups dispose of trading subsidiaries.
This announcement was a surprise, and we feared that this well-used relief could be curtailed. When the consultation details were released at the end of May, it was reassuring to find that overall the government’s proposals are to extend the exemption to more situations rather than limit it, which is especially good news for international businesses that have a degree of choice about where they incorporate and how they hold subsidiaries. The government wants to ensure that the UK remains competitive in this regard.
For SSE to apply, the company making the disposal must be a trading company or a member of a trading group before and immediately after the disposal and the shares being sold must also be shares in a trading company or a holding company of a trading sub-group. The consultation proposes to widen these rules and puts forward various options, including removing the trading condition for the company making the disposal, often one of the more complex and challenging issues faced when applying SSE in practice, so this change would be welcome.
The UK’s tax system is notoriously complex and corporate tax exemptions are no exception. The rules for SSE are different from those for dividend exemption even though the underlying profits they seek to exempt are effectively the same. Add to this the controlled foreign companies (CFC) regime, a measure targeted at companies overseas that are controlled by a UK parent company, you can see where the reputation for complexity comes from.
Other countries do things differently, and the consultation acknowledges this. Other corporate tax systems include wide-ranging exemptions, so-called participation exemptions, whereby if a situation qualifies for capital gains exemption, it also achieves dividend and CFC exemptions. Whilst there is no suggestion the UK will combine its three separate sets of rules, the new SSE could be more generous, particularly for non-trading scenarios.
A broader SSE is good news overall; but whether this brings a reduction in complexity is still to be seen. We think simplification is unlikely, so businesses could still have analysis to do despite the increased scope.
If you would like any more information on this issue please get in touch with Rebecca Reading or your usual RSM contact.