28 October 2023
There are lots of reasons why corporate groups, that have a company within the group which has paused trading or ceased to trade altogether, may choose to keep that entity dormant, rather than arrange for it to be liquidated or struck-off. These may include:
- a desire to prevent another business from setting up a company using the same name – as that may affect the reputation in the market or brand value of businesses within the corporate group; or
- preserving the possibility that the company may restart trading at some point – maintaining a dormant company may reduce set-up costs for future ventures.
However, a recent tax case serves as a good reminder of another potential advantage, which could be the most valuable of all.
The M Group Holdings case
In the recent Upper Tribunal case of M Group Holdings Limited v HMRC, the taxpayer, which had originally been a standalone company, had incorporated a subsidiary in June 2015. In September 2015, it transferred a trade and assets to its new subsidiary, before selling its shareholding in the subsidiary in May 2016. The taxpayer believed that the substantial shareholding exemption (SSE) would be in point on the share disposal, which would mean that the associated capital gain was exempt from corporation tax.
However, to benefit from the SSE the relevant shareholding must be held for at least 12 months in the two years prior to disposal, or an asset used in a trade at the time of disposal by the company whose shares are disposed of must have previously been used in a trade carried on by a member of the same group during the relevant 12-month period.
HMRC denied the benefit of the SSE, on the basis that the corporate group did not exist throughout the 12 months prior to the disposal (as the standalone company had incorporated its subsidiary only 11 months before the share sale). The First-tier Tribunal, and now the Upper Tribunal, concurred with HMRC’s interpretation of the SSE legislation.
How things could have been different
If the taxpayer had either waited a month longer to sell the shares or had a dormant subsidiary which had been in existence for more than 12 months, SSE would have applied and a tax bill of over £10m would not have arisen.
As well as demonstrating to existing corporate groups the potential value of continuing to maintain at least two group companies, even if one is dormant, this case may also be a good reminder to those businesses who are not already part of a corporate group, that they may wish to incorporate a subsidiary (which may remain dormant), as this could provide increased flexibility to structure potential future transactions in a tax efficient way.
For more information, please get in touch with Suze McDonald or your usual RSM contact.