Transactions in securities (TIS) legislation is anti-avoidance legislation whereby in certain circumstances HMRC can stop a taxpayer taxing themselves on a gain (at low capital gains tax rates) and make them pay tax at dividend rates (of up to 39.35%). The TiS legislation is quite complicated but, in a nutshell, it seeks to stop capital gains tax being paid in scenarios where nothing has really been sold in commercial terms. There were quite a few transactions before 6 April 2016 which seemingly escaped this legislation, although the rules were tightened up from 6 April 2016.
The pre-6 April 2016 capital reduction: One such planning arrangement broadly involved the following:
As part of some historical restructuring a holding company was inserted above a trading company or group, creating share capital or share premium.
A loan was paid up to the holding company by the subsidiary or subsidiaries.
The cash, along with the share capital above, was then used to effect a capital reduction and capital was paid out to the shareholders.
It was generally accepted that the shareholder could treat the capital reduction as a part disposal for capital gains tax purposes and at the time they would generally pay tax at 10%, taking advantage of Business Asset Disposal Relief (then known as Entrepreneurs’ Relief). The contentious point was around whether HMRC had the power to invoke TIS legislation in these transactions and therefore ‘convert’ some of the gain to dividends taxable at higher rates.
Most tax advisers felt that these transactions were outside the scope of TIS legislation and the 2016 change in legislation seemed to support this point. However, HMRC stuck to their guns and contended that such capital reductions had always been within TIS legislation. This led to them issuing hundreds of counteraction notices around the end of March 2022 to anybody who had done this in 2015/2016. This was on the basis that they had a six-year time limit to send out such a notice.
The case below involved some taxpayers who had received such a notice.
I Oscroft and others v HMRC [2026] UKFTT 251 (TC): This case broadly involved the above planning arrangement. The First-tier Tribunal (FTT) ruled against them on a technical point about whether reserves of a subsidiary company can be treated as available to the parent (which is necessary for TIS to apply). This however is not the main point that I want to discuss. The taxpayers effectively won the case because (shock news!) the FTT concluded that the counteraction notice should have been made within four years rather than the generally accepted six years. Pete Miller highlighted this point in this journal (‘Miller’s tales: Transactions in securities and counteraction assessments’, Tax Journal, 14 December 2022). This article may even have been the basis for the Oscroft case. The broad conclusion was that, although ITA 2007 s 698(5) stated that the time limit was six years under TIS, the TIS legislation had no power to trump the general four-year time limit which prevailed (under TMA 1970) at the time.
Our view: It is perhaps surprising that the TIS rules ran for many years before anybody questioned the six-year deadline. It is probably an oversight on HMRC’s part when the TMA 1970 rules were amended to reduce the time limits for HMRC assessments from six to four years in 2008. This point would have been academic for many transactions because counteraction notices are usually issued within the first four years in any event. I think that the flurry of notices which were sent out in early 2022 were part of a HMRC initiative in response to the wide popularity of capital reductions in the 2015/16 tax year. In many cases there were ongoing enquiries, but counteraction notices had not yet been issued.
It is still early days here and HMRC may well appeal this case. If they do, then we will need to see what happens. If they do not appeal, or if they ultimately lose the case in a higher court, then the question arises about what happens to taxpayers who paid up on the back of erroneous counteraction notices. This is probably something of an open question. Although such taxpayers should be considering their position, it is likely that their settlement with HMRC will be treated as final and they will not be able to turn back the clock. There may well be many who wish, in hindsight, that they had been one of the ‘others’ in the above case.
Note that the amended legislation since 2016 indisputably gives a six-year time limit for counteraction notices.
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Transactions in Securities counteraction notices
A six-year assumption unravels.
Transactions in securities (TIS) legislation is anti-avoidance legislation whereby in certain circumstances HMRC can stop a taxpayer taxing themselves on a gain (at low capital gains tax rates) and make them pay tax at dividend rates (of up to 39.35%). The TiS legislation is quite complicated but, in a nutshell, it seeks to stop capital gains tax being paid in scenarios where nothing has really been sold in commercial terms. There were quite a few transactions before 6 April 2016 which seemingly escaped this legislation, although the rules were tightened up from 6 April 2016.
The pre-6 April 2016 capital reduction: One such planning arrangement broadly involved the following:
As part of some historical restructuring a holding company was inserted above a trading company or group, creating share capital or share premium.
A loan was paid up to the holding company by the subsidiary or subsidiaries.
The cash, along with the share capital above, was then used to effect a capital reduction and capital was paid out to the shareholders.
It was generally accepted that the shareholder could treat the capital reduction as a part disposal for capital gains tax purposes and at the time they would generally pay tax at 10%, taking advantage of Business Asset Disposal Relief (then known as Entrepreneurs’ Relief). The contentious point was around whether HMRC had the power to invoke TIS legislation in these transactions and therefore ‘convert’ some of the gain to dividends taxable at higher rates.
Most tax advisers felt that these transactions were outside the scope of TIS legislation and the 2016 change in legislation seemed to support this point. However, HMRC stuck to their guns and contended that such capital reductions had always been within TIS legislation. This led to them issuing hundreds of counteraction notices around the end of March 2022 to anybody who had done this in 2015/2016. This was on the basis that they had a six-year time limit to send out such a notice.
The case below involved some taxpayers who had received such a notice.
I Oscroft and others v HMRC [2026] UKFTT 251 (TC): This case broadly involved the above planning arrangement. The First-tier Tribunal (FTT) ruled against them on a technical point about whether reserves of a subsidiary company can be treated as available to the parent (which is necessary for TIS to apply). This however is not the main point that I want to discuss. The taxpayers effectively won the case because (shock news!) the FTT concluded that the counteraction notice should have been made within four years rather than the generally accepted six years. Pete Miller highlighted this point in this journal (‘Miller’s tales: Transactions in securities and counteraction assessments’, Tax Journal, 14 December 2022). This article may even have been the basis for the Oscroft case. The broad conclusion was that, although ITA 2007 s 698(5) stated that the time limit was six years under TIS, the TIS legislation had no power to trump the general four-year time limit which prevailed (under TMA 1970) at the time.
Our view: It is perhaps surprising that the TIS rules ran for many years before anybody questioned the six-year deadline. It is probably an oversight on HMRC’s part when the TMA 1970 rules were amended to reduce the time limits for HMRC assessments from six to four years in 2008. This point would have been academic for many transactions because counteraction notices are usually issued within the first four years in any event. I think that the flurry of notices which were sent out in early 2022 were part of a HMRC initiative in response to the wide popularity of capital reductions in the 2015/16 tax year. In many cases there were ongoing enquiries, but counteraction notices had not yet been issued.
It is still early days here and HMRC may well appeal this case. If they do, then we will need to see what happens. If they do not appeal, or if they ultimately lose the case in a higher court, then the question arises about what happens to taxpayers who paid up on the back of erroneous counteraction notices. This is probably something of an open question. Although such taxpayers should be considering their position, it is likely that their settlement with HMRC will be treated as final and they will not be able to turn back the clock. There may well be many who wish, in hindsight, that they had been one of the ‘others’ in the above case.
Note that the amended legislation since 2016 indisputably gives a six-year time limit for counteraction notices.
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