A company’s business activities may need to be reconstructed, for a variety of sound commercial reasons. For example, a reconstruction can occur prior to a company takeover, or where different businesses undertaken by the same company are to be separated and operated through different companies.
That’s a relief
Company reconstructions come in different forms, depending on the particular circumstances. There are numerous potential tax implications to be considered for the company and shareholders, which are beyond the scope of this article. However, tax reliefs may be available, if certain conditions are satisfied.
For example, there is statutory relief from an immediate capital gains charge for shareholders on a ‘share for share’ exchange (within TCGA 1992, s 135), or on the issue of shares or securities in a ‘scheme of reconstruction’ (within s 136 and Sch 5AA).
However, the above reliefs are generally not available unless the share exchange or reconstruction is for bona fide commercial reasons, and does not form part of a scheme or arrangements of which a main purpose is the avoidance of a capital gains tax or corporation tax liability (s 137(1)).
Is that ‘clear’?
It is possible to apply to HM Revenue and Customs (HMRC) for clearance in advance, broadly that HMRC is satisfied that the proposed reconstruction satisfies the above commerciality and purpose conditions (s 138(1)).
Of course, HMRC may not necessarily give the clearance requested. For example, there may be more than one way to undertake a company reconstruction. Naturally, the participants will normally prefer the way that results in the lowest overall tax liability. However, HMRC may object (for example) on the basis that tax liabilities arising from the proposed reconstruction are lower than under alternative ways of achieving the same outcome.
Indeed, HMRC could even refuse to give clearance unless the reconstruction is undertaken in a different way, which is more expensive in tax terms. This scenario might seem unlikely, but I have seen it in practice.
Not taking ‘no’ for an answer!
However, if HMRC refuses to give clearance (under s 138), all is not necessarily lost. It is possible to require HMRC to refer to the tribunal a refusal to give clearance under s 138 on a share-for-share exchange, or a reconstruction involving the issue of shares.
Alternatively, the clearance applicant can refer the clearance application to the tribunal if HMRC fails to give its decision within 30 days of the clearance application (or the supply of further information).
The effect of the tribunal’s decision is broadly that it is treated as a decision by HMRC. For example, if the tribunal disagrees with HMRC’s conclusion that clearance should be refused, the tribunal’s decision will apply instead; HMRC’s decision is effectively overturned.
I have used the TCGA 1992, s 138(4) procedure successfully in the past where HMRC refused to give clearance for a company reconstruction to be undertaken in a particular way, on a business sale to an unconnected third party. HMRC considered that the transactions could be structured differently (and more expensively in tax terms). However, the tribunal disagreed with HMRC.
Unfortunately, in the above case more than twelve months (and protracted correspondence with HMRC) elapsed since the original clearance application was submitted. During that time, the prospective purchaser of the business decided to look elsewhere, and the sale fell through.
The procedure in TCGA 1992, s 138(4) is not very well known or commonly used. However, it might offer assistance in some cases where HMRC refuse to give the clearances mentioned above. A referral to the tribunal can be a very satisfactory and cheap option in some cases, as there is otherwise no right of appeal against a refusal by HMRC to give those clearances. However, in practice it can take several months, so be prepared for possible delays in the proposed reconstruction.
The above article was first published by Tax Insider (November 2015) (www.taxinsider.co.uk).