TiS eliminates tax advantage of redemption of preference shares

In Ivan Wroe & Ors v HMRC [2022] TC08474, the First Tier Tribunal (FTT) found that the Transactions in Securities (TiS) legislation applied to the redemption of preference shares issued on a reorganisation. Obtaining an Income Tax advantage was a main purpose of the reorganisation and repurchase. 

• Mr Wroe, Mr Rimmer and Mr Timms (the appellants) established Proline Engineering Limited in 1996. All three appellants were directors and equal shareholders.
• A fourth director acquired 9.91% of the company’s share capital in 2011. Following this, the appellants each owned approximately 30% of Proline.
• The appellants sought advice from their tax advisers in June 2013 in relation to a potential restructuring of the company which would involve equalising the shareholdings of the four director-shareholders.
  • The advice given was summarised in a letter from the advisers dated 25 June 2013. This formed a key part of evidence.
• In August 2013, a Holding company (Jenbest Ltd) was inserted above Proline.
  • Each of the three appellants exchanged their Proline shares for 25% of the Ordinary share capital of Jenbest along with £600,000 £1 preference shares.
  • The fourth Proline shareholder was issued with 25% of the ordinary shares in Jenbest, designated as A ordinary shares.
• A purported objective behind the transaction was to increase the fourth director’s shareholding in the company from 10% to 25%, while compensating the three appellants for the reduction in their shareholdings.
  • It was argued the resulting structure would facilitate the eventual retirement of the three appellants.
• Prior to the Reorganisation, the company’s advisers sought and obtained, statutory Clearance from HMRC.
  • The clearance application described the preference shares as irredeemable and did not mention the possibility of them being repurchased.
• During the 2014-15 and 2015-16 tax years, Jenbest repurchased all of the preference shares at their nominal value.
• Each appellant reported their disposal of the preference shares on their tax returns as being subject to Capital Gains Tax (CGT) at 10%, having claimed Entrepreneurs’ Relief (now Business Asset Disposal Relief).
• HMRC notified each Appellant in September 2018 that they considered that the Transactions in Securities (TiS) legislation might apply to the reduction in share capital in Jenbest.
• In March 2020, following correspondence between HMRC and the appellants, HMRC issued counteraction notices and assessments to each appellant, charging a total tax and interest of approximately £367,000.

The TiS rules give HMRC the power to counteract an Income Tax advantage resulting from transactions between Close companies and their owners where the main or one of the main purposes for undertaking the transaction is that of obtaining an Income Tax advantage.

Following a Statutory review, which upheld HMRC's counteraction notices, the taxpayers Appealed to the First Tier Tribunal (FTT).

The FTT dismissed the taxpayers’ appeals, finding that a main purpose of each of the appellants in being a party to the reorganisation and the repurchase of the preference shares was to obtain an Income Tax advantage.

• While there were commercial non-tax reasons for increasing the fourth director’s shareholding, the reorganisation undertaken was not necessary to achieve this.
• The issue of the preference shares in the reorganisation was not related to the desire to equalise shareholdings. While it may have formed part of a phased retirement plan, it was structured to produce a capital receipt rather than income subject to Income Tax.
• The advisers’ letter in June 2013 was the only contemporaneous documentary evidence of the appellants’ purposes. This:
  • Indicated that one of the main purposes of the issue of preference shares was to enable the appellants to receive cash representing the historic value of Proline in capital form, once the preference shares were repurchased.
  • Took the payment of a dividend as a ‘baseline’ case. It suggested that even if HMRC counteracted the tax advantage, the appellants would be in no worse position than if they had simply received dividends. The plan was therefore to achieve a better tax result than simply paying dividends.
• The statutory clearance was void as the description of the proposed transactions in the application did not fully and accurately disclose all facts and considerations which were material: any mention of the repurchase of the preference shares was omitted.
  • The advisers’ June 2013 letter made it clear there was a risk that if HMRC knew that a repurchase of the preference shares was planned, clearance may be refused. 
  • The omission was deliberate. The advisers believed that seeking to obtain clearance in advance for the repurchase of the preference shares would simply ‘flag’ the issue to HMRC. This indicated that the potential repurchase was considered to be material information.

Useful guides on this topic

Transactions in Securities
This note examines the rules for an Income Tax advantage from the perspective of shareholders.

Transactions in Securities: Case studies
This guide contains potential case studies for the Transactions in Securities (TiS) rules. 

An Index to Reorganisations, Demergers & Share transactions
What is a company reorganisation or reconstruction? What tax reliefs apply to a company reorganisation, a share for share exchange, reconstruction or other transaction involving shares?

Case Study 7: Creating a group by share for share exchange
What are the steps for creating a group by way of a share for share exchange? 

Share capital: What's an ordinary share?
What is an ordinary share? Why is it important?

Business Asset Disposal Relief (Entrepreneurs' Relief): Disposal of shares or securities in a company
When can you claim Business Asset Disposal Relief (BADR) on a share sale? What is the rate of Business Asset Disposal Relief (Entrepreneurs' Relief)? How do you claim BADR? What case law is there on BADR?

External link

Ivan Wroe & Ors v HMRC [2022] TC08474