Transactions in securities
Share Transactions such as a company purchase of its own shares or a company sale for consideration which includes loan notes commonly involve applications to HMRC for advance clearance (under ITA 2007, s 701), that the ‘transactions in securities’ anti-avoidance rules do not apply. The rules are in ITA 2007, Part 13, Chapter 1 (previously ICTA 1988, ss 701-709). However, in what circumstances could those provisions bite?
The rules generally apply if:
- In one of five specific circumstances (see below) and
- In consequence of a transaction in securities (or the combined effect of two or more of them),
a person obtains (or is in a position to obtain) a tax advantage (ITA 2007, s 684).
However, the transaction(s) is not ‘caught’ if:
- it took place for genuine commercial reasons (or in the ordinary course of making or managing investments); and
- obtaining an income tax advantage is not a main object of the transaction(s) (s 685).
The five specific situations mentioned in the legislation are referred to as Circumstances A to E. Most owner-managed and family companies are closely controlled (or ‘close’) companies, and there are special rules to deal with them, referred to in the legislation as ‘Circumstance D’ and ‘Circumstance E’ (nb Circumstances A to C are less common in practice, and apply to dividend stripping and bond washing).
Circumstance ‘D’ and ‘E’
Circumstance D very broadly applies where:
- a person receives consideration (i.e. from the distribution, realisation or transfer of a relevant company’s assets, or applying assets to discharge liabilities);
- the consideration reflects the value of distributable assets or future receipts or trading stock of the company; and
- the consideration is such that there is no income tax liability in respect of it.
However, the repayment of amounts originally subscribed for the shares is not caught (ITA 2007, s 689). Nevertheless, the rules are widely drafted. HMRC will often use case law (Cleary v CIR) to support their view the Circumstance D applies if, for example, a controlling shareholder in company A sells his shares to company B, which he also controls.
Circumstance E very broadly applies where:
- a person receives consideration (i.e. from a direct or indirect transfer of assets from one relevant company to another, or any transaction in securities involving two or more relevant companies);
- the consideration reflects the value of distributable assets or trading stock of a relevant company; and
- the consideration consists of shares or securities issued by a relevant company.
This rule is intended to catch the subsequent repayment of (non-redeemable) share capital, including distributions in a winding up or dissolution of the company (ITA 2007, s 690).
HMRC often use case law to support an argument that the ‘transactions in securities’ rules apply in situations involving the liquidation or winding up of a company. Those cases include CIR v Joiner and Addy v CIR. However, in another case, Laird Group plc v CIR, it was held that declaring a dividend was not caught. In the House of Lords, Lord Millett said that whether the company is in liquidation or continuing to carry on business as a going concern, the distribution of undistributed profits to company shareholders merely gives effect to the rights attaching to the shares. In addition, in CIR v Joiner, the Court held that the liquidation of a company cannot of itself be regarded as a transaction in securities.
This is clearly a difficult area of tax law. Firms can (and generally should) apply to HMRC for advance clearance that the transactions in securities rules do not apply, where appropriate. Please contact me if you are unsure about whether the rules could apply in individual cases, or for assistance in drafting clearance applications to HMRC.
The above article is taken from the Mark McLaughlin Associates eNewsletter (May/June 2008). To receive future copies by email, contact us.