UK and International Tax news
FTT Decision In Transactions In Securities Case
Monday 12th August 2024
The FTT has recently heard an appeal involving the application of the transactions in securities rules in a case involving share buybacks.
In Osmond & Anor v HMRC [2024 UKFTT 378 TC], the FTT had to consider the application of the TIS legislation contained in ITA 2007 to the consideration received by the appellants for share buybacks by Xercise2 Limited which took place in March 2015. The total consideration received by the appellants was £20m.
The appellants and their advisers took the view that this consideration represented a return of capital and was thus chargeable to capital gains tax, subject to EIS disposal relief. HMRC took a contrary view, and argued that the TIS regime applied with the TIS consideration being subject to income tax and not CGT. On 31 March 2021 HMRC issued counteraction notices and assessments in relation to the 2014/2015 tax year, totaling just over £6m. Both appellants appealed against these assessments.
It is noted that no application was made to HMRC for advance clearance in respect of the share buybacks.
The FTT had to consider four issues relating to main purpose, relevant consideration, counteraction notice and limitation period. Of particular importance was whether the main purpose of the transactions was to obtain an income tax advantage per s.687 ITA2007 and were the assessments invalid by being served outside the four-year time limit per s.34 TMA 1970.
On the main purpose issue, HMRC maintained that it was wrong to consider EIS relief solely as a CGT relief. The appellants’ admitted that the purpose of the share buyback was to secure the benefit of EIS disposal relief, and as a matter of law had a main purpose of obtaining an income tax advantage in entering into the share buybacks as income tax would have been payable by the appellants on the consideration if they had constituted a distribution.
The appellants argued that the sole purpose of the share buyback was to bank or secure EIS disposal relief. It was not to extract value from the company as the appellants did not need the money. Had they been able to secure the relief without undertaking the buyback transaction, i.e. by way of a sale to outside parties, they would have done so. That this was their only purpose was clear from the commercial history of transactions predating the share buybacks and the oral and documentary evidence. Wanting to bank the EIS relief was not to obtain an income tax advantage but to ensure that a valuable CGT relief would not be lost by virtue of a change in government and legislation.
On detailed review of the legislation and previous tax cases, the FTT held that, as a matter of law, the appellants did have, as a main purpose of entering into the share buyback, the obtaining of an income tax advantage.
With respect to the limitation period issue, HMRC stated that s.698 ITA2007 gave HMRC power to issue an assessment within a six-year time period and the provisions of s.698(7) trumped any statutory limitation period in the TMA as it was an Income Tax Act which could not limit their powers under s.698.
The appellants argued that whilst the provisions of s.698 did give HMRC power to issue an assessment, like all assessments, it was subject to the provisions of the TMA and did not give HMRC an extended six-year period to issue an assessment.
After detailed consideration, the FTT held that the TIS regime and s.698 provided HMRC with the power to issue a counteraction notice and a corresponding assessment within six years from the end of the relevant tax year. There was no further limitation imposed on HMRC by, for example, s.34 TMA and therefore the assessments made within six years were valid.
This is perhaps a suprising result as the appellants were trying to bank EIS disposal relief on their share disposals and were not attempting to avoid paying income tax. It is thought that an appeal is quite likely.
If you would like more information on the case, please contact Keith Rushen on 0207 486 2378.
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