The anti-avoidance provisions regarding Transactions in Securities (TiS) have been around in one form or another since the 1960s. Such is the significance of the provisions that even many non-tax specialists are aware of them, and will seek to address whether share transactions involving their clients are 'caught' by an income tax charge in appropriate cases.
The TiS legislation for individuals is in ITA2007, Pt 13 (ss 682-713), and for companies is in CTA 2010, Pt 15 (ss 731-751). The focus below is on the TiS provisions as they apply to individuals. The legislation was amended significantly by FA 2010, to be more targeted at tax avoidance. The following five points are among those which need to be considered in respect of the TiS provisions as they now stand.
1. 'Main purpose' test
The TiS provisions are subject to a 'main purpose' test. This is that "the main purpose, or one of the main purposes, of the person in being a party to the transaction in securities...is to obtain anincome tax advantage" (ITA 2007, s684(1)). The burden of proof is on HMRC to prove that this is the case. By contrast, the previous version of the legislation included a let-out from the TiS provisions (in ITA 2007, s 685(1),previously ICTA 1988, s 703), but which required the transaction(s) to be for genuine commercial reasons (or for ordinary investment purposes). This requirement has disappeared from the TiS code, which could be helpful in certain circumstances (e.g. owner-managed or family companies where succession planning is a major consideration).
2. The 75% 'let-out'
There is an exclusion from the TiS provisions, where there is a "fundamental change of ownership" (ITA 2007, s 686). In the context of a vendor shareholder,this broadly means that at least 75% of ordinary share capital, distributions and voting rights in the close company must be held by one or more unconnected persons (i.e. person(s) not connected at the time of the TiS or within the previous two years). These conditions must continue to be satisfied for a period of at least two years after the transaction. This 75% 'let-out' was intended to provide some certainty and reduce the number of clearance applications submitted toHMRC, whose previous (unpublished)practice had been to grant clearance "inmost cases" where there had been a 75% change in ownership.
3. Measuring the tax advantage
The proceeds potentially subject to'counteraction' under the TiS provisions depends on the extent of any 'income tax advantage'. An income tax advantage is obtained broadly where the amount of any income tax payable if the relevant consideration was a qualifying distribution exceeds the CGT payable in respect of it,or if the consideration would be liable to income tax if paid as a qualifyingdistribution and no CGT is payable. That figure is then reduced by any relevant consideration in excess of the maximumthat could 'in any circumstances' have been paid as a qualifying distribution (ITA2007, s 687(2)). In other words, in broad terms 'income tax advantage' is defined by reference toCGT, and limited by reference to distributable reserves (e.g. any excess of sale proceeds over a company's distributable reserves).
4. Clearance applications
For taxpayers who require certainty about whether the TiS rules apply, there is a statutory clearance procedure. Many tax advisers will be familiar with clearance applications under ITA 2007, s 701. Of course, full and accurate disclosure is required so that any clearance which has been given by HMRC can be relied upon. Unfortunately, there remains no right of appeal if HMRC refuses to give clearance that transactions are not 'caught' by the TiS provisions and that no counteraction notice ought to be served. This may result in a change in the structure of transactions by the taxpayer, and the submission of a new clearance application. Alternatively, some taxpayers may prefer to 'take a chance' and proceed as planned without submitting a clearance application, in the hope that HMRC will not considerthat the TiS legislation apply (but seebelow).
5. Not self-assessed
One practical aspect of the TiS provisions that effectively remains unchanged following the FA 2010 amendments is that taxpayers are not required to self-assess income tax liabilities under the TiS rules (although taxpayers will still need to disclose and self-assess CGT on thetransaction, as appropriate). HMRC must issue a 'counteraction notice' under the TiS legislation (CTA 2010, ss 695-700). As mentioned, the lack of an appeal procedure against HMRC clearance refusals means that some taxpayers willprefer to self-assess a CGT liability ratherthan apply for clearance, and take their chances on whether HMRC will issue acounteraction notice. Some taxpayers may even wish to self-assess their tax liability on that basis despite clearance having been applied for and refused, albeit that the required full disclosure may result in an enquiry and the issue of acounteraction notice (see HMRC Statement of Practice 3/80).
Finally, HMRC's guidance on transactionsin securities in the Company Tax Manual(at CTM36800-CTM36885) has not been updated for the Finance Act 2010 changes at the time of writing. Draft guidance was published by HMRC in a consultation document in July 2009, but for some reason the final version has yet to be published. The final guidance (albeitnon-statutory) is therefore overdue, as its appearance is awaited with interest.
Mark McLaughlin CTA (Fellow) ATT TEP