What is the deadline for transactions in securities legislation?
30th May 2023
Posted in Articles, Business Asset Disposal Relief, Capital Gains Tax by Andrew Marr
The issue
Transactions in securities legislation (TISL) has been around for a while. In very broad terms it allows HMRC to issue a counteraction notice to tax proceeds at dividend rates of up to 39.35% rather than capital gains tax rates (which are normally 20% but can be as low as 10% if Business Asset Disposal Relief (BADR) applies). The mischief that these rules are intended to counter is where shareholders extract distributable reserves from a company or group of companies in capital form without significantly reducing their ownership in the company in question. Although these rules are not generally invoked very often, HMRC did issue a large quantity of counteraction notices just before 6 April 2022. The relevance of this date is that it is six years from the end of the 2015/2016 tax year when quite a few taxpayers took advantage of an opportunity to reduce share capital in their companies and pay capital gains tax on any consequent gain. This tended to work as follows:
1. At some point in a group’s history a holding company had been inserted over a company or companies.
2. This gave rise to a large amount of capital at the holding company level.
3. This capital was ‘reduced’ using company reserves (perhaps from the underlying companies) and paid to the shareholders who assessed it as a capital receipt.
4. Before the rules changed from 6 April 2016 there were fairly compelling arguments as to why TISL should not apply in these circumstances.
5. HMRC disagreed with these technical arguments, although they did amend the legislation anyway (they would say that this was just to be safe).
There are various technical arguments that can be used to justify that TISL does not apply in the above case. I am also aware of an interesting argument (credit to Pete Miller and Philip Ridgway here) as to why HMRC may have been out of time with their six-year counteraction notices.
Time limit for a 2015/2016 transaction
Pete Miller has suggested that the deadline for HMRC to raise a counteraction notice for a 2015/2016 transaction should be 5 April 2020 and therefore anything later than that was out of time. His argument is broadly as follows:
1. Although the TISL rules (applicable up to 5 April 2016) say that no assessment can be made more than six years after the end of a tax year, there is no specific provision which gives a power about when an assessment can be made.
2. This leaves us with the standard rules on income tax assessments which is that HMRC have four years from the end of a tax year to raise them.
3. It seems that this lacuna has occurred because the old TISL rules were not amended to give HMRC the power to counteract within six years, once the general rules were reduced from six years to four years from April 2009.
As of last December, I know that Pete was collating cases with a view to possibly setting up a test case here.
Forbes Dawson view
The technical argument here seems robust and it would be interesting to see it argued out in a test case. This should not however prevent taxpayers using this argument in their communications with HMRC, whether alone or in conjunction with other arguments, about why TISL should not apply under general principles. There have already been various cases where HMRC have failed on procedural grounds. On a slightly different issue, we have seen various cases where HMRC have got the details of various counteraction notices mixed up and sent them to the wrong people. Where this error was not corrected before the deadline (whatever that is!) then there should be an additional procedural argument about why TISL should not apply…
