05 September 2023
One of the most valuable tax exemptions for companies is the substantial shareholdings exemption (SSE). In overview, SSE can provide an exemption from tax for capital gains made by companies when they sell a qualifying shareholding in another company.
SSE can be particularly valuable in circumstances where the proceeds from any sale of shares in a company are to be reinvested in the corporate group’s wider business, rather than spent personally by the ultimate shareholders. In the absence of SSE, corporation tax could be due at a rate of up to 25% on any capital gain made, potentially putting the brakes on some transactions.
An example of when SSE can be useful includes a scenario where a potential buyer does not want to buy shares in an existing company. Instead, they would rather buy the trading assets of the business. This can typically arise when the buyer does not want to inherit the trading history of the business it wants to acquire for commercial reasons. In this scenario, the vendor could incorporate a new subsidiary and transfer its trade and assets to this new company. The shares in the new company could then be sold to the buyer.
One of the conditions that must be met in order to benefit from SSE is that the relevant shareholding must have been held for at least 12 months. In the example above, the vendor’s shareholding in the new company will not meet this condition if the sale takes place less than 12 months after the new company is incorporated. However, the SSE rules allow a vendor to take into account whether the trade had been owned by another company in the group when assessing whether this condition is met, ie as long as the trade has been owned by a member of the group for at least 12 months, this condition is considered to be met.
In a recent tax case, M Group Holdings Ltd vs HMRC, the taxpayer had originally been a standalone company (ie not part of a group). In June 2015, it incorporated a subsidiary and in September 2015 it transferred its trade and assets to the new subsidiary, before selling its shareholding in the subsidiary in May 2016. The timeline of events meant that the corporate group was only in place for 11 months before the sale instead of the 12 months prescribed in the rules. HMRC had denied the availability of SSE as a result and the taxpayer has now failed in their arguments against this decision before both the First-tier Tribunal and the Upper Tribunal, resulting in a taxable gain of around £53m.
The arguments made by the taxpayer included that a ‘group’ could be taken to mean a ‘group of one’, ie a single company. Whilst this argument was described as a ‘valiant attempt’ in the case judgment, it ultimately failed as it was considered the ordinary meaning of the word ‘group’ requires there to be more than one company for there to be a group.
The taxpayer also contended that the rules themselves were discriminatory against single companies, an argument that might garner some sympathy from many familiar with the rules. However, this argument also fell on deaf ears as it was concluded that it was indeed the intention of parliament to limit SSE in these circumstances to cover transfers within groups established for at least 12 months.
The decision in the case confirms what many advisers will have considered to be true but does highlight what might be considered by some to be an absurdity in the SSE rules. If a standalone company incorporates a subsidiary that it transfers its trade to and then sells its shareholding in the subsidiary less than 12 months after its incorporation, no SSE would be available. However, if the company had an existing dormant subsidiary for many years, that it then transfers its trade to and then sells its shareholding in this subsidiary, SSE would be available. We could therefore see a spate of standalone companies seeking to establish dormant subsidiaries to give themselves a better opportunity of benefitting from SSE in the future.