UK and International Tax news
UT Decision In Substantial Shareholding Exemption Case
Tuesday 10th October 2023
The Upper Tribunal has recently issued its decision in an appeal concerning the substantial shareholding exemption from the charge to corporation tax on gains arising on the disposal of a shareholding in a subsidiary.
In M Group Holdings Ltd v HMRC [2023 UKUT 00213 TCC], the appellant traded as a stand-alone company providing services under NHS contracts to hospitals and clinics.
In 2015, the sole shareholder started to receive interest from potential buyers for the appellant company. However, there were contingent tax liabilities arising from tax investigations by HMRC which would have made the appellant less attractive to buyers. Advice was therefore taken as to the most tax efficient way to structure any sale.
On 29 June 2015, the appellant incorporated Medinet Clinical Services Limited (MCS) as its wholly owned subsidiary. On 30 September 2015, the appellant disposed of its trade and assets to MCS and on 27 May 2016 sold MCS to a third-party purchaser for approximately £54.8m, realising a chargeable gain of £53.2m.
The appellant claimed the entire gain was exempt from corporation tax on the basis that it fell within the SSE. In March 2019, HMRC issued a closure notice amending the appellant’s return by disallowing the SSE relief so that the appellant became liable to corporation tax of £10.6m.
Generally, the SSE applies where the investing company has held a substantial shareholding in the investee company throughout a 12 month period beginning not more than two years before the date of disposal.
In this case, there were submissions as to whether the relief was available given MCS had been owned by the appellant for only 11 months before its disposal and there was no group before MCS had been incorporated.
The UT held that the period to be treated as holding a substantial shareholding was that during which the assets were held and used for the purposes of a trade by a company that was at the time a member of the group. The group must have consisted of more than one company. In the context of the legislative provisions and their purpose, a group of companies cannot consist of one stand-alone company.
It is noted however that, notwithstanding various views on the interpretation of the conditions for the SSE, the relief would have been available if the disposal had been a month later.
If you would like more information on the decision, please contact Keith Rushen on 0207 486 2378.
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