Substantial shareholding exemption and hive-downs

The Upper Tribunal has held that a stand-alone company that transferred its business by way of hive down to a new subsidiary and then sold that subsidiary 11 months later could not benefit from substantial shareholdings exemption: M Group Holdings Ltd v HMRC [2023] UKUT 213. The Upper Tribunal rejected the argument that a stand-alone company could amount to a group of one and held that the legislation clearly required the selling company to be a member of a group for a period of 12 months in the two years prior to the sale.

Background

The appellant company traded as a stand-alone company until 2015 when there was interest from third party buyers. However, the appellant had contingent tax liabilities and so decided to incorporate a subsidiary and transfer its trade to that new, clean subsidiary to effect a disposal. It set up a wholly owned subsidiary, MCS, in June 2015 and transferred its trade by way of hive down to MCS in September 2015. In May 2016, the appellant sold MCS for £54m.

The appellant claimed that the gain on the sale of MCS was exempt from corporation tax on the basis that it fell within the substantial shareholding exemption (SSE). HMRC disallowed that claim on the basis that the appellant had not held a substantial shareholding in MCS for a twelve month period in the two year period before the disposal as required by TCGA 1992 Schedule 7AC paragraph 7.

The appellant appealed arguing that the period that it was treated as holding the shares in MCS was extended by the provisions of paragraph 15A of Schedule 7AC. This provision states that the "investing company is to be treated as having held the substantial shareholding at any time during the final 12 month period" during which an asset (which was transferred to the investee company) was used by "a member of the group... for the purposes of a trade carried on by that member".

The FTT rejected the appeal on the basis that it was clear from the language of paragraph 15A that the asset must have previously been used by a "member of the group" and the appellant company was not, prior to June 2015, a member of a group. Accordingly, the 12 month period requirement was not met.

Decision of the Upper Tribunal

The appellant first argued that the appellant was a member of a group during the whole period for the purposes of the SSE, even though there were no other members of the group. In essence, it argued that there could be a group of one. The Upper Tribunal has rejected this argument. Group was not specifically defined for the purposes of these provisions and the Upper Tribunal concluded that this was for the "obvious reason... that its meaning is sufficiently clear".  The obvious and natural meaning of the word group requires there to be more than one in the group. This was reinforced in the context of the SSE by various provisions that refer to the principal company of the group and which contrasted a trading company with a trading group.

Secondly, the appellant argued that the correct interpretation of paragraph 15A(3) did not require the corporate structure to have the form of a group throughout the 12 month period. Rather the focus of the paragraph was on the use of the asset only. The Upper Tribunal has also rejected this argument. Paragraph 15A(2)(d) looked at the use of the asset transferred "at a time when it was such a member" and during the period from May 2015 to June 2015, the appellant was not a member of any group. Paragraph 15A made it clear that the "treated" period is only extended if all the conditions in paragraph 15A are met. It was clear that the investing company can only benefit from the extended "deemed" period of ownership if the asset being used during the period by a member of the group. In addition, there was no reason to consider that this interpretation ran counter to the purpose of the legislation which expressly contemplated groups only.

In addition, the Upper Tribunal rejected the argument that there was an obvious defect in the drafting of the provisions which justified reading into the legislation additional wording making it clear it could apply to a stand-alone transferor company. The Upper Tribunal considered that Parliament had chosen to include only the words "member of a group" deliberately because it was only intending to cover transfers within a group.

Comment

The decision of the Upper Tribunal that a stand-alone company cannot, on its own, amount to a group will not come as a surprise. The whole tenor of the legislation is predicated on the existence of a holding company and its 51% subsidiaries such that there was "no merit at all" in the appellant's argument.