The Upper Tribunal (UT) has delivered a difficult judgement in relation to the substantial shareholder exemption (SSE) and the disposal of Medinet Clinical Services Limited.
A taxpayer had built a business in supporting NHS providers helping them clear waiting lists and backlogs. The business was contained within one company and the taxpayer looked to sell the business. A buyer was found, and it was agreed the business would sell for almost £55 million. During due diligence, the buyer was concerned about inheriting contingent tax liabilities so it was agreed that the taxpayer’s company would create a new subsidiary and then hive down the assets and trade to this new subsidiary and the buyer would then buy this new subsidiary free of any historic contingent tax liabilities.
Broadly, where a company holds more than 10% of the shares of another company and have held for the shares for 12 months then the disposal will qualify for SSE meaning that the gain in the investing company will be free of corporation tax. The legislation does allow for assets to be transferred to a new company and for this company not to be held for 12 months if the assets have been held for at least 12 months. In the case decided at the UT the assets had been held for many years, but the new company was sold 11 months after being incorporated by the taxpayer’s initial company.
HMRC held that the asset transfer legislation only related to groups of companies and since a group had only been in existence for 11 months then the SSE couldn’t apply. The UT, like the First-tier Tribunal agreed with HMRC holding that the asset transfer legislation couldn’t apply in this instance as a group was not in existence for over 12 months. Therefore, the initial company was required to pay corporation tax of over £10 million.
The decision can be found at: M GROUP HOLDINGS LIMITED v THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS [2023] UKUT 00213 (TCC) – GOV.UK (www.gov.uk)
A £10 million tax charge is a very expensive result to provide the buyer with comfort that there are no contingent tax liabilities within a business being transferred and the outcome of this case is disappointing from a UK economic perspective. The taxpayer will now suffer double taxation on the disposal of his business as he will be subject to capital gains tax (or income tax) when he extracts the net of tax proceeds from the initial company.
The UT was in a difficult position as the legislation clearly talks about groups of companies and can only interpret the intention of Parliament as expressed in legislation. As a firm we feel the legislation will require changing to allow for situations like the above. Hiving down the assets and trade to a new subsidiary is a common way to transfer a business free of historic events that will have taken place at the older company and allowing a group of companies to take advantage of the asset transfer provisions while disallowing single companies is an outcome that will not encourage the sensible transfer of trades. If the initial company had held a dormant subsidiary, then it would have qualified for the SSE, which is an odd result.
