When dealing with company reorganisations and some business sales, it is generally good practice to apply to HMRC for clearance (under ITA 2007, s 701) that the anti-avoidance rules regarding ‘transactions in securities’ will not apply to treat a capital transaction as giving rise to a potential income tax liability. The rules were originally introduced in the 1960s, and their complexity and lack of clarity previously caused a great deal of uncertainty in many cases.
However, the ‘old’ transactions in securities provisions were replaced in Finance Act 2010 with simplified legislation. This follows an ‘anti-avoidance simplification review’. HMRC issued a 65 page consultation document (‘Simplifying Transactions in Securities Legislation’) on 31 July 2009, which was the subject of my article ‘New and Improved’ in Taxation magazine on 21 October 2009.
The new rules
The ‘new’ transactions in securities rules apply to all close companies (replacing ‘relevant company’ in the old rules). The legislation was intended to be targeted more effectively at arrangements involving tax avoidance, using a new and more specific definition of an income tax advantage. There is also a new exemption covering fundamental changes in ownership of shares in a close company.
The 75% test
The ‘fundamental change of ownership’ exemption excludes circumstances otherwise caught by the anti-avoidance rules. For vendor shareholders, the exemption broadly applies if at least 75% of the close company’s ordinary share capital (with an entitlement to at least 75% of distributions and voting rights) is held by one or more unconnected persons (who were also unconnected persons for at least the previous 2 years).
HMRC’s stated intention for this new exemption is to remove the need for as many clearance applications, as it was previously HMRC’s practice to grant clearances in most cases where there was a 75% change of ownership.
Despite HMRC’s stated intention to narrow the transactions in securities rules to and target them more at anti-avoidance situations, the definition of ‘transactions in securities’ itself is wide enough to include everyday transactions within its definition, including the sale of shares and subscriptions for new shares. An awareness and understanding of the rules is therefore important.
HMRC guidance on transactions in securities in the Company Taxation Manual (at CTM36800-CTM36885) is based on the ‘old’ rules at the time of writing. HMRC has produced detailed guidance on the ’new’ transactions in securities rules for publication in the Company Taxation Manual, which will probably be released into the public domain shortly.
Detailed guidance is an unfortunate but probably necessary consequence of the brevity of the new legislation, which is written in the tax law rewrite style. Nevertheless, the guidance cannot cover all situations and is non-statutory in any event, so clearance applications to HMRC will still be necessary in many cases.
The above article is reproduced from ‘Practice Update’ (May/June 2010), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.