HMRC has various powers available to it to counteract and discourage tax avoidance. One such set of rules is known as the transactions in securities (TiS) legislation. These rules seek to prevent taxpayers from benefiting from a CGT rate, rather than an income tax rate, in certain circumstances.
It is relatively common for business owners to be involved in a transaction which includes a transfer of securities, such as a sale of shares in their company or encashing a loan note. In these circumstances, the TiS legislation may apply if the main purpose, or one of the main purposes of the transaction, is the avoidance of income tax. If a transaction falls foul of the TiS rules, then the proceeds received by the taxpayer may be taxed at an income tax rate as high as 39.35% rather than at the main rate of CGT of 20% for higher or additional rate taxpayers.
It may therefore come as a surprise that HMRC’s use of this powerful tax anti-avoidance legislation has been highly sporadic at best in recent years. In order for HMRC to apply the TiS rules, it must issue a counteraction notice. In fact, the tax legislation makes it impossible for taxpayers to self-assess whether they are impacted by the TiS rules. The burden lies with HMRC to enforce the rules.
In data released to RSM UK by HMRC, it has been confirmed that HMRC issued a very small number of counteraction notices in the five tax years from 2017/18 onwards:
2017/18: 0 (number of counteraction notices issued)
2018/19: 0
2019/20: <10
2020/21: 13
2021/22: 119
The latest estimates of how much tax revenues have been generated by these counteraction notices are £13.9m in 2020/21 and £34.2m in 2021/22. It should be noted that some of the cases may be appealed by taxpayers which could impact these figures. These figures also do not include details of cases which were settled by contract in advance of counteraction notices being issued.
Perhaps the most interesting point is in how long it takes for a counteraction notice to be issued. For the notices issued in 2019/20, 2020/21 and 2021/22, the average times were six years, five and ¾ years and an estimated six to six and a half years respectively.
The rules relating to TiS were changed in 2016. Prior to this rule change, HMRC had a legal requirement to issue a counteraction notice within six years of the end of the tax year in which the transaction took place.
So, for a transaction undertaken in 2015/16, a counteraction notice needed to be issued by HMRC in 2021/22 at the latest. This explains the spike of counteraction notices in 2021/22, as there will have been individuals who undertook transactions in 2015/16 ahead of the rules being changed.
However, there are tax specialists who argue that HMRC’s deadline to raise a counteraction notice was actually four years, rather than a six-year period, and are seeking to bring a test case against HMRC to prove this theory [see ‘Miller’s tales: Transactions in securities and counteraction assessments’ (Pete Miller), Tax Journal, 13 January 2023]. If such arguments are successful, HMRC’s delay in raising counteraction notices could potentially result in it losing tax revenues of up to £34.2m.
Home >Articles > Transactions in securities: HMRC delays could cost it £34m
Transactions in securities: HMRC delays could cost it £34m
HMRC has various powers available to it to counteract and discourage tax avoidance. One such set of rules is known as the transactions in securities (TiS) legislation. These rules seek to prevent taxpayers from benefiting from a CGT rate, rather than an income tax rate, in certain circumstances.
It is relatively common for business owners to be involved in a transaction which includes a transfer of securities, such as a sale of shares in their company or encashing a loan note. In these circumstances, the TiS legislation may apply if the main purpose, or one of the main purposes of the transaction, is the avoidance of income tax. If a transaction falls foul of the TiS rules, then the proceeds received by the taxpayer may be taxed at an income tax rate as high as 39.35% rather than at the main rate of CGT of 20% for higher or additional rate taxpayers.
It may therefore come as a surprise that HMRC’s use of this powerful tax anti-avoidance legislation has been highly sporadic at best in recent years. In order for HMRC to apply the TiS rules, it must issue a counteraction notice. In fact, the tax legislation makes it impossible for taxpayers to self-assess whether they are impacted by the TiS rules. The burden lies with HMRC to enforce the rules.
In data released to RSM UK by HMRC, it has been confirmed that HMRC issued a very small number of counteraction notices in the five tax years from 2017/18 onwards:
2017/18: 0 (number of counteraction notices issued)
2018/19: 0
2019/20: <10
2020/21: 13
2021/22: 119
The latest estimates of how much tax revenues have been generated by these counteraction notices are £13.9m in 2020/21 and £34.2m in 2021/22. It should be noted that some of the cases may be appealed by taxpayers which could impact these figures. These figures also do not include details of cases which were settled by contract in advance of counteraction notices being issued.
Perhaps the most interesting point is in how long it takes for a counteraction notice to be issued. For the notices issued in 2019/20, 2020/21 and 2021/22, the average times were six years, five and ¾ years and an estimated six to six and a half years respectively.
The rules relating to TiS were changed in 2016. Prior to this rule change, HMRC had a legal requirement to issue a counteraction notice within six years of the end of the tax year in which the transaction took place.
So, for a transaction undertaken in 2015/16, a counteraction notice needed to be issued by HMRC in 2021/22 at the latest. This explains the spike of counteraction notices in 2021/22, as there will have been individuals who undertook transactions in 2015/16 ahead of the rules being changed.
However, there are tax specialists who argue that HMRC’s deadline to raise a counteraction notice was actually four years, rather than a six-year period, and are seeking to bring a test case against HMRC to prove this theory [see ‘Miller’s tales: Transactions in securities and counteraction assessments’ (Pete Miller), Tax Journal, 13 January 2023]. If such arguments are successful, HMRC’s delay in raising counteraction notices could potentially result in it losing tax revenues of up to £34.2m.
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