Brian Garner CTA
Posted on 18 Feb 2016

Proposed changes to transactions in securities

HMRC is proposing to amend the Transactions in Securities legislation rules with effect from 6 April 2016 in order to introduce a connected parties rule and to change the counteraction rules.

The proposals are looking to tackle situations where HMRC perceive that company owners abuse the tax rules and may receive capital tax treatment instead of income tax treatment. They include:

  • A disposal of shares to a third party where a cash balance is left in the company in order to increase sales proceeds and so in effect turn cash into capital.
  • A purchase of own shares (for unquoted companies) where the seller retains 25% or more of the company.
  • A capital distribution made in a winding-up, in cases where:
  1. A company has been used as a moneybox company.
  2. The owner is setting up a phoenix operation
  3. A company is a special purpose vehicle.

A disposal of shares to a third party

  • Where a cash balance is left in the company in order to increase sales proceeds and so in effect turn cash into capital. This can sometimes happen but if the cash is in the company for a reason such as required working capital, one would expect HMRC to take this into account as they have in the past.

A purchase of own shares (for unquoted companies)

  • Where the seller retains a 25% or more interest in the company.
  • The current rules allow the seller to retain up to 30% of the share capital provided that the substantial reduction test is met. Therefore this is only a minor moving of the goalposts.
  • This may also be extended to an MBO type arrangement where the current owner continues to hold 25% or more of Newco

Distribution on winding up

  • A moneybox company is where the shareholders of a company retain profits in excess of the company’s commercial needs and so receive these profits as capital when the company is eventually wound up
  • Phoenixing is where a company enters into a members’ voluntary liquidation and a new company is set up to replace the old and carry on the same, or substantially the same, activities. The shareholder here receives all of the value of the company in a capital form while the trade continues albeit now in the new company exactly as before.
  • A special purpose company is where the operations of a business have been divided among separate companies, each undertaking a particular project. As each project or contract comes to an end, the company is liquidated and the profits and gains of that project are realised in a capital rather than income form. 

Clearance Applications

As always with the type of transaction outlined above, one should consider seeking advance clearance from HMRC.  HMRC's clearance team are currently using the following wording where they believe that a clearance given now might not be valid should the proposed changes be brought in on 6 April 2016:

"The Board take the view that the notification given in this letter may become void with effect from 6 April if the proposed changes to the transactions in securities provisions which were published on 9 December 2015 come into effect as drafted."

and where HMRC's clearance team consider that a transaction is not affected by the proposed changes, their clearance will include the wording:

"The Board consider that this clearance will not be affected by the proposed changes to the transactions in securities provisions which were published on 9 December 2015."

It is an uncertain time for tax advisors and companies looking to undertake transactions as the proposals are not yet legislation.  However when structuring a transaction it would be sensible to bear the proposals in mind as it is highly likely that they will find their way onto the statute book.

If you have any questions in relation to the above please contact Brian Garner on 01392 687662 or brian.garner@michelmores.com