M Group Holdings Ltd – the Upper Tribunal judgement

The UTT decision in M Group Holdings reaffirmed the FTT judgment in respect of the question as to whether, for the purposes of the Substantial Shareholding Exemption (SSE), relief under TGCA 1992, Sch 7AC, para 15A is available in a situation where a single company owned by individuals sets up a new subsidiary into which part of its trade is transferred, following which the subsidiary is sold within 12 months.

The taxpayer was a private limited company which prior to 29 June 2015, traded as a stand-alone company. On 29 June 2015 the taxpayer incorporated MCS, a private company limited by shares, as its wholly-owned subsidiary. On 30 September 2015, the taxpayer transferred its trade and assets to MCS and subsequently it sold the shares in MCS on 27 May 2016.

HMRC argued in the FTT that SSE was not available on the disposal of the shares. Although most of the conditions in Schedule 7AC, para 15A were met, HMRC took the view that the taxpayer did not satisfy the requirement to hold the MCS shares for at least 12 months before the share sale. This was because paragraph 15A(3) deemed the taxpayer only to hold the MCS shares in the 12 months before the share sale at times when the assets transferred to MCS (the investee) were used as mentioned in paragraph 15A(2)(d). This required that the asset was previously used by a member of the group in question (other than the company being disposed of) for the purposes of a trade carried on by that member at a time when it was such a member (i.e., when it was a member of the group).

In this case, the asset was used by the taxpayer for the 12 months previously, but it was not a member of a group until 29 June 2015, and the group existed for less than 12 months before the share sale.

The FTT agreed with the argument of HMRC in respect of this point, and this decision was upheld by the UTT, notwithstanding new arguments from the taxpayer that it was possible for a single company to constitute a group, and also that the group requirement did not relate to the period of membership of a group, only to the period of use of the relevant asset of the investee company.

Although this made no difference to the result, there was an interesting difference between the FTT and the UTT in respect of construction of the underlying purpose of the legislation. The FTT took the view that it was unable to determine from the wording of the legislation any purpose which pointed either way as to whether the purpose of the legislation extended to include providing relief for stand-alone trading companies acquiring and selling subsidiaries within 12 months. In its view, the natural or ordinary meaning of paragraph 15A(3) was the one put forward by HMRC, although it also noted that HMRC’s construction produces what might be described as the “oddity or arbitrariness” of SSE applying or not depending on whether there has been a separate, possibly dormant, subsidiary or other group company owned for the previous 12 months. It agreed that there did not seem to be any obvious justification for this distinction.  However, it pointed out that being odd or arbitrary is not enough. The outcome might be odd in the abstract but as the purpose of the legislation on the specific point in this appeal is opaque, the Tribunal found it difficult to say with confidence such an interpretation would “defeat the obvious intention of the legislation”.

Even if there was an injustice or absurdity that requires correcting, the FTT noted it would only be possible to correct it to the extent “the language admits”. Here it was not possible, even on a "strained basis", to construe the legislation as the taxpayer argued.

By contrast, having reviewed relevant case law, and materials such as explanatory notes and HM Treasury consultation documents, the UTT concluded that the legislation was designed only to give relief to groups of companies, and rejected the taxpayer’s argument based on the perceived absurdity that this construction of the legislation would create an arbitrary disparity of treatment between a stand-alone company and another company in the same circumstances, but which also fortuitously had a dormant subsidiary in the contested period.

This last point has led to considerable debate amongst commentators, including those involved in discussions with HMRC when the legislation was first being drafted, as to whether the UTT is correct in its understanding as to the background of the legislation. Notwithstanding that fact, the matter appears to have been decided for the time being on the wording of the legislation as it currently stands, and legislative intervention will probably be required to address the issues noted by the FTT.

The Wilkinson FT judgment

The other recent judgment which may of interest in the field of reorganisations is that of Wilkinson v HMRC [2023] UKFTT 00695 (TC) which was released on 4 August 2023. This case concerned a relatively straight-forward share for share exchange which the taxpayer contended fell within s135 TCGA. Broadly, a family business was run by Mr and Mrs Wilkinson who collectively held 58% of the issued share capital of a company, P Ltd. The other shareholders were Mr Wilkinson’s brother and two non-family members. Ahead of a commercial third-party disposal, Mr and Mrs Wilkinson gave each of their three daughters ordinary shares in P Ltd which equated to each daughter holding approximately 7% of P Ltd.

Two days later, the shareholders in P Ltd disposed of their interest in P Ltd to a third-party (TF1 Ltd) in exchange for ordinary shares and: (i) in the case of each of Mr & Mrs Wilkinson’s daughters ‘0% deferred payment loan notes’; or (ii) for the other shareholders, a combination of ‘earn out loan notes’ and ‘0% deferred loan notes’. Two days after the exchange, each of the daughters was appointed as a non-executive director of 100% subsidiary of P Ltd with no remuneration due.

One year and one day after completion of the SPA, each of the daughters redeemed their nil rate deferred payment notes for £10 million and sold their ordinary shares in TF1 to an affiliated company of TF1 Ltd. The following day, each daughter resigned their non-executive directorships. The daughters claimed entrepreneurs relief (ER) (the predecessor to business asset disposal relief) on the gain arising on their disposals, the effect of which was to reduce the rate of CGT from 20% to 10%.

HMRC raised discovery assessments on the basis that TCGA 1992, s 137 would apply to deny the share exchange from falling within TCGA 1992, s 135 thereby giving rise to a taxable disposal of the shares on completion of the SPA and the reduced rate of 10% under ER would not apply. As TCGA 1992, s 137 requires consideration of the “arrangement” and the extent to which this arrangement has a main purpose of avoiding the charge to CGT, the key question for the FTT was to identify what the arrangement was and whether a main purpose of that arrangement was the avoidance of CGT.

HMRC argued that it was not necessary for the ‘scheme or arrangements’ to include the entirety of the ‘exchange’ to which TCGA 1992, s 135 would otherwise apply. Instead, HMRC argued that one set of ‘arrangements’ in this case consisted of the steps involving the daughters of Mr & Mrs Wilkinson and the other set of arrangements consisted of the steps entered into by the other shareholders. The steps involving the daughters of Mr & Mrs Wilkinson consisted of: (i) being given shares in P Ltd; (ii) exchanging these shares for shares and deferred loan notes in TF1; (iii) being appointed as employees of a subsidiary of P ltd; (iv) disposing of the shares and loan notes in TF1; and (v) resigning their directorships; each of which is required to ensure the availability of relief under ER, HMRC argued that there was a narrow scheme of arrangement which had a main purpose of avoiding the charge to CGT based on the subjective intentions of the family as a whole.

It was clear that the Wilkinson family were aware of the CGT consequences of the steps involving their daughters, however the Tribunal disagreed with HMRC and held that “the obvious scheme or arrangement of which the exchange formed part was that aimed at selling P Ltd to TF1 Ltd for a total consideration whose value was £130 million”. It found that based on a realistic view of the facts, the steps involving Mr & Mrs Wilkinson’s daughters were not a self-standing arrangement separable from the deal as a whole but were a plan for reducing the family’s overall CGT liability in the event of a sale of their shares in P Ltd to a third party. The Tribunal reiterated the principles established in Euromoney that TCGA 1992, s 137 sets out a straightforward test.

In arriving at this view, the FTT concluded that whilst the avoidance of a liability to CGT was a purpose of the arrangements, it was not a main purpose. The main purpose of the arrangement was that the shareholders in P Ltd sell their shares to TF1. When considering the shareholders as a whole: (i) 42% of the shares in P Ltd were held outside Mr & Mrs Wilkinson and their daughters and these shareholders were not impacted by the CGT planning; and (ii) For Mr & Mrs Wilkinson and their daughters, the value of the CGT planning (c£3 million) was only around 4% of their anticipated proceeds. It was also clear from the evidence provided that Mr Wilkinson was not prepared to forego the deal even if the structuring required for Wilkinson’s CGT planning could not be achieved and the design of the consideration to include deferred notes was an agreed term from a very early stage in the deal negotiations.

Accordingly, the taxpayers’ appeal was allowed by the FTT. This judgment gives rise to a sensible outcome based on both the plain reading of TCGA 1992, s 137 and other related judgments, including those in Snell, Coll and Euromoney that were considered by the Tribunal. An interesting point here is that Mr & Mrs Wilkinson intentionally decided to give 7% to each of their daughters rather than 4.9% which would have resulted in TCGA 1992, s 137 not being engaged at all. However, whilst this might initially be considered an oversight, the requirements for ER required the taxpayer to hold at least 5% of the shares in the company being disposed of.

Fehzaan Ismail and George Hardy are co-authors (with Pete Miller) of Taxation of Company Reorganisations. A new edition is due to publish in September 2024. Sign up to our newsletter to stay up-to-date with its progress. Follow the link at the bottom of this page.