HMRC have been taking a particularly hardline view on what transactions they consider to be carried out for bona fide commercial reasons. This has been problematic when seeking clearance for transactions which have no exiting shareholders and where directors simply want to insert a holding company for asset protection.
Here, HMRC are often refusing clearance because they say that the transaction is not being carried out for bona fide commercial reasons. They typically argue as follows:
• That a share exchange doesn’t seem to be needed as there are other ways to resolve the commercial issues (eg. cash can be protected by paying dividends directly to shareholders); or
• That the commercial reasons stated for the transaction are a benefit to the shareholders and not the company.
Where transactions are not carried out for bona fide commercial reasons and where one of the main purposes of the transaction is the avoidance of a tax liability, then a share for share exchange does give rise to a market value taxable disposal.
Is there a magic bullet?
These kinds of arguments should be rebutted through the use of relevant case law and with a bit of luck HMRC may back down and grant clearance.
The relevant case law
Snell v HMRC
Although the court found in HMRC’s favour, on the basis one of the main reasons was the avoidance of tax (the taxpayer used loan notes to defer the tax point of a transaction to a time when he was non-resident) it also rejected HMRC second argument and found the transaction had been effected for bona fide commercial reasons.
The judgement states “I can see no reason why Parliament should have been concerned with whether the same result might have been achieved by some other legal form or means. This is particularly so when the same sub-section introduces a non-avoidance test by reference to the scheme or arrangements as a whole. In my judgment this conclusion is confirmed by the wording of the subsection. The question is whether ‘the exchange in question is effected for bona fide commercial reasons’. If the answer is in the affirmative, it is irrelevant to consider the reasons why the parties chose to structure their transaction in that way.”
The verdict in this case clearly shows that HMRC are wrong to deny clearance because other mechanisms can be used to achieve the same aims.
Clark v Commissioners of Inland Revenue
In this case Mr Clark, a farmer, sold his shareholding in a company to a family investment company in order to realise cash to fund the purchase of adjoining farmland. It was found by Special Commissioners that the transaction had not been carried out for bona fide commercial reasons because the commercial reasons must be connected with the companies being sold. This decision was over ruled by the High Court who stated that the words “bona fide commercial reasons” were general in their scope and not limited in the way the special commissioner had decided.
Forbes Dawson view
HMRC are certainly now giving clearance-seekers a hard time. In the first instance, it is usually worth referring them to the above cases in the hope that they will back down. If this approach fails, then you can consider taking the case to Tribunal or simply proceeding with the transaction without clearance. Although securing a clearance is usually advisable, it is still acceptable to proceed and present the position in the shareholder’s tax return – although this does bear the risk of an adverse enquiry!
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