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M Group Holdings and the SSE

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The basic rule of the substantial shareholding exemption (SSE) is that it exempts from tax a gain made by a company on the disposal of shares in a trading company (‘the affiliate’) if it has held a ‘substantial shareholding’ (meaning, broadly, 10% or more of the shares) in the affiliate for a ‘qualifying holding period’ of at least 12 months.

The relief is also available in some circumstances where at the time of disposal the affiliate is using trading assets previously transferred to it by another group company. It was the exact scope of that extended relief that was in point in M Group Holdings [2021] UKFTT 69 (TC).

In that case, a long-established standalone trading company formed a new subsidiary, hived down its trade, and sold the shares some 11 months later. Clearly relief under the basic rule was not available. But was the extended relief available?

The extended relief works by treating the qualifying holding period as extended by any period of time during which the trading assets held by the affiliate at the time of sale had been ‘used by a member of the group for the purposes of a trade carried on by that member at a time when it was such a member.’ 

There is no question but that the condition would have been fulfilled and relief would have been available if M Group Holdings had been a member of a group for at least a year before the disposal (even if that had been by virtue of holding shares in a dormant subsidiary). Could HMRC really be right in saying that it was not available in the case of a standalone company like M Group Holdings? What possible policy reason could Parliament have had for making the distinction?

The tribunal fully accepted that ‘HMRC’s construction produces the odd or apparently arbitrary result of SSE applying or not depending on whether there has been a separate, possibly dormant, subsidiary or other group company owned for the previous 12 months.’

As a matter of statutory construction, it is sometimes appropriate to adopt a strained interpretation of legislation in order to make it achieve the intention of Parliament in enacting the legislation. There were, however, two problems with that approach in this case.

The first was that HMRC’s reading was, in the view of the tribunal, the only possible way to interpret the words of the Act: the taxpayer’s was not merely strained but was impossible. The second was that the tribunal was unable to discern Parliament’s intention: ‘The outcome may be odd in the abstract but as the purpose of the legislation on the specific point in this appeal is opaque it is difficult to say with confidence that [HMRC’s] interpretation would “defeat the obvious intention of the legislation”.’

Hence, odd or arbitrary as it was, HMRC’s interpretation of the legislation had to prevail.

The simple result is that any standalone company hoping to secure SSE on the future sale of a business needs to constitute itself a member of a group at least one year before the sale. Forming a dormant subsidiary with £1 of share capital should do the trick; but probably more prudent to ensure that it has a taxable source of income by having it place a few pounds on deposit.