The substantial shareholdings exemption is in danger of being misunderstood, warns Heather Self (Pinsent Masons)
Some campaigners have begun to campaign for the substantial shareholdings exemption (SSE) to be repealed, and have even described it as ‘tax-dodging’. I chaired the CIOT Technical Committee during the original consultation process, and have looked back at the documents issued at that time to give a brief historical perspective.
In the mid-90s, the key issue for UK multinationals was surplus ACT: many global companies could not offset their ACT against mainstream tax liabilities, so preferred to receive UK rather than foreign income in order to minimise the surplus. ACT could be offset against tax on capital gains, so the effective tax rate was around 10%.
ACT was, of course, abolished by the incoming Labour government in 1997 and there was a further upheaval in the changes to the taxation of foreign profits in 2000. That consultation produced a very muted response from business, which preferred the (imperfect) existing system to radical change, and was somewhat shocked at the complexity of the eventual outcome.
So when the first consultation document on what became SSE was published in June 2000, business decided to engage actively. The original proposal was for a deferral, broadly recognising that the tax system imposed a significant difference between sales of assets (where the gain could be rolled over) and sales of shares. By the time the second document was published in November 2000, the possibility of an exemption was being contemplated.
Of course, there was a general election in June 2001, and those of us leading the consultation responses discussed whether we should settle for deferral (which could probably have been implemented before the election) or hold out for the possibility of exemption, which would take longer and might not have been followed up by the new government. I distinctly remember arguing for the latter, while Edward Troup (now at HMRC, but at the time involved in the consultation from the private sector) advocated the former!
Sure enough, in July 2001, a further consultation document was published and Gordon Brown said in the introduction: ‘We are designing a new relief for corporate capital gains to facilitate the process of restructuring and investment helping business take advantage of emerging global opportunities. We believe that the proposed exemption approach has substantial attractions, a view shared by business during the initial consultation.’
The logic of the exemption is that the gain on shares in a trading subsidiary broadly represents after tax profits and so should not suffer additional tax on a disposal. To the extent that there is additional value representing goodwill, rollover relief has long been available. The important point is that SSE only applies where the funds remain invested in active trading businesses; once the proceeds are paid out to shareholders, the return is taxable in their hands (as dividend or capital gain). So SSE is, in my view, consistent with the principle that profits should be taxed, but should not be taxed twice.
Without SSE, tax would become a potential distortion in commercial transactions: it is likely that a valuable but non-core business would be retained rather than triggering a tax charge, even if a new owner could derive greater future value by investing in the business. As Gordon Brown himself said in 2001: ‘The tax system should facilitate decision-making that is driven by commercial factors, rather than by tax considerations.’
It will, of course, be up to a new government to decide what happens to SSE after May 2015, but I have yet to hear any coherent argument for its abolition.
The substantial shareholdings exemption is in danger of being misunderstood, warns Heather Self (Pinsent Masons)
Some campaigners have begun to campaign for the substantial shareholdings exemption (SSE) to be repealed, and have even described it as ‘tax-dodging’. I chaired the CIOT Technical Committee during the original consultation process, and have looked back at the documents issued at that time to give a brief historical perspective.
In the mid-90s, the key issue for UK multinationals was surplus ACT: many global companies could not offset their ACT against mainstream tax liabilities, so preferred to receive UK rather than foreign income in order to minimise the surplus. ACT could be offset against tax on capital gains, so the effective tax rate was around 10%.
ACT was, of course, abolished by the incoming Labour government in 1997 and there was a further upheaval in the changes to the taxation of foreign profits in 2000. That consultation produced a very muted response from business, which preferred the (imperfect) existing system to radical change, and was somewhat shocked at the complexity of the eventual outcome.
So when the first consultation document on what became SSE was published in June 2000, business decided to engage actively. The original proposal was for a deferral, broadly recognising that the tax system imposed a significant difference between sales of assets (where the gain could be rolled over) and sales of shares. By the time the second document was published in November 2000, the possibility of an exemption was being contemplated.
Of course, there was a general election in June 2001, and those of us leading the consultation responses discussed whether we should settle for deferral (which could probably have been implemented before the election) or hold out for the possibility of exemption, which would take longer and might not have been followed up by the new government. I distinctly remember arguing for the latter, while Edward Troup (now at HMRC, but at the time involved in the consultation from the private sector) advocated the former!
Sure enough, in July 2001, a further consultation document was published and Gordon Brown said in the introduction: ‘We are designing a new relief for corporate capital gains to facilitate the process of restructuring and investment helping business take advantage of emerging global opportunities. We believe that the proposed exemption approach has substantial attractions, a view shared by business during the initial consultation.’
The logic of the exemption is that the gain on shares in a trading subsidiary broadly represents after tax profits and so should not suffer additional tax on a disposal. To the extent that there is additional value representing goodwill, rollover relief has long been available. The important point is that SSE only applies where the funds remain invested in active trading businesses; once the proceeds are paid out to shareholders, the return is taxable in their hands (as dividend or capital gain). So SSE is, in my view, consistent with the principle that profits should be taxed, but should not be taxed twice.
Without SSE, tax would become a potential distortion in commercial transactions: it is likely that a valuable but non-core business would be retained rather than triggering a tax charge, even if a new owner could derive greater future value by investing in the business. As Gordon Brown himself said in 2001: ‘The tax system should facilitate decision-making that is driven by commercial factors, rather than by tax considerations.’
It will, of course, be up to a new government to decide what happens to SSE after May 2015, but I have yet to hear any coherent argument for its abolition.
