To many people, the transactions in securities legislation is an impenetrable set of anti-avoidance rules. We normally only encounter them as a sentence at the end of clearance applications for certain transactions, asking HMRC to confirm that the rules don't apply to the particular transactions. For a few people, however, these rules are a live issue.
Generally, the rules could be described as being in place to prevent people extracting company profits in capital form in order to avoid the income tax on dividends. Many of the transactions for which we seek clearance are disposals of one sort or another and HMRC would not normally invoke the transactions in securities rules where a person is disposing of all or most of their shares in a company. What HMRC objects to is transactions where a person sells some shares but retains a large shareholding in the company, and the sale proceeds are derived from the company's profits (such as with a management buy-out).
The normal way of counteracting an income tax advantage is for HMRC to issue an assessment to income tax. Currently, the rules say that HMRC can open an enquiry within six years of the end of the tax year in which the tax advantage arose (ITA 2007 s 695), after which they can issue a counteraction assessment at any time (s 698(5)). But before the rule change in 2016, a counteraction assessment could not be raised more than six years after the end of the tax year in which the income tax advantage had arisen. This rule was not changed when the normal time limit for assessment was reduced from six years to 4 years from April 2009. The upshot is that, for transactions in securities cases for tax years 2015/16 and earlier, there is a dispute with HMRC about the time limit for raising assessments. Quite a number of taxpayers entered into some tax planning towards the end of 2015/16 and HMRC's counteraction assessments were raised towards the end of 2021/22, i.e. six years later. I am personally dealing with a number of these cases, directly or indirectly, and part of our defence in each case is that HMRC should have raised its counteraction assessments by the end of 2019/20.
Our argument is that the standard time limit for raising an income tax assessment is four years from the end of the relevant tax year (TMA 1970 s 34). While the transactions in securities rules say that no assessment can be raised more than six years after the end of the relevant tax year, there is no authority within those rules to override the normal four-year time limit.
HMRC's argument is that the transactions in securities rules say that nothing in the Income Tax Acts can limit the powers given by the transactions in securities rules, themselves (ITA 2007 s 698(7)). It then cites the case of HMRC v Inverclyde Property Renovation LLP and Clackmannanshire Renovation LLP [2020] UKUT 1061 (TCC), which confirmed that the provisions of TMA 1970 are part of the Income Tax Acts, so that HMRC’s view is that nothing in TMA 1970 can limit the powers conferred by the transactions in securities rules.
That said. it was never part of my argument that TMA 1970 was not part of the Income Tax Acts. Indeed, quite the opposite, because otherwise the time limit in TMA 1970 would not apply to transactions in securities! So HMRC say that the time limit in TMA 1970 cannot restrict the operation of any of the powers in the transactions in securities rules, but our point is that the pre-2016 time limit for a counteraction assessment is not a power conferred by the transactions in securities rules, it is a restriction on the operation of those rules. There is no specific power in the transactions in securities rules that overrides the normal assessing time limit in TMA 1970. Therefore, any assessment raised by HMRC for 2015/16 should have been raised by the end of 2019/20 and all the assessments raised in 2021/22 are out of time.
Because there are a lot of these cases, it seems sensible to try and arrange for a test case be taken through the appeals process on that specific point, either as a preliminary point or in a case where it seems clear that the income tax advantage was one of the main purposes for the taxpayer having been party to a transaction in securities, so that the main point of principle to be established by the tribunals and courts would be about the time limit. All the other cases could be stayed behind this test case. If the ultimate decision is that HMRC's assessments were raised too late, then all of the 2015/16 cases will fall away. If HMRC is successful on that point, then some current cases will fall away, if the taxpayers are not comfortable defending their position from a commercial perspective, particularly if they were deliberately trying to avoid income tax. In other cases, the taxpayers will feel that what they did was commercially justifiable and that the income tax advantage was not one of their main purposes, and those cases can then be decided on their merits.
A number of cases have now reached the stage where appeals have been transmitted to the tribunal and HMRC has prepared its statement of case. The logical next step is for the taxpayers involved, together with their advisers, to consider whether the test case approach is a sensible way forward. While this approach can be mandated by the tribunal, there is no reason why a group of taxpayers should not approach the tribunal with such a proposal, or, indeed, taxpayers and HMRC could mutually agree that this is the best way forward. The only proviso is that the cases must have been transmitted to the tribunal, so that the tribunal has jurisdiction to make the appropriate orders. For the moment, I am collating information about cases to see if this is a worthwhile approach.
The author thanks Keith Gordon and Philip Ridgway of Temple Tax Chambers for their help in formulating this approach and with the drafting of this note.
To many people, the transactions in securities legislation is an impenetrable set of anti-avoidance rules. We normally only encounter them as a sentence at the end of clearance applications for certain transactions, asking HMRC to confirm that the rules don't apply to the particular transactions. For a few people, however, these rules are a live issue.
Generally, the rules could be described as being in place to prevent people extracting company profits in capital form in order to avoid the income tax on dividends. Many of the transactions for which we seek clearance are disposals of one sort or another and HMRC would not normally invoke the transactions in securities rules where a person is disposing of all or most of their shares in a company. What HMRC objects to is transactions where a person sells some shares but retains a large shareholding in the company, and the sale proceeds are derived from the company's profits (such as with a management buy-out).
The normal way of counteracting an income tax advantage is for HMRC to issue an assessment to income tax. Currently, the rules say that HMRC can open an enquiry within six years of the end of the tax year in which the tax advantage arose (ITA 2007 s 695), after which they can issue a counteraction assessment at any time (s 698(5)). But before the rule change in 2016, a counteraction assessment could not be raised more than six years after the end of the tax year in which the income tax advantage had arisen. This rule was not changed when the normal time limit for assessment was reduced from six years to 4 years from April 2009. The upshot is that, for transactions in securities cases for tax years 2015/16 and earlier, there is a dispute with HMRC about the time limit for raising assessments. Quite a number of taxpayers entered into some tax planning towards the end of 2015/16 and HMRC's counteraction assessments were raised towards the end of 2021/22, i.e. six years later. I am personally dealing with a number of these cases, directly or indirectly, and part of our defence in each case is that HMRC should have raised its counteraction assessments by the end of 2019/20.
Our argument is that the standard time limit for raising an income tax assessment is four years from the end of the relevant tax year (TMA 1970 s 34). While the transactions in securities rules say that no assessment can be raised more than six years after the end of the relevant tax year, there is no authority within those rules to override the normal four-year time limit.
HMRC's argument is that the transactions in securities rules say that nothing in the Income Tax Acts can limit the powers given by the transactions in securities rules, themselves (ITA 2007 s 698(7)). It then cites the case of HMRC v Inverclyde Property Renovation LLP and Clackmannanshire Renovation LLP [2020] UKUT 1061 (TCC), which confirmed that the provisions of TMA 1970 are part of the Income Tax Acts, so that HMRC’s view is that nothing in TMA 1970 can limit the powers conferred by the transactions in securities rules.
That said. it was never part of my argument that TMA 1970 was not part of the Income Tax Acts. Indeed, quite the opposite, because otherwise the time limit in TMA 1970 would not apply to transactions in securities! So HMRC say that the time limit in TMA 1970 cannot restrict the operation of any of the powers in the transactions in securities rules, but our point is that the pre-2016 time limit for a counteraction assessment is not a power conferred by the transactions in securities rules, it is a restriction on the operation of those rules. There is no specific power in the transactions in securities rules that overrides the normal assessing time limit in TMA 1970. Therefore, any assessment raised by HMRC for 2015/16 should have been raised by the end of 2019/20 and all the assessments raised in 2021/22 are out of time.
Because there are a lot of these cases, it seems sensible to try and arrange for a test case be taken through the appeals process on that specific point, either as a preliminary point or in a case where it seems clear that the income tax advantage was one of the main purposes for the taxpayer having been party to a transaction in securities, so that the main point of principle to be established by the tribunals and courts would be about the time limit. All the other cases could be stayed behind this test case. If the ultimate decision is that HMRC's assessments were raised too late, then all of the 2015/16 cases will fall away. If HMRC is successful on that point, then some current cases will fall away, if the taxpayers are not comfortable defending their position from a commercial perspective, particularly if they were deliberately trying to avoid income tax. In other cases, the taxpayers will feel that what they did was commercially justifiable and that the income tax advantage was not one of their main purposes, and those cases can then be decided on their merits.
A number of cases have now reached the stage where appeals have been transmitted to the tribunal and HMRC has prepared its statement of case. The logical next step is for the taxpayers involved, together with their advisers, to consider whether the test case approach is a sensible way forward. While this approach can be mandated by the tribunal, there is no reason why a group of taxpayers should not approach the tribunal with such a proposal, or, indeed, taxpayers and HMRC could mutually agree that this is the best way forward. The only proviso is that the cases must have been transmitted to the tribunal, so that the tribunal has jurisdiction to make the appropriate orders. For the moment, I am collating information about cases to see if this is a worthwhile approach.
The author thanks Keith Gordon and Philip Ridgway of Temple Tax Chambers for their help in formulating this approach and with the drafting of this note.
