Transactions in securities (TiS) in a nutshell
The transaction in securities rules are legislation aimed at schemes which look to turn income into capital and thereby benefit from a lower tax charge i.e. a tax advantage. The rules apply mainly to income tax and are particularly relevant when a company is returning capital to its shareholders. Paying out accumulated reserves through a capital transaction can result in a beneficial capital gains tax (CGT) rate when compared to paying out dividends. The TiS rules for corporation tax are largely obsolete now.
When the TiS rules apply, HMRC can use them to reverse the tax advantage obtained from the transaction. This could result in an assessment to a higher tax charge, a repayment of tax being removed or the return of a repayment.
When do the TiS rules apply?
The TiS legislation targets arrangements very broadly, by providing that the regime will apply where there is a transaction in securities (this essentially includes all transactions involving shares or securities ― eg a sale of a company), the main purpose, or one of the main purposes, of the transaction is to obtain a tax advantage and the person concerned receives ‘relevant consideration’. Relevant consideration’ usually means the value of reserves available for distributions as a dividend by the company subject to the TiS and any companies it controls.
The TiS rules are not self-assessed by the taxpayer, instead HMRC will issue a counteraction notice where it believes the rules apply. The counteraction notice recovers the underpaid tax.
In practice, a company liquidation should not represent a TiS if the liquidation occurs in isolation and is not part of a series of transactions which together represent a TiS. Although the phoenix targeted anti-avoidance rules (TAAR) may apply to certain company distributions in respect of share capital on a winding up.
Are there any exclusions from the TiS rules?
There are exclusions that apply in an effort to prevent genuine commercial transactions from being caught which include where the company involved in the transaction is not a close company, where there is no tax advantage and also where there is a fundamental change in ownership of the company. This last exclusion broadly means the original shareholders do not control 25% or more of the ordinary share capital after the transaction so it would take a transaction out of the rules if it involves the outright sale of a close company to an independent third party.
Can a taxpayer get HMRC clearance that the TiS rules will not apply?
The TiS rules are widely drafted and in practice it is not a black and white decision as to whether a transaction will fall within the TiS regime. There are many shades of grey in between. It is however possible to apply to HMRC for advance clearance on the transaction.
A clearance application generally takes the form of a letter or email setting out the steps and anticipated tax implications of the proposed transaction. Once clearance is given by HMRC, its decision is binding on them and it is precluded from taking counteraction.
The clearance does not cover transactions that are not notified to HMRC in the application. If the application does not make full and complete disclosure of all relevant transactions the clearance may be void.
There is no appeal against a refusal of clearance by HMRC, in contrast to the procedure for demerger clearances or capital gains.
What are the time limits for HMRC to apply the TiS rules?
Under the TiS regime a counteraction notice can be issued within six years of the chargeable accounting period of the tax advantage, as opposed to the enquiry window for self-assessment of 12 months following the filing date for the tax return. Therefore this is a substantially longer period during which HMRC can challenge the tax treatment applied to the transaction than for standard enquiries.
What is the phoenix TAAR?
Distributions on a winding-up are specifically defined as transaction in securities, so the TiS rules will need to be considered in the usual manner.
However, if after a liquidation the same or similar trade will, within a two year period, be restarted in another company or in an unincorporated form, the ‘phoenix’ TAAR may apply instead. Where the TAAR applies, the onus is on the taxpayer to declare any liquidation distribution as dividend income on their tax return in the usual manner. The TAAR may apply broadly, if the company being liquidated is close, the individual has a 5% interest in the company and the main purpose, or one of the main purposes, of the transaction is to obtain a reduction in a charge to income tax.
The TAAR takes priority over the TiS rules, simply because the TAAR is self-assessed. If the taxpayer self-assesses a liquidation distribution as income under the TAAR, there will be no ‘tax advantage’ so the TiS rule will not be relevant. However, if there is no such self-assessment, the TiS rules may be relevant if HMRC considers that the obtaining of the tax advantage was the main reason for the winding-up of the company.