Attempts to claim EIS disposal relief on share buybacks were denied by the First Tier Tribunal (FTT). The FTT determined that the Transactions in Securities (TiS) legislation applied because the main purpose of the transaction was to obtain an Income Tax advantage.
The Transaction in Securities (TiS) legislation seeks to treat capital receipts as income receipts where certain conditions are met. The regulations are widely drafted.
In general, the TiS regulations apply when:
- There is a transaction of 'whatever description relating to securities'.
- Which involves at least one close company.
- The main or one of the main purposes of the transaction is to pay less Income Tax (obtain an Income Tax advantage).
- An Income Tax advantage is actually obtained as a result of the transaction.
In Hugh Edward Mark Osmond and Matthew Charles Allen V HMRC [2024] TC09163, the FTT found that the main purpose of the share buybacks was to obtain EIS disposal relief. Consequently, as a matter of law, the main purpose was to obtain an Income Tax advantage.
- The taxpayers subscribed to EIS shares in Xercise Ltd.
- Xercise Ltd was not profitable and the business was sold on. To preserve the Capital Gains Tax (CGT) exemption on future disposal of the shares (EIS disposal relief), several share buybacks were carried out, leaving the taxpayers as the only members of Xercise Ltd.
- Xercise Ltd was used as a holding company for investments. A new holding company was inserted, Xercise 2 Ltd, with the intention that the EIS status passed onto the shares.
- The taxpayers later received £9m and £11m from a share buyback by Xercise 2 Ltd and claimed EIS disposal relief on these amounts.
- HMRC issued counteraction notices and Assessments, stating that TiS legislation applied, the main purpose of the transaction was to obtain an Income Tax advantage and the consideration should be subject to Income Tax and not CGT.
- The taxpayers Appealed the assessments.
The FTT found that:
- The share buyback was a transaction in securities and the taxpayers had gained an Income Tax advantage, as no CGT liability arose due to the claim for EIS disposal relief. If the consideration had been a qualifying distribution, they would have incurred a significant Income Tax liability.
- Whether the main purpose was to obtain that Income Tax advantage is a pure question of subjective fact, see Assem Allam v HMRC. It is a purpose and not a benefit test.
- The TiS legislation defines Income Tax advantage, requiring the alternative transaction that would give rise to Income Tax to be considered, irrespective of whether or not the taxpayers would extract the funds by way of qualifying distribution.
- Whilst the transaction was not motivated by Income Tax avoidance, the main purpose of the share buyback was to enable the taxpayers to crystallise the EIS disposal relief. As a matter of law, the main purpose was to obtain an Income Tax advantage.
- The TiS legislation applied, and the taxpayers were subject to Income Tax on the amounts received.
The FTT also found that:
- The amounts paid to the taxpayers were relevant consideration, they represented the value of assets which were lawfully available for distribution. The amounts were not excluded because they were a return of capital to subscribers. The TiS legislation was amended by FA 2016, which somewhat diminishes the relevance of the commentary.
- Counteraction notices issued by HMRC were valid, despite the omission of relevant information. They did not misrepresent the position; the omission was not fundamental in view of the knowledge of the taxpayers.
- HMRC’s assessments were made within the correct period. The TiS legislation trumps the Taxes Management Act 1970. It provides HMRC with the power to issue a counteraction notice and corresponding assessment within 6 years from the end of the relevant tax year.
The FTT dismissed the appeals.
Comment
The TiS legislation is designed as a standalone anti-avoidance measure. Whilst the facts of this case are unique, it serves as a stark reminder of its broad scope.
This is the first case in which HMRC has argued that if the main purpose of the transaction is to crystallise a CGT tax relief, as a matter of law, the main purpose is also deemed to be obtaining an Income Tax advantage.
We suspect that the FTT decision will be appealed to the Upper Tribunal. Our concern is that if HMRC’s argument is correct, where the main purpose or one of the main purposes of entering a transaction is to obtain a CGT relief these transactions will potentially fall within the scope of the TiS legislation.
Useful guides on this topic
Transactions in Securities
What are the Transactions in Securities rules? When do they apply?
Transactions in Securities: Case studies
This guide contains potential case studies for the Transactions in Securities (TiS) rules.
EIS: Enterprise Investment Scheme (Subscriber guide)
When can EIS relief be claimed? What are the conditions for EIS relief? What are the benefits of EIS relief?
Time limits for tax assessments, claims and refunds
What are the time limits for claiming a tax refund? How far can HMRC go back and raise an assessment? How many years back can a taxpayer appeal? What are the time limits for correcting a tax return?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
External Links
Hugh Edward Mark Osmond and Matthew Charles Allen V HMRC [2024] TC09163
