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Simplifying Transactions in Securities Legislation Consultation Document 31 July 2009

2 Simplifying Transactions in Securities Legislation

Subject of this consultation:

Whether a package of proposals aimed at simplifying the Transactions in Securities legislation fulfils the twin aims of revenue protection and simplicity whilst providing clear benefits for customers.

Scope of this consultation:

We are seeking opinions on a package of proposals to simplify and clarify the existing Transactions in Securities legislation. Whilst the proposals contained in this consultation document relate to changes to sections 682-713 Income Tax Acts 2007, which cover income tax advantages, the intention where possible would be to replicate the same changes for Corporation Tax advantages, the current legislation on which is being rewritten with a view to inclusion in the proposed new Corporation Tax Act 2010. Proposal 1 considers refocusing the purpose test to target tax avoidance. A separate discussion document considers simplification of unallowable purpose tests. It can be found at http://www.hmrc.gov.uk/consultations/

Impact Assessment: Please see the Consultation Stage impact assessment for this package of proposals.

Who should read this:

Any customer, advisor or representative body that has experience of working with the anti-avoidance provisions in sections 703 to 709 Income and Corporation Tax Acts 1988 and sections 682 to 713 Income Tax Acts 2007.

Duration: The consultation will comply with the Government Code of Practice. All responses should reach HMRC by Friday 30 October 2009.

Enquiries: All enquiries regarding the content or scope of this consultation or further information about the consultation should be addressed to: HM Revenue & Customs, Business Customer Unit, Room 3/46, 100 Parliament Street, London, SW1A 2BQ Telephone: 020 147 3684 Fax: 020 7147 0128 Email: [email protected]

How to respond: Written responses can be made to Mr Hussein Saleh at the above address or the above email address.

Additional ways to become involved:

In order to engage as wide an audience as possible with the consultation, we would be happy to meet with customers, advisors and representative bodies if they consider that this will add to our understanding of the issues faced by customers. Please use the contact details above if you wish to arrange such a meeting. HMRC proposes a workshop for external stakeholders in early September 2009 to further consider and inform opinion of the issues raised in this discussion document on simplifying unallowable purpose tests. Please use the contact details below if you would like to attend this workshop providing your name and contact details. Customers, advisors and representative bodies may also want to consider the separate review on simplification of unallowable purpose tests at http://www.hmrc.gov.uk/consultations.

After the consultation:

A summary of the responses to this consultation will be published. Emerging findings will inform Government decisions in respect of the simplification of the Transactions in Securities legislation in the period leading up to Budget 2010.

http://www.hmrc.gov.uk/consultations/

mailto:[email protected]

http://www.hmrc.gov.uk/consultations

3 Simplification Transactions in Securities Legislation

Getting to this stage:

Customers, advisors and representative bodies have been involved from an early stage to help identify the legislation to review and develop initial proposals. As part of the 2007 Budget, the Chancellor announced a series of consultations with external stakeholders to identify specific areas of anti-avoidance legislation in need of change. The proposals contained in this consultation document represent the results of those external workshops and associated follow-up work.

Previous engagement:

External stakeholder workshops with customers, advisors and representative bodies were held at the start of September 2008. Between September 2008 and January 2009, we held a number of further one-to-one meetings with external stakeholders. In January 2009 an additional workshop with a small number of external stakeholders was held, where we developed a set of draft proposals which form the basis of this consultation document.


Contents

Chapter no. Chapter title Page no.

1. The Consultation Process 5

2. Introduction 6

3. Proposal 1: Refocus the Transactions in Securities legislation to target tax avoidance 9

4. Proposal 2: Adopt the definition of a close company for 'Relevant Company' in section 691 ITA 2007. 11

5. Proposal 3: Simplifying the remaining circumstances in sections 686 to 690 ITA 2007. 13

6. Proposal 4: The fundamental change of ownership rule 16

7. Proposal 5: Defining and quantifying 'Tax Advantage' 18

8. Proposal 6: Clarifying the scope of the Transaction in Securities legislation 20

9. Proposal 7: Framework guidance for Transactions in Securities 21

10. Summary of consultation 23

Annex A The Government’s code of practice on consultation 25

Annex B List of abbreviations used 26

Annex C Draft amendments to ITA 2007 27

Annex D Draft guidance for Transactions in Securities legislation sections 682 to 713 ITA 2007 31

Annex E Current ITA 2007 legislation 52

Annex F Current ICTA 1988 legislation 60

Annex G Impact Assessment 65


1. The Consultation Process

1.1 How to Respond

A summary of the questions in this consultation is included at Chapter 10; Summary of Consultation. A list of all the abbreviations used in this document is at Annex B. Responses should be sent by Friday 30 October 2009. By email to: [email protected]; Or by post to: HM Revenue & Customs, Business Customer Unit, Room 3/46, 100 Parliament Street, London, SW1A 2BQ Telephone: 020 7147 3684 Fax: 020 7147 0128 This document can be accessed from the HMRC Internet site at http://www.hmrc.gov.uk/consultations. All responses will be acknowledged, but it will not be possible to give substantive replies to individual representations. When responding, please say if your response is on behalf of an individual, business, advisor, or representative body. In the case of individuals please provide details on your experience of the Transactions in Securities legislation. In the case of businesses please provide information on the size of your business, the nature of the industry in which you work and your experience of the Transactions in Securities legislation. In the case of advisors please provide information on the number and type of clients you work with and the nature of your work with them. In the case of representative bodies please provide information on the number and nature of people and or businesses you represent. 1.2 Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004. If you want the information that you provide to be treated as confidential please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs (HMRC). HMRC will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties. 1.3 The Government’s Consultation Code of Practice

This consultation is being conducted in accordance with Government's Code of Practice on Consultation. A copy of the Code of Practice criteria and a contact for any comments on the consultation process is located in Annex A.




2. Introduction

2.1 Overview of this Consultation Document

We are aware from consultations with stakeholders that customers, advisors and representative bodies consider the Transactions in Securities (TiS) legislation currently found at sections 703 to 709 Income and Corporation Tax Acts (ICTA) 1988 for corporation tax and sections 682 to 713 Income Tax Acts (ITA) 2007 for income tax to be extremely complex and unnecessarily cumbersome. There is, therefore, a clear argument for simplifying this legislation and clarifying its scope to ensure customers are not weighed down by unnecessary compliance burdens or excessive advisors fees. This consultation document proposes changes that would be made to Part 13, Chapter 1, sections 682 to 713 ITA 2007. The principles established by these changes will be replicated in to the Corporation Tax legislation. As part of the tax law rewrite, sections 703 to 709 ICTA 1988 are being rewritten for inclusion in the proposed Corporation Tax Act 2010 (CTA 2010). It is therefore proposed that Corporation Tax (CT) amendments are not made to ICTA 1988 but are instead made to the proposed CTA 2010. The specific changes to the proposed CTA 2010 are not covered in this consultation document. This consultation document details a package of proposals which HMRC consider meet the objectives of the Anti Avoidance Simplification Review for Transactions in Securities. Chapters 3 to 9 give further details on each proposal. At the end of each chapter there are a series of questions relating to each proposal to which we would appreciate your responses. Additionally, there are a number of questions at the end of this Chapter regarding the package of measures as a whole. When considering the proposals in this document, you should remember that we are not consulting on each proposal individually, but on all proposals together, as a single package. 2.2 History of the Legislation

The TiS legislation was originally enacted in 1960 to combat specific income tax 'stripping' avoidance devices which, before the introduction of Capital Gains Tax, turned taxable income into tax exempt capital. Since 1960, its general power has protected the Exchequer against a wide range of avoidance schemes in shares and securities transactions which seek to exploit the differences in the rates of tax applying to income and Capital Gains. There have been a number of changes to the TiS legislation since 1960 that culminated in sections 703 to 709 ICTA 1988 covering both IT and CT. In 2007 the legislation was amended so that, from 5 April 2007, sections 703 to 709 ICTA 1988 cover only CT as the IT aspects of the TiS legislation are incorporated into sections 682 to 713 ITA 2007. In 2008, approximately 6,000 clearance applications were made of which approximately 2% were rejected. Most applications are processed quickly (the average time to process clearances in 2008 was less than 8 working days) because the majority of applications concern genuine commercial transactions with no tax avoidance motive, to which the TiS legislation does not apply. 2.3 History of the Anti Avoidance Simplification Review

The Pre-Budget Report (PBR) 2007 launched the Anti-Avoidance Simplification Review, to consider how anti-avoidance legislation can best meet the twin aims of simplicity and revenue protection. The PBR document set out the Government's view of how simplification can best be achieved in anti-avoidance legislation through ensuring new anti-avoidance legislation is clear, effective and well targeted and by simplifying areas of existing anti-avoidance legislation where appropriate.


At Budget 2008, HMRC published an update on the Anti-Avoidance Simplification review. (http://irscot.inrev.gov.uk/budget08/main/00notices/others/aa-simplification.pdf). This included a summary of the results of the initial engagement with business and professional stakeholders, who accepted the need for Government to ensure that anti-avoidance legislation provides effective protection to the Exchequer. However, they wanted legislation that is clear, well targeted and easier to use. Additionally they wanted to be able to understand the tax consequences of complex commercial transactions with reasonable certainty. On 17 July 2008, HMRC published an update paper providing further information on three areas that were subject to the Anti-Avoidance Simplification Review. http://www.hmrc.gov.uk/avoidance/avoid_report.pdf. These were: TiS legislation, Simplification of Unallowable Purpose tests and the rules on Employment Related Securities. Following this update paper, HMRC held a number of external stakeholder workshops with businesses, advisors and representative bodies at the start of September 2008. Between September 2008 and January 2009, we held a number of further one-to-one meetings with external stakeholders. In January 2009, an additional workshop with a small number of external stakeholders was held, where we developed a set of draft proposals which form the basis of this consultation document. 2.4 Effect of this package of measures

The package of measures proposed in this consultation document will result in a fundamental and significant change in the approach and application of the TiS legislation. The aim is to give greater clarity and certainty to our customers which should lead to reduced compliance burdens. These proposed changes will focus the scope of the legislation to target TiS which had been entered into for a main purpose of obtaining a tax advantage. The proposed changes would provide greater clarity in relation to the calculation of any tax advantage and thus the amount potentially at stake in any counteraction process. The aim is to create clearer, more focused legislation, supported by guidance, which should help customers understand the specific behaviour being targeted, improve certainty about how and when the legislation applies and consequently reduce compliance burdens meeting the twin aims of the simplification review of simplicity and revenue protection. 2.5 Questions

For the purposes of this consultation, the proposals should be considered as a single package of proposals, not as seven individual proposals. Specific questions for each proposal can be found at the end of each chapter. However, in addition, we ask respondents to provide responses to the following overview questions: 2.5.1 Do you welcome the package of proposals (as a whole) as simplification to the TiS

legislation?

2.5.2 Does the package of proposals (as a whole) capture the main opportunities to provide customers with simplification and increased certainty?

2.5.3 Are there any additional areas you feel we should consider to further simplify the TiS legislation?

http://irscot.inrev.gov.uk/budget08/main/00notices/others/aa-simplification.pdf

http://www.hmrc.gov.uk/avoidance/avoid_report.pdf


2.6 Summary of Proposals

This document contains a package of seven proposals relating to the TiS simplification review on which we would like to obtain external opinions. In summary, these proposals cover:

Proposal Title of Each Proposal

1 Refocus the Transactions in Securities legislation to Target Tax Avoidance

2 Adopt the definition of close company for 'Relevant Company' in section 691 ITA 2007 ('D2 Company' in section 704 ICTA 1988).

3 Simplifying the remaining circumstances in sections 686 to 690 ITA 2007.

4 The fundamental change of ownership rule

5 Defining and quantifying 'Tax Advantage'

6 Clarifying the scope of the Transaction in Securities legislation

7 Framework guidance for Transactions in Securities


3. Proposal 1: Refocus the Transactions in Securities legislation to target tax avoidance

3.1 Aim of the Proposal

The aim of this proposal is to modernise the TiS legislation to ensure it is clearer and more focused. This should help customers understand what the legislation is targeted at and how it applies. This will increase certainty and reduce compliance costs. The refocused legislation should only catch customers who enter into TiS that have a tax avoidance purpose. What was previously described as the prescribed circumstances and the 'Escape Clause' will now be incorporated into a new purpose test at section 683 ITA 2007 removing the need for a separate 'Escape Clause'. 3.2 Current Position

Broadly, the current TiS legislation means that a person is subject to counteraction (i.e. HMRC will issue a counteraction notice to the person in question effectively charging to tax an equivalent amount to the tax advantage gained from the TiS) if all of the following main conditions are met: (a) a person must be in a position to obtain (or have obtained) a tax advantage (section 703(1) ICTA 1988/ section 684(1) ITA 2007); (b) the tax advantage must be obtained (or obtainable) by that person in consequence of one or more TiS or in consequence of the combined effect of the TiS and the liquidation of a company (section 703(2) ICTA 1988 / section 684(3), ITA 2007); (c) the TiS falls into one of the four prescribed circumstances (section 704, ICTA 1988 / sections 686-690 ITA 2007); (d) the ‘Escape clause’ does not apply - the person cannot show that the TiS is done for bona fide commercial reasons or in the ordinary of making or managing investments and gaining a tax advantage was not a main or one of the main purposes of the TiS (section 703(1), ICTA 1988 / section 685 ITA 2007). This basic approach potentially brings all TiS within the scope of the legislation and then uses filters such as tax advantage, the four circumstances and the escape clause to take some TiS out of the scope of the legislation. The problem with this type of approach is that whilst it is effective as an anti avoidance rule, it does require a person to consider each of the conditions mentioned above before they can be ruled out. This can create unnecessary compliance costs for businesses and individuals involved in wholly innocent TiS. 3.3 Proposed Change

To address this problem and with a view to providing a clearer, simpler way of identifying whether TiS are within the scope of the TiS legislation, this proposal will amend the TiS legislation to put a new purpose test at the start of the legislation. For demonstration purposes this is shown as part of amendments to ITA 2007 (proposed new section 684), the parallel change for CT purposes would be incorporated in the proposed CTA 2010. The new test would be constructed as follows: (a) a person must be party to a TiS (or two or more TiS), (b) The TiS falls within Condition A or B of the circumstance set out in the new section 684 (broadly what was covered previously in circumstances D and E which have been merged into section 684) (c) the person is unable to take advantage of the Exclusion at section 685 (see the proposal 4 on the new fundamental change of ownership rule) and


(d) an income tax advantage is obtained by that person. This proposal includes a refined definition of tax advantage which incorporates a clear method for calculating that advantage. Section 683(d) makes it clear that where there is no income tax advantage obtained by a person, then the TiS legislation will not apply to them. In addition, for the first time, the proposed legislation, through the definition of tax advantage would make it clear that the TiS legislation does not apply to TiS where an advantage in relation to tax on chargeable gains is obtained. This would be more relevant for corporation tax where the position is not clear from the existing legislation. The proposed legislation would bring into scope only those transactions where obtaining a tax advantage was a main purpose, in contrast with current legislation where all transactions are potentially in scope. Genuine commercial transactions (i.e. those where gaining or obtaining a tax advantage was not a main purpose, or one of the main purposes) would effectively be removed from the legislation by the introduction of this refocused test, therefore increasing certainty and clarity for customers. The separate 'Escape Clause' would no longer be required and so this package includes a proposal to repeal section 685 ITA 2007. We are not proposing a widening of the legislation, the purpose of this new approach is to narrow its scope to include only those TiS which are undertaken with a main purpose of obtaining a tax advantage. The proposed draft legislation does not contain a provision that explicitly sets out the equivalent of section 684(3) ITA 2007. That covers situations where an income tax advantage is obtained or obtainable by a person in consequence of a TiS or the combined effect of two or more TiS, if it is in consequence of the combined effect of the transaction or transactions and a liquidation. We consider that the proposed legislation should be capable of covering this type of situation, without needing to deal with it separately. We would welcome your opinions on whether you consider the new draft legislation adequately covers the situations that were intended to fall within section 684(3). 3.4 Costs and Benefits

This proposal is revenue neutral. It solely focuses on reducing the unnecessary administrative burdens incurred by customers considering the impact of the TiS legislation by focusing the legislation upfront only on wholly commercial transactions with no tax avoidance purpose. 3.5 Questions for consultation

This is a fundamental change in approach to the way in which the TiS legislation will be applied. The emphasis will now be on transactions where gaining a tax advantage is a main (or one of the main purposes) of the transactions. The idea of a framework for purpose tests is the subject of a separate discussion document called "Simplifying Unallowable Purpose Tests". You may find it useful to consider the ideas in that document in conjunction with this consultation document. 3.5.1 Do you have any thoughts on this shift in focus within the TiS legislation?

3.5.2 Do you consider there are there any pitfalls you can see for customers?

3.5.3 Do you consider this will this help provide certainty and clarity for customers?

3.5.4 Do you consider this will lead to less work or more work for our customers?

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http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_ShowContent&columns=1&id=CURRENTCONSULTATIONS


4. Proposal 2: Adopt the definition of a close company for 'Relevant Company' in section 691 ITA 2007.


The aim of this proposal is to simplify the definition of a "Relevant Company" by aligning this definition, with the more widely known and understood definition of "Close Company" in sections 414 and 415 ICTA 1988. This would achieve the following: (a) It would provide users of the legislation with a clear, commonly understood, definition of what type of company the current Circumstances D and E of both the IT and CT legislation will apply to. (b) It would clear any uncertainty as to whether the definition of Relevant Company is EU compliant. It has been suggested to HMRC that because the current definition includes a requirement that a company has to be listed in the UK and dealt in on a recognised stock exchange in the UK, not on any other equivalent stock exchanges within the EU, there may be concerns that it is not EU compliant and in need of amendment to ensure it is EU compliant. Adopting the Close Company definition should resolve this matter. (c) It would close a current opportunity for avoidance which enables companies to fall out of the scope of the prescribed circumstance D currently found at section 704D ICTA 1988 and section 689 ITA 2007 by inserting listed companies in their group structure, a practice known as 'D proofing'. (d) It would allow section 689 ITA 2007 Circumstance C to be repealed (see Proposal 3). We consider that those TiS that are currently caught by section 688 ITA 2007 would be caught by section 684 in the draft legislation where Condition A or B are met (currently section 689 and section 690 ITA 2007). We are still considering whether this proposal will allow a similar repeal of the CT equivalent in section 704C ICTA 1988. 4.2 Current Position

Currently, the TiS legislation uses a unique definition of a Relevant Company, limiting the application of the legislation under certain circumstances, to companies falling under what is commonly termed the 'D2' definition. There are good reasons (mentioned above) for aligning the D2 company definition with the more commonly known definition of a Close Company. Given the potential avoidance risk and the possibility that the D2 company definition may not be EU compliant, it is likely that the current Relevant Company definition would have been subject to amendment in any case. However, a real benefit of doing this as part of this simplification review is that it delivers a further simplification of the TiS legislation with the proposed repeal of the C Circumstance in section 688 ITA 2007. 4.3 Proposed Change

The proposal is to simplify the legislation by replacing the current definition of a relevant company in section 691 ITA 2007 so that it has the same meaning as close company in sections 414 and 415 ICTA 1988 for the purposes of ITA 2007. This new definition should: (a) facilitate the repeal of section 688 ITA 2007, the C Circumstance. (b) remove the avoidance risk known as D proofing with minimal impact to administrative burdens. This should be a simple and straightforward change that external consultations have suggested would be widely welcomed.


(c) the change would also ensure compliance with EU law, which we would otherwise need to address outside of the Anti-Avoidance Simplification Review. This change should mean that separate new anti-avoidance rules are not required to prevent this form of avoidance, as the new close company definition should effectively address the current avoidance risks. 4.4 Costs and Benefits

This new definition should have minimum impact from a compliance cost perspective. As this proposal will close a loophole in the legislation (albeit used by a small number of customers) it is potentially both a revenue raising and a revenue protection measure. We estimate that this proposal will in 2010/11 protect revenue of £130 million and yield £30 million and that each subsequent year to 2013/14 this proposal will protect revenue of £50 million and raise an additional £15 million of revenue. Please refer to Annex G for the Impact Assessment on this measure specifically, and on the consultation document as a whole. 4.5 Questions for consultation

4.5.1 Do you consider this change will be beneficial for HMRC's customers?

4.5.2 Do you have any reservations about the change in close company definition?

4.5.3 Do you foresee any practical problems or benefits?

4.5.4 Can you foresee any issues with certain situations, such as Management Buy Outs (where more than 5 managers buy control of a company), which would be affected by the change of the close company definition?


5. Proposal 3: Simplifying the remaining circumstances in sections 686 to 690 ITA 2007.


The aim of this proposal is to simplify the legislation by: (a) Repealing section 704A ICTA 1988 which is now largely obsolete apart from a very narrow application with regard to Shadow Advance Corporation Tax (Shadow ACT). We propose a much more targeted amendment to the Shadow ACT Regulations (SI 1999/358) will secure the required revenue protection in this area. (b) Repealing section 686 ITA 2007 which sets out the equivalent circumstance A and is now considered redundant since the abolition of tax credits in 1999. (c) Repealing section 688 ITA 2007 which sets out the circumstance C. A repeal of this provision for IT purposes is a follow-on from Proposal 2 (Adopt the definition of a close company for 'Relevant Company' in section 691 ITA 2007). Replacing the definition of a relevant company will mean that the type of arrangements we have seen in the past that would normally fall within the circumstance C would now fall within the circumstance D, consequently, there is no longer a need to retain the circumstance C for income tax purposes. We are still considering whether this proposal will allow a similar repeal of the CT equivalent in section 704C ICTA 1988 One consequence of repealing sections 686 and 688, will mean that there is no need to retain the following provisions in ITA 2007: sections 692, 693 and 694. These sections relate to the meaning of abnormal dividends for the purposes of sections 686 and 688 ITA 2007. Whether the equivalent sections for CT purposes can be repealed will depend on whether it is possible to repeal section 704C ICTA 1988. Together, these changes should further increase certainty and clarity for customers. 5.2 Current Position

Section 686 ITA 2007 (Circumstance A) applies after 5 April 2007 for IT purposes where a person receives an abnormal amount by way of dividend and the receipt is in connection with (a) the purchase of securities followed by the sale of securities (b) a sale of securities followed by a purchase of securities (c) the distribution, transfer or realisation of assets of a company, or (d) the application of those assets in discharge of liabilities and the amount so received is taken into account for exemption from income tax, setting off of losses against profits or income or the giving of relief for certain interest payments Section 704A ICTA 1988 (Circumstance A) applies (for CT purposes, for accounting periods ending after 5 April 2007) where a person receives an abnormal amount by way of dividend and the receipt is in connection with (a) a distribution of profits of a company or (b) the sale or purchase of securities followed by the purchase or sale of securities and the amount so received is taken into account for any exemption from corporation tax, the setting off of losses against profits or income, the giving of group relief or the application of franked investment income in computing Shadow ACT.


For income and corporation tax in earlier periods (section 704 ICTA 1988), Circumstance A applies where a person receives an abnormal amount by way of dividend in connection with the distribution of profit of a company or the purchase or sale of securities followed by a sale or purchase of securities. The amount received must be taken into account for: any exemption from tax, setting off losses against profit or income, giving group relief, obtaining relief for certain interest payments, the application of franked investment income in computing Shadow ACT, or franking annual payments. Section 688 ITA 2007 (Circumstance C) applies where a person receives consideration which is or represents the value of (a) assets which are available for distribution by a company by way of dividend, or assets which would have been so available apart from anything done by the company, (b) is received in respect of future receipts of a company, or (c) is or represents the value of trading stock of a company, and the receipt is in consequence of a transaction whereby another person subsequently receives, or has received, an abnormal amount by way of dividend. The assets referred to above do not include those shown to represent a return of sums paid by subscribers on the issue of securities, despite the fact that, under the law of the country in which the company is incorporated, assets of that description are available for distribution by way of dividend. References to the receipt of consideration include references to the receipt of any money or money’s worth. A dividend is considered abnormal for the circumstances A and C if the excessive return condition is met or in the case of a dividend at a fixed rate, if the excessive accrual condition is met. The conditions are set out in sections 692 to 694 ITA 2007 and section 709(4) ICTA 1988. 5.3 Proposed Change

Corporation Tax We propose to repeal section 704A ICTA 1988 and, at the same time, amend the Shadow ACT regulations (SI 1999/358). Although the above refers to ICTA 1988, this is for demonstration purposes. The changes would actually be made to the proposed CTA 2010. Income Tax We propose to amend ITA 2007 as follows: (a) Repeal section 686 which contains the A circumstance. (b) Repeal section 688 which contains the E circumstance. (c) Repeal sections 692, 693 and 694 which deal with abnormal dividends and are only relevant to the A and C circumstances mentioned above. If the above sections are repealed, there would only be two remaining circumstances for IT purposes in ITA 2007, section 689 (Circumstance D) and section 690 (Circumstance E.) This proposal would amalgamate them into the new section 684. In broad terms, the new section 684 seeks to replicate and simplify the provisions in sections 689 and 690 ITA 2007. We welcome your views on whether the new section 684 achieves this and any feedback on whether and how the new section 684 should be amended in order to retain the features of the existing sections 689 and 690 whilst presenting them in a clearer and more easily understood fashion. When considering this proposal please bear in mind the proposed change in the definition of a company in section 691 ITA 2007 (Proposal 2).


5.4 Costs and Benefits

This is a revenue neutral proposal. Amending the legislation in a clear, well targeted and effective manner should increase certainty and clarity regarding the scope and application of the TiS legislation and therefore reduce our customers' administrative burden. It should also result in fewer clearance applications being made to HMRC. 5.5 Questions for Consultation

5.5.1 Do you agree with the repeals of section 686 ITA 2007 and its CT counterpart?

5.5.2 Do you agree with the repeals of sections 688, 692, 693, 694 ITA 2007?

5.5.3 Do you agree that sections 689 and 690 ITA should be merged into one single circumstance? Or would you prefer to have these two provisions retained in their current form?

5.5.4 Do you have any views on the new section 684?

5.5.5 Do you have any views or suggestions on how to amend the new section 684 so that it can be made clearer and more easily understood by our customers?


6. Proposal 4: The fundamental change of ownership rule


The aim of this proposal is to remove from the scope of the TiS legislation those TiS that result from a fundamental change in ownership. Such a rule should increase certainty in those cases where there has been a fundamental change in ownership, reducing the compliance costs and advisors' fees for our customers. The fundamental change of ownership exclusion is included at section 685 of the draft legislation. 6.2 Current Position

At present, there is no statutory exclusion of any specific TiS from the scope of the legislation. Specifically, there is no 'fundamental change of ownership' exclusion. This means that many unnecessary clearance applications being made by customers in that, in such cases, the applications are approved as it is clear that the transactions are motivated by a commercial purpose rather than any tax avoidance motive. Accordingly, we are aware that customers involved with fundamental change in ownership transactions may be facing unnecessary compliance costs and advisors' fees. 6.3 Proposed Change

The proposal is to introduce a new rule in section 685 to exclude from new section 684 a person who is party to a TiS of a close company if immediately before the TiS that person holds shares or an interest in that company and the TiS results in a fundamental change in ownership of that company. This will provide clarity by specifically removing these transactions from the scope of the legislation. We propose to define a fundamental change of ownership as being when each of the three conditions below is met for a period of two years from when all of these conditions are met. (a) at least 75% of the ordinary share capital of the company is held beneficially by a person (or persons) who is not, and never has been, connected with the person mentioned in section 683 (e.g. the person who is party to the TiS); (b) the shares in the close company are held by the person or persons mentioned in (a) above carry an entitlement to at least 75% of the distributions which may be made by that company; (c) the shares so held carry at least 75% of the total voting rights in the close company. Section 685 is designed only to exclude those cases which, in our view, would otherwise fall outside the scope of the TiS legislation. A person who fails these tests will be liable to counteraction of an income tax advantage only if the other technical provisions (e.g. the purpose test in section 683) of the TiS legislation are met. The period of two years is proposed as a reasonable length of time to ensure that the fundamental change in ownership is substantive, in other words, protecting against the situation where the conditions A to C mentioned above are met at the time of the TiS but afterwards there are further transactions or arrangements which return ownership of some or all of the shares/interest in the close company to the original shareholders. The proposed level of 75% is based on the current HMRC practice to grant clearance in most cases where there has been a 75% change in ownership. The new exclusion therefore removes from the legislation those TiS which would typically be granted rapid clearance. At this level, we expect to provide increased certainty and clarity, reducing the number of clearance applications without creating any additional avoidance opportunities. This exemption should not be available in situations where the vendors and purchasers are connected persons either before, during or after the change of ownership. Connected persons for these purposes would have the same meaning as section 993 ITA 2007.


We do not propose to remove or modify the statutory clearance procedures. 6.4 Costs and Benefits

This should be a revenue neutral proposal, as the above proposals are closely based on current HMRC practice. 6.5 Questions for Consultation

6.5.1 Do you consider this change will benefit potential clearance applicants and their advisers?

6.5.2 Do you consider that the proposed test accurately describes what a fundamental change in ownership is? If not, what other factors should be considered?

6.5.3 Are you aware of any other indicators that can be used to separate genuine transactions from those implemented for avoidance purposes?

6.5.4 Do you consider 75% is an appropriate level for this proposal? If not, what level do you feel would be more appropriate and why?


7. Proposal 5: Defining and quantifying 'Tax Advantage'


The aim of this proposal is to introduce a new statutory definition of 'income tax advantage' in the TiS legislation, based on current HMRC practice. The proposal would replace the existing meaning of income tax advantage in section 683 ITA 2007, with a more targeted definition to provide greater clarity to our customers, based around the calculation of the amount of the tax advantage that would be subject to counteraction. The proposal does not include the introduction of a lower limit for when counteraction will take place. This is because each case will continue to be treated individually on its own set of facts. Although this consultation document focuses on IT advantages, it is envisaged a similar approach would be replicated for CT purposes in CTA 2010. The new definition of income tax advantage is contained in section 686 of in the draft legislation in Annex C. We welcome your views on the benefits of quantifying the tax advantage in statute and whether the approach set out in the draft legislation under this proposal achieves those benefits. 7.2 Current Position

The TiS legislation does not apply if no tax advantage is obtained or obtainable in consequence of the TiS. Though 'tax advantage' is currently defined in legislation at section 683 ITA 2007 and section 709 ICTA 1988 they are very wide definitions and this has led to uncertainty. During previous more informal consultations, we received repeated requests to be clearer on how we define and quantify the tax advantage when applying the legislation. Neither the current legislation nor the new proposal set any lower limit for when counteraction will be taken. 7.3 Proposed Change

We propose a more targeted approach to establish the amount of the 'income tax advantage' obtained, by comparing the tax due on proceeds received as capital with the amount of income tax that would have been due had the amount available for distribution been received as income. Put simply, the amount subject to counteraction would be the difference between the two amounts. 7.4 Section 686 of the draft legislation: "Income Tax Advantage"

The proposed draft legislation at section 686 defines an income tax advantage by taking the amount of IT payable by a person receiving relevant consideration (which in most cases will be the amount of proceeds received by a person from a sale of shares or securities) had that consideration been received as an income dividend, and comparing this with the amount of capital gains tax actually payable (after all capital gains tax reliefs and exemptions). The proposal regards any difference between the hypothetical income tax and actual capital gains tax payable as the tax advantage which is the subject of counteraction. This will mean that section 699 ITA 2007 which limits the amount assessed in sections 689 and 690 (D and E circumstance) could be repealed as the proposed new section 686 sets out the amount of the income tax advantage to be counteracted. New section 686(1)(b) takes into account situations where there is no actual capital gains tax payable.


Calculation of income tax advantage The following sets out a simple example to illustrate these new rules. All figures in the example below are hypothetical and serve merely to illustrate the proposed logic for calculating the 'tax advantage'. Step 1 – Calculation of amounts not subject to counteraction Proceeds received as capital from a company (e.g. relevant consideration) £100 A Amount that would have been available for distribution (say) £ 90 B The amount not subject to counteraction is (A-B) £ 10 C B is therefore the amount potentially subject to counteraction. Step 2 – Compare the tax due on (B) as if it was an income dividend Amount potentially subject to counteraction £ 90 B Tax paid on B say 18% CGT rate (ignoring reliefs/exemptions) £ 16 D Tax payable if B constituted a qualifying distribution (a dividend) £ 22 E (e.g. 25% of net dividend for person paying tax in the 40% bracket after taking into account notional tax credits) Step 3 – Income Tax advantage per section 686 IT that would have been payable less the actual tax paid (E-D) £ 6 It is this additional tax due that would be subject to counteraction if the customer cannot avail themselves of any of the exclusions such as section 685, the fundamental change of ownership proposal. The Income Tax advantage arises when the person receives the relevant consideration. 7.5 Costs and Benefits

Formalising the quantification of the tax advantage would be revenue neutral, as the above formula is closely based on current HMRC practice. There are clear benefits in terms of clarity and consistency for our customers if a method for quantifying the tax advantage is introduced. It will also help clarify the tax avoidance that the TiS legislation is designed to target. 7.6 Questions for consultation

7.6.1 Do you consider there are benefits to quantifying the 'tax advantage' in statute in the way set out in the new section 683 ITA 2007?

7.6.2 Do you agree with the principle and approach detailed above?

7.6.3 Do you consider it would be appropriate to include any conditions or restrictions? If so where and why?

7.6.4 Do you have any other comments or concerns with this proposal? If so, what are they?


8. Proposal 6: Clarifying the scope of the Transaction in Securities legislation


HMRC have received feedback from customers that suggests they would like clarity on whether the TiS legislation applies to situations where capital gains are converted into income. For income tax purposes the proposed changes in Proposal 5 'Defining and Quantifying the Tax Advantage' relating to the draft legislation at section 686 will provide sufficient certainty on this matter. No further amendments to the legislation will be required as section 686 describes the comparator that needs to be considered and it does not include a reduction in the level of capital gains tax that is paid. Although this consultation document focuses on the changes to ITA 2007, it is envisaged a similar approach would be replicated for CT purposes in CTA 2010. 8.2 Current Position

This issue does not currently affect the provisions in ITA 2007, as the issue is more of a concern for our customers in relation to corporation tax. Whilst HMRC has not taken up any cases involving a company’s chargeable gains, the legislation could in theory apply to avoidance of corporation tax on chargeable gains. This is because the definition of tax advantage at section 709(1) ICTA 1988 does not specify whether or not 'tax advantage' for a company includes the avoidance of corporation tax on chargeable gains. 8.3 Proposed Change

We propose to make clear in the new guidance on the TiS Legislation (mentioned in proposal 7) that the TiS legislation only applies where the tax advantage relates to corporation tax on a company's income and not to its chargeable gains. This Consultation only covers how we propose to clarify the scope of the TiS legislation for IT purposes by narrowing the definition of "income tax advantage". It is envisaged that a similar approach will be adopted for CT to make clear in the statute that for the purposes of the TiS legislation a corporation tax advantage excludes tax advantages relating to a company's chargeable gains. 8.4 Costs and Benefits

This proposal should be revenue neutral as it is based on current HMRC practice. It should also reduce administrative burdens for HMRC and our customers because it will provide increased certainty regarding when a clearance application is required. 8.5 Questions for consultation

8.5.1 Do you have any concerns with this proposal?


9. Proposal 7: Framework guidance for Transactions in Securities


There is currently only limited HMRC guidance on the practical application of sections 703 to 709 ICTA 1988 and sections 682 to 713 ITA 2007 at CTM36805 to CTM36885. This proposal is to publish clear and more extensive guidance for the new simplified TiS legislation. This should improve understanding of the legislation and reduce customers' uncertainty and compliance costs 9.2 Current Position

Broadly, the current guidance covers the clearance and counteraction process and the type of transactions that might be caught by the prescribed circumstances in sections 704A-E ICTA 1988. The guidance does not draw on any case law or provide practical examples of when the legislation takes effect, which we understand has led to uncertainty for customers. This has resulted in a number of arguably unnecessary clearance applications and significant demand from customers and advisors for more guidance on the TiS legislation. 9.3 Proposed Change

We propose to publish detailed guidance which meets our customers' requirements for certainty and clarity. It is intended that any guidance will cover sections 682 to 713 ITA 2007 (for IT purposes) as amended by the proposals contained in this consultation document and the equivalent or similar provisions for CT that will be contained in the CTA 2010. The guidance will set out the position from the date that the simplified TiS legislation comes into effect. Annex D of this document contains (for illustrative purposes only) an overview of the contents, format and level of detail that will form the basis of the full guidance. It will cover all areas of the amended legislation and will include practical examples where appropriate. Annex D only refers to guidance covering the TiS legislation for IT purposes contained in ITA 2007. It is envisaged that similar guidance will be produced covering CT aspects of the TiS legislation that will be rewritten for CTA 2010 either as a standalone document or if practical (and the preferred approach) incorporated into one document covering the TiS legislation for both IT and CT purposes. Overview The new guidance will include a brief introduction to the history and purpose of the legislation and provide an overview of how the TiS legislation is intended to work. Technical The guidance will include sections covering HMRC's interpretation of key technical phrases contained in the legislation such as the meaning of income tax advantage together with an explanation of the method of quantifying any income tax advantage that arises. Circumstance This part will include guidance on the prescribed circumstances as amended by the draft legislation at section 684 although this will still be very much based around the existing circumstance D and E.

http://www.hmrc.gov.uk/manuals/ctmanual/CTM36805.htm



The purpose test This part will include guidance on how to interpret and apply the new purpose test found section 683. Procedural Matters This part will include explanation of the clearance and counteraction process detailing the procedures of how to obtain clearance for a specific transaction, what should go into a clearance application and what to do if you do not agree with the decision reached by HMRC. There will also be a section on the counteraction process and new appeals process. Specific Areas of Difficulty There will be sections in the guidance that cover specific areas that are currently causing problems to our customers, using practical examples to demonstrate how the principles and legislation should be applied. It is envisaged that this section of the guidance may over time grow to include more areas of difficulties as they arise and your opinion of areas that should be covered is welcomed. 9.4 Costs and Benefits

This is a revenue neutral proposal. If the guidance fulfils the stated aims it should provide the desired certainty and clarity and decrease compliance costs for customers, their advisors and HMRC. It should also help to provide businesses, advisors and representative bodies with a better understanding of the TiS legislation and its practical application. By addressing specific sets of customer circumstances, we also anticipate that comprehensive guidance will result in a decrease in the number of clearance applications. 9.5 Questions for consultation

9.5.1 Would better guidance increase certainty and reduce administrative burdens?

9.5.2 Would better guidance reduce your need to submit clearance applications to HMRC?

9.5.3 Are there any other areas or subjects you would like to see included in the guidance?

9.5.4 Does our proposed layout meet customers' needs (i.e. is it appropriate and comprehensive)? If not, what changes would you suggest to the proposed layout and content?

9.5.5 If the proposed layout is adopted, what specific case law guidance would you like included under 'Specific Areas of Difficulty'?


10. Summary of consultation

It is important to remember that the 7 proposals are a package of measures that would be introduced simultaneously to bring about the simplification of the TiS legislation, not 7 separate proposals. HMRC are seeking the opinions of businesses, advisors and representative bodies on this range of measures to ensure any changes are clear, effective and well targeted to meet our customers' needs and provide clear benefits and administrative savings where possible. A summary of all the questions in this consultation is provided below: Introduction 2.5.1 Do you welcome the package of proposals (as a whole) as simplification to the TiS legislation? 2.5.2 Does the package of proposals (as a whole) capture the main opportunities to provide customers with simplification and increased certainty? 2.5.3 Are there any additional areas you feel we should consider to further simplify the TiS legislation? Proposal 1: Refocus the Transactions in Securities Purpose Test to Target Tax Avoidance 3.5.1 Do you have any thoughts on this shift in focus within the TiS legislation? 3.5.2 Do you consider there are there any pitfalls you can see for customers? 3.5.3 Do you consider this will this help provide certainty and clarity for customers? 3.5.4 Do you consider this will lead to less work or more work for our customers? Proposal 2: Adopt the definition of a close company for a 'Relevant Company' in section 691 ITA 2007 4.5.1 Do you consider this change will be beneficial for HMRC's customers? 4.5.2 Do you have any reservations about the change in close company definition? 4.5.3 Do you foresee any practical problems or benefits? 4.5.4 Can you foresee any issues with certain situations, such as Management Buy Outs (where more than 5 managers buy control of a company), which would be affected by the change of the close company definition? Proposal 3: Simplifying the remaining circumstances in sections 686 to 690 ITA 2007 5.5.1 Do you agree with the repeals of section 686 ITA 2007 and its CT counterpart? 5.5.2 Do you agree with the repeals of sections 688, 692, 693, 694 ITA 2007? 5.5.3 Do you agree that sections 689 and 690 ITA should be merged into one single circumstance? Or would you prefer to have these two provisions retained in their current form? 5.5.4 Do you have any views on the new section 684? 5.5.5 Do you have any views or suggestions on how to amend the new section 684 so that it can be made clearer and more easily understood by our customers?


Proposal 4: The Fundamental Change of Ownership Rule 6.5.1 Do you consider this change will benefit potential clearance applicants and their advisers? 6.5.2 Do you consider that the proposed test accurately describes what a fundamental change in ownership is? If not, what other factors should be considered? 6.5.3 Are you aware of any other indicators that can be used to separate genuine transactions from those implemented for avoidance purposes? 6.5.4 Do you consider 75% is an appropriate level for this proposal? If not, what level do you feel would be more appropriate and why? Proposal 5: Defining and Quantifying 'Tax Advantage' 7.6.1 Do you consider there are benefits to quantifying the 'tax advantage' in statute in the way set out in the new section 683 ITA 2007? 7.6.2 Do you agree with the principle and approach detailed above? 7.6.3 Do you consider it would be appropriate to include any conditions or restrictions? If so where and why? 7.6.4 Do you have any other comments or concerns with this proposal? If so, what are they? Proposal 6: Clarifying the scope of the Transaction in Securities Legislation 8.5.1 Do you have any concerns with this proposal? Proposal 7: Framework Guidance for Transactions in Securities 9.5.1 Would better guidance increase certainty and reduce administrative burdens? 9.5.2 Would better guidance reduce your need to submit clearance applications to HMRC? 9.5.3 Are there any other areas or subjects you would like to see included in the guidance? 9.5.4 Does our proposed layout meet customers' needs (i.e. is it appropriate and comprehensive)? If not, what changes would you suggest to the proposed layout and content? 9.5.5 If the proposed layout is adopted, what specific case law guidance would you like included under 'Specific Areas of Difficulty'?


Annex A The Government’s code of practice on consultation

10.1 About the consultation process

This consultation is being conducted in accordance with the Government’s Consultation Code of Practice. If you wish to access the full version of the Code, you can obtain it online at: http://www.berr.gov.uk/files/file47158.pdf 10.2 The consultation criteria

1. When to consult - Formal consultation should take place at a stage when there is scope to influence the policy outcome. 2. Duration of consultation exercises - Consultations should normally last for at least 12 weeks with consideration given to longer timescales where feasible and sensible. 3. Clarity of scope and impact - Consultation documents should be clear about the consultation process, what is being proposed, the scope to influence and the expected costs and benefits of the proposals. 4. Accessibility of consultation exercise - Consultation exercises should be designed to be accessible to, and clearly targeted at, those people the exercise is intended to reach. 5. The burden of consultation - Keeping the burden of consultation to a minimum is essential if consultations are to be effective and if consultees’ buy-in to the process is to be obtained. 6. Responsiveness of consultation exercises - Consultation responses should be analysed carefully and clear feedback should be provided to participants following the consultation. 7. Capacity to consult - Officials running consultations should seek guidance in how to run an effective consultation exercise and share what they have learned from the experience. If you feel that this consultation does not satisfy these criteria, or if you have any complaints about the process, please contact: Richard Bowyer, Better Regulation Unit 020 7147 0062 or [email protected]

http://www.berr.gov.uk/files/file47158.pdf



Annex B List of abbreviations used

AAG Anti-avoidance Group

ACT Advance Corporation Tax

CT Corporation Tax

CTA 2010 Corporation Tax Act 2010

CTM Corporation Tax Manual

ESC Extra-Statutory Concession

EU European Union

HMRC HM Revenue & Customs

ICTA 1988 Income and Corporation Taxes Act 1988

IT Income Tax

ITA 2007 Income Tax Act 2007

ITSA Income Tax Self Assessment

PBR Pre-Budget Report

TiS Transactions in Securities


Annex C Draft Amendments to ITA 2007

1 Tax avoidance: transactions in securities (1) Chapter 1 of Part 13 of ITA 2007 (tax avoidance: transactions in securities) is amended as follows. (2) For sections 682 to 694 substitute- "Introduction 682 Overview of Chapter (1) This Chapter makes provision for counteracting a person's income tax advantages from transactions in securities where section 683 applies to the person. (2) See section 698 (counteraction notices) for the way in which the income tax advantages may be countered. Person liable to counteraction of income tax advantage 683 Person liable to counteraction of income tax advantage (1) This section applies to a person where- (a) the person is a party to a transaction in securities or two or more transactions in securities (see subsection (2)), (b) the circumstances are covered by section 684 and not excluded by section 685, (c) the main, or one of the main purposes, of the person in being a party to the transaction in securities, or any of the transactions in securities, is to obtain an income tax advantage, and (d) the person obtains an income tax advantage. (2) In this Chapter "transaction in securities" means a transaction of whatever description, relating to securities, and in particular- (a) the purchase, sale or exchange of securities, (b) issuing or securing the issue of new securities, (c) applying or subscribing for new securities, and (d) altering or securing the alteration of the rights attached to securities. (3) Section 686 defines "income tax advantage". (4) This section is subject to- section 696(3) (disapplication of this section where person receiving preliminary notification that this Chapter may apply makes statutory declaration and relevant officer of Revenue and Customs sees no reason to take further action), and section 697(5) (determination by tribunal that there is no prima facie case that this Chapter applies).


684 Receipt of consideration in connection with distribution by or assets of close company (1) The circumstances covered by this section are circumstances where condition A or condition B is met. (2) Condition A is that, as a result of the transaction in securities or any of the transactions in securities, the person receives relevant consideration in connection with- (a) the distribution, transfer or realisation of assets of a close company, (b) the application of assets of a close company in discharge of liabilities, or (c) the direct or indirect transfer of assets of one close company to another close company, and does not pay or bear income tax on the consideration (apart from this Chapter). (3) Condition B is that- (a) the person receives relevant consideration in connection with the transaction in securities or any of the transactions in securities, (b) two or more close companies are concerned in the transaction or transactions in securities concerned, and (c) the person does not pay or bear income tax on the consideration (apart from this Chapter). (4) In a case within subsection (2)(a) or (b) .relevant consideration. means consideration which- (a) is or represents the value of. (i) assets which are available for distribution by way of dividend by the company, or (ii) assets which would have been so available apart from anything done by the company, (b) is received in respect of future receipts of the company, or (c) is or represents the value of trading stock of the company. (5) In a case within subsection (2)(c) or (3) "relevant consideration" means consideration which consists of any share capital or any security issued by a close company and which is or represents the value of assets which- (a) are available for distribution by way of dividend by the company, (b) would have been so available apart from anything done by the company, or (c) are trading stock of the company. (6) The references in subsection (2)(a) and (b) to assets do not include assets which are shown to represent a return of sums paid by subscribers on the issue of securities, despite the fact that under the law of the country in which the company is incorporated assets of that description are available for distribution by way of dividend. (7) So far as subsection (2)(c) or (3) relates to share capital other than redeemable share capital, it applies only so far as the share capital is repaid (in a winding up or otherwise); and for this purpose any distribution made in respect of any shares in a winding up or dissolution of the company is to be treated as a repayment of share capital.


(8) References in this section to the receipt of consideration include references to the receipt of any money or money's worth. (9) In this section- "security" has the meaning given in section 254(1) of ICTA (interpretation of Part 6 of ICTA: company distributions, tax credits etc), and "share" includes stock and any other interest of a member in a company. 685 Excluded circumstances: fundamental change of ownership (1) Circumstances are excluded by this section if. (a) immediately before the transaction in securities (or the first of the transactions in securities) the person (referred to in this section as "the party") holds shares or an interest in shares in the close company, and (b) there is a fundamental change of ownership of the close company. (2) There is a fundamental change of ownership of the close company if. (a) as a result of the transaction or transactions in securities, conditions A, B and C are met, and (b) those conditions continue to be met for a period of 2 years. (3) Condition A is that at least 75% of the ordinary share capital of the close company is held beneficially by a person who is not and never has been, or persons who are not and never have been, connected with the party. (4) Condition B is that shares in the close company held by that person or those persons carry an entitlement to at least 75% of the distributions which may be made by the company. (5) Condition C is that shares so held carry at least 75% of the total voting rights in the close company. 686 Income tax advantage (1) For the purposes of this Chapter the person obtains an income tax advantage if. (a) the amount of any income tax which would be payable by the person in respect of the relevant consideration if it constituted a qualifying distribution exceeds the amount of any capital gains tax payable in respect of it, or (b) income tax would be payable by the person in respect of the relevant consideration if it constituted a qualifying distribution and no capital gains tax is payable in respect of it. (2) So much of the relevant consideration as exceeds the maximum amount that, having regard to all the circumstances, could have been paid to the person by way of a qualifying distribution at the time when the relevant consideration is received is to be left out of account for the purposes of subsection (1). (3) The amount of the income tax advantage is the amount of the excess or (if no capital gains tax is payable) the amount of the income tax which would be payable. (4) In this section "relevant consideration" has the same meaning as in section 684.


(3) In section 698(6) (counteraction notices), omit- (a) the entry relating to section 699, and (b) in the entry relating to section 700, "in section 690 cases". (4) Omit section 699 (limit on amount assessed in section 689 and 690 cases). (5) In section 700 (timing of assessments in section 690 cases)- (a) in subsection (1), for .690 (receipt of relevant company assets (circumstance E)). substitute .688(2)(c) or (3)., and (b) in the heading, omit "in section 690 cases". (6) In section 713 (interpretation), omit the definition of "transaction in securities". (7) The amendments made by this section have effect in relation to income tax advantages obtained in the tax year 2010-11 or any subsequent tax year.


Annex D

Draft Guidance for the Transactions in Securities Legislation sections 682 to 713 ITA 2007

This is a draft outline of the structure and contents of the Transactions in Securities Legislation in Chapter 1 of Part 13 of the Income Taxes Act 2007 (sections 682 to 713) based on the new draft legislation. Note: Transactions in Securities are referred to in this document as “TiS”. HMRC would appreciate feedback on the proposed structure of the guidance, and on the content of the preliminary draft. This draft guidance is at an early stage and your responses can help shape what we hope will be useful guidance. It should be noted that this guidance is written (solely) for Income Tax purposes. It is proposed that similar guidance for Corporation Tax purposes will be written to reflect changes to [the Corporation Tax Act 2010] or that this guidance will be expanded to include Companies and Corporation Tax advantages. The approach for companies will however mirror the approach for individuals as set out in this guidance. Further guidance on the detail of the TiS legislation is contained within each of the relevant sections below. 100000+ Overview 100001 Overview: Introduction (Section 682 ITA 2007) 100002 Overview: The Broad Approach Taken By The TiS Legislation 100003 Overview: For Periods On Or After 6 April 2010 100004 Overview: For Periods On Or After 6 April 2007 100005 Overview: For Periods On Or Before 5 April 2007 100006 Overview: Historical Background 100007 Overview: The Purpose Of The Legislation 100008 Overview: The Legislation Is Intended To Be A General Provision Against Income Tax Avoidance 100009 Overview: Incestuous Transactions 100100+ Person Liable to Counteraction of Income Advantage 100101 Person Liable To Counteraction Of Income Tax Advantage: Overview 100102 Person Liable To Counteraction Of Income Tax Advantage: Section 683(1) 100103 Person Liable To Counteraction Of Income Tax Advantage: Section 683(2) 100104 Person Liable To Counteraction Of Income Tax Advantage: Section 683(3) 100105 Person Liable To Counteraction Of Income Tax Advantage: Section 683(4) 100200+ Receipt of Consideration in Connection with Distribution of Assets of Close Company 100201 Receipt Of Consideration: Overview 100202 Receipt Of Consideration: Section 684(1) – The Circumstances 100202 Receipt Of Consideration: Section 684(2) – Condition A 100203 Receipt Of Consideration: Section 684(3) – Condition B 100204 Receipt Of Consideration: Section 684(4) – Relevant Consideration 100205 Receipt Of Consideration: Section 684(5) – Relevant Consideration 100206 Receipt Of Consideration: Section 684(6) – Assets Representing Sums Paid By Subscribers On The Issue Of Shares 100207 Receipt Of Consideration: Section 684(7) – Repayment Of Irredeemable Share Capital


100208 Receipt Of Consideration: Section 684(8) – Receipt Of Any Money Or Money’s Worth 100209 Receipt Of Consideration: Section 684(9) – Meaning Of Share And Security 100210+ Receipt Of Consideration: In Connection With A Relevant Company (Circumstance D) - Distribution 100230+ Receipt Of Assets Of A Relevant Company - Circumstance E 100300+ Excluded Circumstances: Fundamental Change of Ownership 100301 Excluded Circumstances Fundamental Change of Ownership: Overview 100302 Excluded Circumstances Fundamental Change of Ownership: section 685(1) 100303 Excluded Circumstances Fundamental Change of Ownership: section 685(2) 100304 Excluded Circumstances Fundamental Change of Ownership: section 685(3) Condition A 100305 Excluded Circumstances Fundamental Change of Ownership: section 685(4) Condition B 100306 Excluded Circumstances Fundamental Change of Ownership: section 685(5) Condition C 100400+ Income Tax Advantage 100401 Income Tax Advantage: Overview 100402 Income Tax Advantage: Section 686(1) Identification Of Income Tax Advantage 100403 Income Tax Advantage: Section 686(2) Quantification Of Income Tax Advantage 100404 Income Tax Advantage: Section 686(3) Quantification Of Income Tax Advantage 100405 Income Tax Advantage: Section 686(4) Quantification Of Income Tax Advantage 100406 Income Tax Advantage: Quantification Of Income Tax Advantage Example 100500+ Transactions in Securities 100501 Transaction In Securities: Overview 100502 Transaction In Securities: Securities 100503 Transaction In Securities: Number Of Persons Involved 100504 Transaction In Securities: Dividends 100505 Transaction In Securities: An Agreement For The Sale Of Shares 100506 Transaction In Securities: An Agreement On How To Distribute Assets On Liquidation Of A Company 100507 Transaction In Securities: Liquidation 100600+ Close Company 100601 Close Company: Overview 100602 Meaning Of “Relevant Company”: Control 100603 Meaning Of “Relevant Company”: Control By A UK Quoted Bank 100604 Meaning Of “Relevant Company”: Clearances 100700+ Purpose Test 100701 Purpose Test: Overview 100702 Purpose Test: When The Purpose Test Should Be Considered? 100703 Purpose Test: The Person Party To The TiS And Related Arrangements 100704 Purpose Test: Related Arrangements 100705 Purpose Test: The Purpose That Should Be Tested 100706 Purpose Test: The Unallowable Purpose 100707 Purpose Test: Main Purpose, The Threshold Of The Purpose Test 100708 Purpose Test: The Tax Consequences Of The Purpose Test 100800+ Procedure for Counteraction of Income Tax Advantages 100801 Procedure for Counteraction: General 100802 Procedure for Counteraction: Outline Of The Counteraction Procedure 100803 Procedure for Counteraction: Preliminary Notification That Section 684 May Apply 100804 Procedure for Counteraction: Opposed Notifications And Statutory Declarations 100805 Procedure for Counteraction: Opposed Determinations By Tribunal 100809 Procedure for Counteraction: Counteraction Notices Under Section 698 ITA 2007 100810 Procedure for Counteraction: Limit On The Amount Assessed In Circumstance D And E Cases 100811 Procedure for Counteraction: Timing Of Assessments In Circumstance E Cases


100900+ Clearance Procedure and Information Powers 100901 Clearance Procedure and Information Powers: Overview 100902 Clearance Procedure and Information Powers: Outline Of The Clearance Procedure 100903 Clearance Procedure and Information Powers: Application For Clearance The Statutory Requirements 100904 Clearance Procedure and Information Powers: Effect Of Clearance Notification Under section 701 TA 2007 100905 Clearance Procedure and Information Powers: Power To Obtain Information 101000+ Appeals and Internal Reviews 101001 Appeals and Internal Reviews: Overview 101002 Appeals and Internal Reviews: Outline Of The Appeal Procedure 101003 Appeals and Internal Reviews: Internal Reviews 101004 Appeals and Internal Reviews: What Can Be Appealed? 101005 Appeals and Internal Reviews: The Tribunal 101006 Appeals and Internal Reviews: Appeals Against Counteraction Notices? 101007 Appeals and Internal Reviews: The Tribunal 101008 Appeals and Internal Reviews: Rehearing By Tribunal of Appeal Against a Counteraction Notice 101009 Appeals and Internal Reviews: Statement Of Case By Tribunal For Opinion of High Court Or Court Of Session 101010 Appeals and Internal Reviews: Cases Before The High Court Or Court of Session 101011 Appeals and Internal Reviews: Effect Of Appeals Against Tribunal’s Determination Under section 706 ITA 2007 101012 Appeals and Internal Reviews: Appeals From High Court Or Court of Session 101013+ Appeals and Internal Reviews: Proceedings in North Ireland 101100+ Specific areas of Difficulty 101110+ Specific Areas Of Difficulty: Incestuous Transactions 101120 Specific Areas Of Difficulty: Interaction With ESC C16 101130+ Specific Areas Of Difficulty: Management Buy Outs, 101140+ Specific Areas Of Difficulty: Group Scenarios 101200+ Commentary on Key Cases 101201 Commentary On Key Cases: CIR v Addy 101202 Commentary On Key Cases: CIR v Brebner 101203 Commentary On Key Cases: CIR v Cleary 101204 Commentary On Key Cases: CIR v Joiner 101206 Commentary On Key Cases: CIR v Parker 101207 Commentary On Key Cases: CIR v E A Wiggins 101208 Commentary On Key Cases: Lloyd v HMRC Commissioners 101209 Commentary On Key Cases: Snell v HMRC Commissioners


100000 Overview 100001 Overview: Introduction (Section 682 ITA 2007) 100002 Overview: The Broad Approach Taken By The TiS Legislation 100003 Overview: For Periods On Or After 6 April 2010 100004 Overview: For Periods On Or After 6 April 2007 100005 Overview: For Periods On Or Before 5 April 2007 100006 Overview: Historical Background 100007 Overview: The Purpose Of The Legislation 100008 Overview: The Legislation Is Intended To Be A General Provision Against Income Tax Avoidance 100009 Overview: Incestuous Transactions 100001 Overview: Introduction (section 682 ITA 2007) The TiS legislation for Income Tax purposes is anti avoidance legislation contained in Part 13, Chapter 1 of ITA 2007. Similar provisions for Corporation Tax purposes are contained in [the Corporation Taxes Act 2010]. HMRC’s Anti-Avoidance Group (AAG) has policy, technical and operational responsibility for the TiS legislation which enables the Commissioners of HMRC to counteract the avoidance of Income Tax by a person who is party to one or more transactions in securities if all of the technical conditions of the TiS legislation are met. The overview sections of this guidance explain the broad approach taken by the TiS legislation: when it applies, the background, purpose and scope of the legislation, as well as introducing the concept of an incestuous transaction for these purposes, which is covered in more detail in [101010].


100100 Person liable to counteraction of Income Tax Advantage This section provides an overview of the section 683 Part 13, Chapter 1 of ITA 2007. 100101 Person Liable To Counteraction Of Income Tax Advantage: Overview 100102 Person Liable To Counteraction Of Income Tax Advantage: Section 683(1) 100103 Person Liable To Counteraction Of Income Tax Advantage: Section 683(2) 100104 Person Liable To Counteraction Of Income Tax Advantage: Section 683(3) 100105 Person Liable To Counteraction Of Income Tax Advantage: Section 683(4) 100101 Person Liable to counteraction of Income Tax Advantage: Overview This section provides guidance on the technical conditions of section 683 ITA 2007, for periods on or after 6 April 2010, which if met will mean that a person is liable to counteraction of any Income Tax advantages they may have obtained from being a party to the transaction in securities. There are four main conditions that have to be met for a person to be within section 683 which are set out in section 683(1) and are covered in [100102] of this guidance.


100200 Receipts of Consideration in Connection with distribution of assets of a close company. This section provides guidance on the technical conditions of section 684, ITA 2007, which sets out the circumstances which are within the scope of the TiS legislation for periods on or after 6 April 2010. Section 684 is based on what was previously known as Circumstance D and E which, prior to 6 April 2010, were contained in sections 689 and 690 ITA 2007 respectively. Consequently, additional guidance covering these two circumstances is also included within this guidance in 100210 and 100230 as the Circumstances described in section 684 should broadly replicate the approach in Circumstance D and E. 100201 Receipt Of Consideration: Overview 100202 Receipt Of Consideration: Section 684(1) – The Circumstances 100202 Receipt Of Consideration: Section 684(2) – Condition A 100203 Receipt Of Consideration: Section 684(3) – Condition B 100204 Receipt Of Consideration: Section 684(4) – Relevant Consideration 100205 Receipt Of Consideration: Section 684(5) – Relevant Consideration 100206 Receipt Of Consideration: Section 684(6) – Assets Representing Sums Paid By Subscribers On The Issue Of Shares 100207 Receipt Of Consideration: Section 684(7) – Repayment Of Irredeemable Share Capital 100208 Receipt Of Consideration: Section 684(8) – Receipt Of Any Money Or Money’s Worth 100209 Receipt Of Consideration: Section 684(9) – Meaning Of Share And Security 100210 Circumstance D - Receipt Of Consideration In Connection With A Relevant Company Distribution 100230 Circumstance E - Receipt Of Assets Of A Relevant Company 100201 Receipt Of Consideration In connection With Distribution By Or Assets Of Close Company: Overview This section explains the technical conditions of section 684 ITA 2007. It set out two circumstances within Conditions A and B of that section. Section 684 will be satisfied if either of these two conditions is satisfied. Section 684(2)(a) and (b) are based what had previously been known as the Circumstance D in section 689 ITA 2007 which applies for periods prior to 6 April 2010. See 100210 for further guidance on Circumstance D. Section 684(2)(c) and (3) are based what had previously been known as the Circumstance E in section 690 ITA 2007 which applies for periods prior to 6 April 2010. See 100230 for further guidance on Circumstance E.


100210 Circumstance D - Receipt of Consideration in Connection with a relevant company distribution This section explains the technical conditions for section 689 ITA 2007, which deals with the receipt of consideration in connection with a relevant company distribution (referred to as circumstance D), to apply, for periods prior to 6 April 2010. 100211 Circumstance D: Overview 100212 Circumstance D: Example 1 100213 Circumstance D: Example 2 100214 Circumstance D: Example 3 100215 Circumstance D: CIR v Cleary, Overview 100216 Circumstance D: CIR v Cleary, Distribution Of Profits To Be Substituted With Transfer Of Assets 100217 Circumstance D: CIR v Cleary, Is It Necessary For The Shareholders Liable Under section 684 ITA 2007 To Have Control Over The Companies In Question? 100218 Circumstance D: Whether A Receipt Of Consideration Was In Connection With The Distribution Of Profits Of A Company (CIR v Wiggins) 100219 Circumstance D: Whether Receipt Of Consideration Was In Connection With The Distribution Of Profits Of A Company (CIR v Anysz) 100220 Circumstance D: Where A Company Capitalises Its Reserves And Issues New Shares, Using The Sum Received To Repay The Original Issued Share Capital (CIR v Hague) 100221 Circumstance D: Loans Used To Fund A Distribution (CIR v Brown) 100222 Circumstance D: Transfer Of A Trade To Newco Following A Liquidation (CIR v Addy) 100223 Circumstance D: The Meaning Of “Available” In Section 689(3)(a) ITA 2007 (CIR v Brown) 100211 Circumstance D: Overview The following explains when section 689 ITA 2007 (circumstance D) applies for the purposes of Part 13, Chapter 1 of ITA 2007 for periods prior to 6 April 2010. For periods on or after 6 April 2010, circumstance D has been incorporated into section 684(2)(a)(b). Circumstance D is present where, in connection with the distribution of profits of a relevant company, a person receives consideration without paying or bearing tax on it as income which is or represents assets available for distribution by way of dividend. See 100602 of this guidance which set out what is a relevant company for circumstance D purposes.


100230 Circumstance E: receipt of Assets of a relevant company This section explains the technical conditions for section 690 ITA 2007, which deal with the receipt of assets of a relevant company (referred to as circumstance E), to apply, for periods before 6 April 2010. 100231 Circumstance E: Overview 100232 Circumstance E: Meaning Of “Apart From Anything Done” 100233 Circumstance E: Timing Of The Tax Advantage 100234 Circumstance E: Where Share Capital Is Not Redeemable 100235 Circumstance E: The Meaning Of Consideration, Security And Share 100231 Circumstance E: Overview The following explains when section 690 ITA 2007 (circumstance E) applies for the purposes of Part 13, Chapter 1 of ITA 2007 for periods prior to 5 April 2010. For periods on or after 6 April 2010, circumstance E has been incorporated into section 684(2)(c) and (3). Circumstance E is present when a shareholder receives (from a relevant company) consideration which is not subject to income tax which might otherwise be received in the form of a dividend or other distribution, and the consideration takes the form of shares or securities. See 100602 of this guidance which sets out what is a relevant company for Circumstance E purposes. The consideration must represent the value of assets that are (or apart from anything done by the company would have been) available for distribution by way of dividend, or trading stock of the company. Circumstance E is unlikely to be present unless one of the companies concerned has (or recently had) distributable reserves. In the case of non-redeemable shares it is sufficient for there to be reserves at the time the share capital is repaid.


100300 Excluded Circumstances: Fundamental Change of Ownership This section explains the technical conditions of section 685 ITA 2007, which excludes certain TiS from falling within section 684 ITA 2007. 100301 Excluded Circumstances Fundamental Change Of Ownership: Overview 100302 Excluded Circumstances Fundamental Change Of Ownership: section 685(1) 100303 Excluded Circumstances Fundamental Change Of Ownership: section 685(2) 100304 Excluded Circumstances Fundamental Change Of Ownership: section 685(3) Condition A 100305 Excluded Circumstances Fundamental Change Of Ownership: section 685(4) Condition B 100306 Excluded Circumstances Fundamental Change Of Ownership: section 685(5) Condition C 100301 Excluded Circumstances Fundamental Change Of Ownership: Overview This section explains the technical conditions in section 685, ITA 2007, which if met will exclude a TiS from being within section 684 ITA 2009 where there has been a fundamental change of ownership of the close company. The basic rules are set out in section 685(1), and section 685(2) provides the definition of a fundamental change of ownership of the close company. Sections 685(3) to (5) contain the three conditions which each have to be met to effect a fundamental change of ownership of a close company for these purposes.


100400 Income Tax Advantage This section explains the meaning of Income tax advantages for the purposes of section 685 ITA 2007. 100401 Income Tax Advantage: Overview 100402 Income Tax Advantage: Section 686(1) Identification Of Income Tax Advantage 100403 Income Tax Advantage: Section 686(2) Quantification Of Income Tax Advantage 100404 Income Tax Advantage: Section 686(3) Quantification Of Income Tax Advantage 100405 Income Tax Advantage: Section 686(4) Quantification Of Income Tax Advantage 100406 Income Tax Advantage: Quantification Of Income Tax Advantage Example This Chapter has been completed for illustrative purposes to provide an example of the level of detail being proposed for this guidance. 100401 Income Tax Advantage: Overview This section provides guidance on the section 686 ITA 2007, which provides a definition of income tax advantage for the purposes of Part 13, Chapter 1 ITA 2007, covering periods on or after 6 April 2010, see [100402] onwards. For periods before 6 April 2010, in order for the TiS legislation to apply, a person must be in a position to obtain (or have obtained) a tax advantage. For income tax purposes the definition of a tax advantage is set out in section 683 ITA 2007. The definition includes - - a relief or increased relief from income tax, or - a repayment or increased repayment of income tax, or - the avoidance or reduction of a charge to income tax, or - an assessment to or avoidance of a possible assessment to income tax whether the avoidance or reduction is effected by receipts accruing in such a way that the recipient does not pay or bear income tax on them, or by a deduction in calculating profits or gains. For periods on or before 5 April 2007 the definition of tax advantage was provided by section 709(1) ICTA 1988. 100402 Income Tax Advantage: Section 686(1) Identification Of Income Tax Advantage For periods on or after 6 April 2010, a person will be treated as obtaining an income tax advantage for the purposes of section 683(1)(d) ITA 2007 by comparing: (A) the amount of any income tax which would be payable by the person in respect of the relevant consideration if it had constituted a qualifying distribution, against (B) the amount of any capital gains tax payable in respect of that same amount. If (A) exceeds (B) the person obtains an income tax advantage. For example: Where relevant consideration is say £100 and capital gains tax payable on this amount equalled say £18 (B). Section 686(1) treats the relevant consideration as if it where a qualifying distribution and requires a hypothetical calculation of what the income tax payable would be: in this case, say £25 (A). (A) exceeds (B), therefore the person obtains a tax advantage. Section 686(1)(b) replicates the approach taken in section 686(1)(a) covering situations where no Capital Gains Tax is payable.


100403 Income Tax Advantage: Section 686(2) Quantification Of Income Tax Advantage Section 686(2) limits the amount of relevant consideration that may be included in the calculation of income tax advantage in section 686(1). For the purposes of that calculation, relevant consideration cannot exceed the amount that could have been paid to the person by way of a qualifying distribution. Example A person receives relevant consideration of, say, £100 from company A. Company A had distributable reserves of, say £70. If the person is the sole shareholder of Company A, the amount that could have been paid to them as a qualifying distribution is £70, which is lower than the amount of relevant consideration the person received. In such cases section 686(2) limits the amount of relevant consideration to £70 for the purposes of calculating an income tax advantage under section 686(1). Using the same example as above, if there were two individuals involved who each owned 50 percent of company A, you would need to ascertain the amount of the maximum qualifying distribution that could have been paid to each person. For this example, if the maximum qualifying distribution that could have been paid to each person is £50, the relevant consideration for the person in question would be limited to £50. 100404 Income Tax Advantage: Section 686(3) Quantification Of Income Tax Advantage Section 686(3) quantifies the amount of the income tax advantage as the amount of the excess identified in section 686(1) [see 100402] or, if no capital gains tax is payable as the amount of the income tax which would be payable, It is this excess tax figure which will be subject to counteraction. For example, using the figures from 100402: Where relevant consideration is say £100 and capital gains tax payable on this amount equalled say £18 (B). Section 686(1) treats the relevant consideration as if it where a qualifying distribution and requires a hypothetical calculation of what the income tax payable would be: in this case, say £25 (A). The excess tax that is liable to counteraction is (A) – (B), £7. 100405 Income Tax Advantage: Section 686(4) Quantification Of Income Tax Advantage Section 686(4) explains that ‘relevant consideration’ for the purposes of the calculation of the income tax advantage has the same meaning as in section 684 ITA 2007. 100406 Income Tax Advantage: Quantification Of Income Tax Advantage Example The following is an illustrative example of how Section 686 is meant to work in practice. All the figures used are hypothetical and for illustrative purposes only. Step 1 – Calculation of amounts not subject to counteraction Proceeds received as capital from a company (‘relevant consideration’) £ 100 A Amount that could have been paid as a qualifying distribution (say) £ 90 B The amount not subject to counteraction is (A-B) £ 10 The amount B is therefore potentially subject to counteraction.


Step 2 – Compare the tax due on (B) as if it was an income dividend Amount potentially subject to counteraction £ 90 B Tax paid on B say 18% CGT rate (ignoring reliefs/exemptions) £ 16 C Tax payable if B constituted a qualifying distribution (e.g a dividend) £ 22 D (e.g. 25% of net dividend for person paying tax in the 40% bracket after taking into account notional tax credits) Step 3 – Income Tax advantage per section 686 I.T. that would have been payable less the actual CGT tax payable (D-C) £ 6 It is this additional tax due that would be subject to counteraction if the customer cannot avail themselves of any of the exclusions such as section 685, the fundamental change of ownership proposal. The Income Tax advantage arises when the person receives the relevant consideration.


100500 Transactions in Securities This section explains the meaning of Transactions in Securities for the purposes of Part 13, Chapter 1 of ITA 2007. 100501 Transaction in Securities: Overview 100502 Transaction in Securities: Securities 100503 Transaction in Securities: Number Of Persons Involved 100504 Transaction in Securities: Dividends 100505 Transaction in Securities: An Agreement For The Sale Of Shares 100506 Transaction in Securities: An Agreement On How To Distribute Assets On Liquidation Of A Company 100507 Transaction in Securities: Liquidation 100501 Transaction in Securities: Overview The following provides guidance on what is a TiS for the purposes of purposes of Part 13, Chapter 1 of ITA 2007. You will note from below that the definition is meant to have a wide definition. TiS means transactions, of whatever description, relating to securities, and in particular it includes - the purchase, sale or exchange of securities - issuing or securing the issue of new securities - applying or subscribing for new securities - altering or securing the alteration of rights attached to securities A straightforward dividend or liquidation should not be regarded as a TiS.


100600 Close Company 100601 Close Company: Overview 100602 Meaning of “Relevant Company”: Control 100603 Meaning of “Relevant Company”: Control By A UK Quoted Bank 100604 Meaning of “Relevant Company”: Clearances 100601 Close Company: Overview For periods on or after 6 April 2010, the definition of a relevant company is aligned with the existing definition for close companies contained in sections 414 and 415 ICTA 1988. See CTM60000 for guidance on close companies. For periods prior to 6 April 2010, a relevant company is defined as a company that is not controlled by more than 5 persons or any other company whose shares or stocks are not listed in the Official List of the Stock Exchange, and dealt in on the Stock Exchange regularly or from time to time is also a relevant company. A company is not a relevant company if it is under the control of one or more companies which are not relevant companies. The reference to shares or stocks above does not include debenture stock, preferred shares or preferred stock and reference to “control” has the meaning given by section 416(2) to (6) of ICTA 1988. “Company” includes any body corporate. 100602, 100603 ad 100604 provide further guidance on the meaning of relevant companies for the purposes of section 689 (circumstance D) and section 690 (circumstance E) ITA 2007. The relevant legislation which defines the meaning of a relevant company is contained in section 691 ITA 2007.



100700 Purpose Test This section explains when and how to apply the purpose test for the purposes of Part 13, Chapter 1 of ITA 2007. 100701 Purpose Test: Overview 100702 Purpose Test: When The Purpose Test Should Be Considered? 100703 Purpose Test: The Person Party To The TiS And Related Arrangements 100704 Purpose Test: Related Arrangements 100705 Purpose Test: The Purpose That Should Be Tested 100706 Purpose Test: The Unallowable Purpose 100707 Purpose Test: Main Purpose, The Threshold Of The Purpose Test 100708 Purpose Test: The Tax Consequences Of The Purpose Test 100701 Purpose Test: Overview For periods on or after 6 April 2010, the TiS legislation introduces a new purpose test. This section of the guidance explains how the purpose test is intended to apply for the purposes of Part 13, Chapter 1 of ITA 2007. The purpose test is intended to apply to TiS where the main purpose or one of the main purposes of a person who is party to the transaction or transactions and related arrangements is to obtain or to be able to obtain a tax advantage in consequence of the transaction, transactions or related arrangements. Guidance in the rest of this section explains the main parts of the purpose test and how to apply it to a given situation when considering whether Part 13, Chapter 1 of ITA 2007 applies or not. Further guidance on purpose test may be found at in the purpose test guidance which is also being consulted on and can be located at http://www.hmrc.gov.uk/consultations.



100800 Procedure for Counteraction of Income Tax Advantages This section explains the procedure and process for counteraction of income tax advantages that are caught by Part 13, Chapter 1 of ITA 2007. 100801 Procedure For Counteraction Of Income Tax Advantages: General 100802 Procedure For Counteraction Of Income Tax Advantages: Outline Of The Counteraction Procedure 100803 Procedure For Counteraction Of Income Tax Advantages: Preliminary Notification That Section 684 May Apply 100804 Procedure For Counteraction Of Income Tax Advantages: Opposed Notifications And Statutory Declarations 100805 Procedure For Counteraction Of Income Tax Advantages: Opposed Determinations By Tribunal 100809 Procedure For Counteraction Of Income Tax Advantages: Counteraction Notices Under Section 698 ITA 2007 100810 Procedure For Counteraction Of Income Tax Advantages: Limit On The Amount Assessed In Circumstance D And E Cases 100811 Procedure For Counteraction Of Income Tax Advantages: Timing Of Assessments In Circumstance E Cases 100801 Procedure For Counteraction Of Income Tax Advantages: General This section of the guidance explains the procedure and process for counteraction of income tax advantages that are caught by Part 13, Chapter 1 of ITA 2007. Sections 695 to 700 ITA 2007 provide the statutory basis for the procedure for counteraction of income tax advantages. The TiS legislation is anti-avoidance legislation that is operated by HMRC Anti-Avoidance Group under powers devolved by the Board independent of the self-assessment provisions. No liability arises under the TiS legislation unless and until HMRC serves a notice and raises an assessment in accordance with the notice. An assessment may be raised no later than 6 years after the tax year of the income tax advantage. AAG may carry out enquiries where a tax advantage is obtained in consequence of transactions in securities within one of the prescribed circumstances outside the time limits for making an enquiry under ITSA. All counteraction work in respect of the TiS legislation is operated under the direction of AAG. AAG will therefore initiate all enquiries and where appropriate seek a contract settlement of the liabilities within the HMRC’s Litigation and Settlements Strategy.


100900 Clearance Procedure and Information Powers This section explains the clearance procedure and information powers included in Part 13, Chapter 1 of ITA 2007. 100901 Clearance Procedure And Information Powers: Overview 100902 Clearance Procedure And Information Powers: Outline Of The Clearance Procedure 100903 Clearance Procedure And Information Powers: Application For Clearance The Statutory Requirements 100904 Clearance Procedure And Information Powers: Effect Of Clearance Notification Under section 701 TA 2007 100905 Clearance Procedure And Information Powers: Power To Obtain Information 100901 Clearance Procedure And Information Powers: Overview This section of the guidance explains the procedure for obtaining clearance that no counteraction notice will be served in respect of TiS contained in the clearance application. Section 701 ITA 2007 provides the statutory basis for an application for clearance of transactions, whether the transactions are yet to be carried out or have already been carried out, that no counteraction notice will be issued in respect of them The effect of receiving clearance is to preclude any counteraction from being taken in respect of those transactions on which clearance is sought. Where HMRC are not satisfied that clearance should be given, clearance will be refused without any further right to appeal.


101000 Appeals and Internal Reviews This section explains the statutory appeals procedure included in Part 13, Chapter 1 of ITA 2007 and the role of HMRC’s internal review in respect of counteraction cases. 101001 Appeals and Internal Reviews: Overview 101002 Appeals and Internal Reviews: Outline Of The Appeal Procedure 101003 Appeals and Internal Reviews: Internal Reviews 101004 Appeals and Internal Reviews: What Can Be Appealed? 101005 Appeals and Internal Reviews: The Tribunal 101006 Appeals and Internal Reviews: Appeals Against Counteraction Notices? 101007 Appeals and Internal Reviews: The Tribunal 101008 Appeals and Internal Reviews: Rehearing By Tribunal Of Appeal Against A Counteraction Notice 101009 Appeals and Internal Reviews: Statement Of Case By Tribunal For Opinion Of High Court Or Court Of Session 101010 Appeals and Internal Reviews: Cases Before The High Court Or Court Of Session 101011 Appeals and Internal Reviews: Effect Of Appeals Against Tribunal’s Determination Under section 706 ITA 2007 101012 Appeals and Internal Reviews: Appeals From High Court Or Court Of Session 101013 Appeals and Internal Reviews: Proceedings In North Ireland 101001 Appeals And Internal Reviews: Overview This section of the guidance explains the statutory appeals procedure included in Part 13, Chapter 1 of ITA 2007 and the role of HMRC’s internal review in respect of counteraction cases. A person issued with a preliminary notification that is served under section 695 ITA 2007 may within 30 days of receiving that notice oppose the notification under section 696 ITA 2007. Guidance in respect of this process is covered in 100800. A person issued with a counteraction notice served under section 698 ITA 2007, may within 30 days appeal to the First-tier Tribunal on the grounds that the TiS legislation does not apply to them in respect of the transaction or transactions in question, or that the assessment etc is inappropriate. The statutory basis for this appeal is included in section 705 ITA 2007. The person may also apply to HMRC to postpone any tax in dispute. Late appeals and postponements will be allowed where there is reasonable excuse. On appeal, the First-tier Tribunal may affirm, vary or cancel the counteraction notice, or affirm, vary or quash an assessment made in accordance with the notice. Prior to appealing to the First-tier Tribunal, a person issued with a counteraction notice may also ask HMRC for an internal review of the decision to issue the counteraction notice on the grounds that the TiS legislation does not apply to the person in respect of the transaction or transactions in question, or that the assessment etc directed to be made is inappropriate.


101100 Specific Areas of Difficulty This section identifies specific areas of difficulties that can arise in applying Part 13, Chapter 1 of ITA 2007 and explains the approach you should take. This is not meant to be an exhaustive list and is intended to grow to cover more specific areas of difficulty as they arises. 101110 Specific Areas of Difficulty: Incestuous Transactions 101120 Specific Areas of Difficulty: Interaction With ESC C16 101130 Specific Areas of Difficulty: Management Buy Outs, 101140 Specific Areas of Difficulty: Group Scenarios 101110 Specific Areas of Difficulty: Incestuous Transactions This section identifies specific areas of difficulties involving incestuous transactions and explains the approach you should take. 101111 Specific Areas of Difficulty: Incestuous Transactions, General 101112 Specific Areas of Difficulty: Incestuous Transactions, CIR v Cleary 101113 Specific Areas of Difficulty: Incestuous Transactions, Assets Available For Distribution Involving Situations Where The Shares In The Relevant Company Are Not Wholly Owned By One Person 101114 Specific Areas of Difficulty: Incestuous Transactions, Situations Where There Is Change In The Number Of Shares Held In The Relevant Company 101115 Specific Areas of Difficulty: Incestuous Transactions, Situations Where Any Capital Proceeds Received By A Person Exceed The Amount Of Dividends That Could Have Been Paid Out To Them From Distributable Reserves But Were Less Than The Total Level Of Distributable Reserves 101120 Specific Areas of Difficulty: Interaction With ESC C16 This section explains the interaction between the TiS legislation and ESC C16 101130 Specific Areas Of Difficulty: Management Buy Outs, This section identifies specific areas of difficulties involving Management Buy Outs and explains the approach you should take. 101131 Management Buy Outs, General 101132 Management Buy Outs, Where The Existing Shareholders Do Not Exit Or There Is A Partial Exit From The Business 101133 Management Buy Outs, Where The Existing Shareholders Sell Their Shares To A New Company In Which They No Longer Control Going Forward But Retain A Significant Interest 101134 Management Buy Outs, Where The Existing Shareholders Sell Their Shares To A New Company In Which They No Longer Control Going Forward And Do Not Retain A Significant Interest 101135 Management Buy Outs, Involving Redeemable Preference Shares Or Securities Issued To The Existing Shareholders In A New Company 101136 Management Buy Outs, Where A Shareholder Sells Their Share In The Relevant Company To A New Company And Receives Cash And Loan Stock Which Can Be Redeemed Over The Next Five Years. 101137 Management Buy Outs, Where A Shareholder Sells Their Shares In The Relevant Company To A New Company And Receives A Mixture Of Cash, Ordinary Shares And Loan Stock Which Can Be Redeemed Over The Next Five Years. 101138 Management Buy Outs, Where A Shareholder (Together With Connected/Associated Parties) And Has Retained A Significant Interest In The New Company 101139 Secondary Management Buy Outs


101140 Specific Areas Of Difficulty: Group Scenarios This section identifies specific areas of difficulties involving Group Scenarios and explains the approach you should take. 101141 Group Scenarios, General 101142 Group Scenarios, Situations Involving A Group Where Each Company Has No Negative Reserves 101143 Group Scenarios, Situations Involving A Group With Negative Reserves In A Sister Company 101144 Group Scenarios, Situations Involving A Group With A Dividend Block In A Parent Company 101145 Group Scenarios, Situations Involving A Group With Negative Reserves In A Sub Holding Company


101200 Commentary on Key Cases This section provides a short commentary on some of the tax cases quoted in this guidance. 101201 CIR v Addy 101202 CIR v Brebner 101203 CIR v Cleary 101204 CIR v Joiner 101206 CIR v Parker 101207 CIR v E A Wiggins 101208 Lloyd v HMRC Commissioners 101209 Snell v HMRC Commissioners


Annex E Current ITA 2007 Legislation

Chapter 1 Transactions in Securities Introduction

682 Overview of Chapter

(1) This Chapter makes provision for counteracting income tax advantages obtained or obtainable by persons to whom section 684 applies in respect of a transaction or transactions in securities.

(2) See section 698 (counteraction notices) for the way in which the income tax advantages may be counteracted. 683 Meaning of “income tax advantage”

(1) In this Chapter “income tax advantage” means— (a) a relief from income tax or increased relief from income tax, (b) a repayment of income tax or increased repayment of income tax, (c) the avoidance or reduction of a charge to income tax or an assessment to income tax, or (d) the avoidance of a possible assessment to income tax.

(2) For the purposes of subsection (1)(c) and (d) it does not matter whether the avoidance or reduction is effected—

(a) by receipts accruing in such a way that the recipient does not pay or bear income tax on them, or (b) by a deduction in calculating profits or gains.

(3) In this section “relief from income tax” includes a tax credit. Person liable to counteraction of income tax advantages

684 Person liable to counteraction of income tax advantage

(1) This section applies to a person in respect of a transaction in securities or two or more such transactions if the person is in a position to obtain or has obtained an income tax advantage— (a) in circumstances where any of the provisions specified in subsection (2) applies in relation to the person, and (b) in consequence of— (i) the transaction, or (ii) the combined effect of the transactions.

(2) The provisions are— section 686 (abnormal dividends used for exemptions or reliefs (circumstance A)), section 687 (deductions from profits obtained following distribution or dealings (circumstance B)), section 688 (receipt of consideration representing company's assets, future receipts or trading stock (circumstance C)), section 689 (receipt of consideration in connection with relevant company distribution (circumstance D)), and section 690 (receipt of assets of relevant company (circumstance E)).

(3) For the purposes of this Chapter an income tax advantage is treated as obtained or obtainable by a person in consequence of— (a) a transaction in securities, or (b) the combined effect of two or more such transactions,

if it is obtained or obtainable by the person in consequence of the combined effect of the transaction or transactions and the liquidation of a company.

(4) This section is subject to— section 685 (exception where no tax avoidance object shown),


section 696(3) (disapplication of this section where person receiving preliminary notification that this section may apply makes a statutory declaration and the relevant officer of Revenue and Customs sees no reason to take further action), and section 697(5) (determination by tribunal that there is no prima facie case that this section applies). 685 Exception where no tax avoidance object shown

(1) Section 684 does not apply to a person in respect of a transaction in securities or two or more such transactions if the person shows that the transaction or transactions meet conditions A and B.

(2) Condition A is that the transaction or transactions are effected— (a) for genuine commercial reasons, or (b) in the ordinary course of making or managing investments. (3) Condition B is that enabling income tax advantages to be obtained is not the main object or one of the main objects of the transaction or, as the case may be, any of the transactions. Circumstances in which income tax advantages obtained or obtainable

686 Abnormal dividends used for exemptions or reliefs (circumstance A)

(1) This section applies in relation to a person if subsections (2) to (4) apply. (2) The person receives an abnormal amount by way of dividend (see section 692). (3) The receipt is in connection with— (a) the purchase of securities where the purchase is followed by the sale of the same or other securities, (b) the sale of securities where the sale is followed by the purchase of the same or other securities, (c) the distribution, transfer or realisation of assets of a company, or (d) the application of such assets in discharge of liabilities. (4) The amount so received is taken into account for the purposes of— (a) any exemption from income tax, (b) the setting-off of losses against profits or income, or (c) the giving of relief under section 383 (relief for interest payments). [687 – repealed] 688 Receipt of consideration representing company's assets, future receipts or trading stock (circumstance C)

(1) This section applies in relation to a person (“A”) if subsections (2), (3) and (6) apply.

(2) A receives consideration which— (a) is or represents the value of— (i) assets which are available for distribution by a company by way of dividend, or (ii) assets which would have been so available apart from anything done by the company, (b) is received in respect of future receipts of a company, or (c) is or represents the value of trading stock of a company.

(3) The receipt is in consequence of a transaction whereby another person (“B”)— (a) subsequently receives, or has received, an abnormal amount by way of dividend (see section 692),

[(4) to (5) repealed]

(6) The receipt of the consideration is such that A does not pay or bear income tax on it (apart from this Chapter).

(7) The assets mentioned in subsection (2) do not include assets which are shown to represent a return of sums paid by subscribers on the issue of securities, despite the fact that under the law of the country in which the company is incorporated assets of that description are available for distribution by way of dividend.

(8) In this section references to the receipt of consideration include references to the receipt of any money or money's worth.


689 Receipt of consideration in connection with relevant company distribution (circumstance D)

(1) This section applies in relation to a person if subsections (2) to (4) apply.

(2) The person receives consideration in connection with— (a) the distribution, transfer or realisation of assets of a relevant company (see section 691), or (b) the application of such assets in discharge of liabilities.

(3) The consideration— (a) is or represents the value of— (i) assets which are available for distribution by way of dividend by the company, or (ii) assets which would have been so available apart from anything done by the company, (b) is received in respect of future receipts of the company, or (c) is or represents the value of trading stock of the company.

(4) The person so receives the consideration that the person does not pay or bear income tax on it (apart from this Chapter).

(5) The assets mentioned in subsection (3) do not include assets which are shown to represent a return of sums paid by subscribers on the issue of securities, despite the fact that under the law of the country in which the company is incorporated assets of that description are available for distribution by way of dividend.

(6) In this section references to the receipt of consideration include references to the receipt of any money or money's worth. 690 Receipt of assets of relevant company (circumstance E)

(1) This section applies in relation to a person if subsections (2) to (4) and (7) apply.

(2) The person receives consideration in connection with— (a) the direct or indirect transfer of assets of a relevant company (see section 691) to another such company, or (b) any transaction in securities in which two or more relevant companies are concerned.

(3) The consideration is or represents the value of assets which— (a) are available for distribution by way of dividend by a relevant company, (b) would have been so available apart from anything done by the company, or (c) are trading stock of a relevant company.

(4) The consideration consists of any share capital or any security issued by a relevant company.

(5) So far as subsection (4) relates to share capital other than redeemable share capital, it applies only so far as the share capital is repaid (in a winding up or otherwise).

(6) The reference in subsection (5) to the repayment of share capital includes a reference to any distribution made in respect of any shares in a winding up or dissolution of the company.

(7) The person does not pay or bear income tax on the consideration (apart from this Chapter).

(8) In this section— (a) references to the receipt of consideration include references to the receipt of any money or money's worth, (b) “security” has the meaning given in section 254(1) of ICTA (interpretation of Part 6 of ICTA: company distributions, tax credits etc), and (c) “share” includes stock and any other interest of a member in a company. 691 Meaning of “relevant company” in sections 689 and 690

(1) A company is a relevant company for the purposes of sections 689 and 690 if it is— (a) a company under the control of not more than 5 persons (but see subsection (2)), or (b) any other company none of whose shares or stocks is— (i) included in the official UK list, and (ii) dealt in on a recognised stock exchange in the United Kingdom regularly or from time to time.

(2) A company is not a relevant company for those purposes if it is under the control of one or more companies which are not relevant companies for those purposes.

http://home.inrev.gov.uk/yhb/TYTHB1A_1988_01a_split02_22.html

http://home.inrev.gov.uk/yhb/TYTHB1A_1988_01a_split01_9.html


(3) The reference in subsection (1)(b) to shares or stocks does not include debenture stock, preferred shares or preferred stock.

(4) In this section “control” has the meaning given by section 416(2) to (6) of ICTA (close companies: meaning of “associated company” and “control”). 692 Abnormal dividends: general

(1) An amount received by way of dividend is treated as abnormal for the purposes of this Chapter if the appropriate authority is satisfied— (a) in any case that the excessive return condition is met (see section 693), or (b) in the case of a dividend at a fixed rate, that the excessive accrual condition is met (see section 694).

(2) In subsection (1) “the appropriate authority” means whichever of the following is determining the question whether the amount is abnormal for the purposes of this Chapter— (a) an officer of Revenue and Customs, (b) the Commissioners for Her Majesty's Revenue and Customs or, [(c) the tribunal. 693 Abnormal dividends: the excessive return condition

(1) The excessive return condition is that the dividend substantially exceeds a normal return on the consideration provided by the recipient for the relevant securities.

(2) In this section “the relevant securities” means— (a) the securities in respect of which the dividend was received, and (b) if those securities are derived from securities previously acquired by the recipient, the securities which were previously acquired.

(3) In determining whether an amount received by way of dividend exceeds a normal return, regard must be had—

(a) to the length of time before its receipt that the recipient first acquired any of the relevant securities, and (b) to any dividends paid and other distributions made in respect of them during that time.

(4) If—

(a) the consideration provided by the recipient for any of the relevant securities exceeded their market value at the time the recipient acquired them, or (b) no consideration was so provided, for the purposes of subsection (1) consideration equal to that market value is taken to have been so provided. 694 Abnormal dividends: the excessive accrual condition

(1) The excessive accrual condition is that the dividend substantially exceeds the amount which the recipient would have received if—

(a) the dividend had accrued from day to day, and (b) the recipient had been entitled to only so much of the dividend as accrued while the recipient held the securities.

(2) But the excessive accrual condition is treated as not being met if during the period of 6 months beginning with the purchase of the securities the recipient does not—

(a) sell or otherwise dispose of any of the securities or any securities similar to them, or (b) acquire an option to sell any of the securities or any securities similar to them.

(3) For the purposes of subsection (2) securities are taken to be similar if they entitle their holders—

(a) to the same rights against the same persons as to capital and interest, and (b) to the same remedies for the enforcement of those rights.

(4) For the purposes of subsection (3) rights guaranteed by the Treasury are treated as rights against the Treasury.

(5) Subsection (3) applies despite any differences—

(a) in the total nominal amounts of the respective securities,


(b) in the form in which they are held, or (c) in the manner in which they can be transferred. Procedure for counteraction of income tax advantages

695 Preliminary notification that section 684 may apply

(1) An officer of Revenue and Customs must notify a person if the officer has reason to believe that—

(a) section 684 (person liable to counteraction of income tax advantage) may apply to the person in respect of a transaction or transactions, and (b) a counteraction notice ought to be served on the person under section 698 about the transaction or transactions.

(2) The notification must specify the transaction or transactions.

(3) See section 698 for the serving of counteraction notices, and sections 696 and 697 for cases where the person on whom the notice under this section is served disagrees that section 684 applies. 696 Opposed notifications: statutory declarations

(1) If a person on whom a notification is served under section 695 is of the opinion that section 684 (person liable to counteraction of income tax advantage) does not apply to the person in respect of the transaction or transactions specified in the notification, the person may—

(a) make a statutory declaration to that effect, stating the facts and circumstances on which the opinion is based, and (b) send it to the officer of Revenue and Customs.

(2) Such a declaration must be sent within 30 days of the issue of the notification.

(3) If the person sends that declaration to the officer and the officer sees no reason to take further action— (a) section 684 does not so apply, and (b) accordingly no counteraction notice may be served on the person under section 698 about the transaction or transactions. 697 Opposed notifications: determinations by tribunal

(1) This section applies if the officer of Revenue and Customs receiving a statutory declaration under section 696(1) sees reason to take further action about the transaction or transactions in question.

(2) The officer must send the tribunal …1 a certificate to that effect, together with the statutory declaration.

(3) The officer may also send the tribunal a counter-statement with the certificate.

(4) The tribunal must—

(a) consider the declaration and certificate and any counter-statement, and (b) determine whether there is a prima facie case for the officer to take further action on the basis that section 684 (person liable to counteraction of income tax advantage) applies to the person by whom the declaration was made in respect of the transaction or transactions in question.

(5) If the tribunal determines that there is no such case—

(a) section 684 does not so apply, and (b) accordingly no counteraction notice may be served on the person under section 698 about the transaction or transactions.

(6) But such a determination does not affect the application of sections 684 and 698 in respect of transactions including not only the ones to which the determination relates but also others. 698 Counteraction notices

(1) If—

(a) a person on whom a notification is served under section 695 does not send a statutory declaration to an officer of Revenue and Customs under section 696 within 30 days of the issue of the notification, or (b) the tribunal to which such a declaration is sent under section 697 determines that there is a prima facie case for serving a notice on a person under this section,


the income tax advantage in question is to be counteracted by adjustments.

(2) The adjustments required to be made to counteract the income tax advantage and the basis on which they are to be made are to be specified in a notice served on the person by an officer of Revenue and Customs.

(3) In this Chapter such a notice is referred to as a “counteraction notice”.

(4) Any of the following adjustments may be specified—

(a) an assessment, (b) the nullifying of a right to repayment, (c) the requiring of the return of a repayment already made, or (d) the calculation or recalculation of profits or gains or liability to income tax.

(5) Nothing in this section authorises the making of an assessment later than 6 years after the tax year to which the income tax advantage relates.

(6) This section is subject to—

section 699 (limit on amount assessed in section 689 and 690 cases), section 700 (timing of assessments in section 690 cases), and section 702(2) (effect of clearance notification under section 701).

(7) But no other provision in the Income Tax Acts is to be read as limiting the powers conferred by this section. 699 Limit on amount assessed in section 689 and 690 cases

(1) This section applies if a counteraction notice is served in a case where the income tax advantage—

(a) consists of the avoidance of a charge to income tax, and (b) is obtained by a person in circumstances falling within—

section 689 (receipt of consideration in connection with relevant company distribution (circumstance D)), or section 690 (receipt of assets of relevant company (circumstance E)).

(2) The amount of income tax which may be specified in an assessment made in accordance with the notice must not exceed the qualifying distribution equivalent.

(3) The qualifying distribution equivalent is the amount of income tax for which the person would be liable if—

(a) the person received a qualifying distribution on the date on which the consideration mentioned in section 689 or, as the case may be, section 690 is received, and (b) that distribution were of an amount equal to the amount or value of that consideration. 700 Timing of assessments in section 690 cases

(1) This section applies if section 684 (person liable to counteraction of income tax advantage) applies to a person because the person is in a position to obtain or has obtained an income tax advantage by falling within the circumstances mentioned in section 690 (receipt of relevant company assets (circumstance E)) when share capital is repaid.

(2) An assessment to income tax made in accordance with a counteraction notice must be an assessment for the tax year in which the repayment occurs.

(3) The references in this section to the repayment of share capital include references to any distribution made in respect of any shares in a winding up or dissolution of the company.

(4) In subsection (3) “shares” includes stock and any other interest of a member in a company. Clearance procedure and information powers

701 Application for clearance of transactions

(1) A person may provide the Commissioners for Her Majesty's Revenue and Customs with particulars of a transaction or transactions effected or to be effected by the person in order to obtain a notification about them under this section.


(2) If the Commissioners consider that the particulars, or any further information provided under this subsection, are insufficient for the purposes of this section, they must notify the person what further information they require for those purposes within 30 days of receiving the particulars or further information.

(3) If any such further information is not provided within 30 days from the notification, or such further time as the Commissioners allow, they need not proceed further under this section.

(4) The Commissioners must notify the person whether they are satisfied that the transaction or transactions, as described in the particulars, were or will be such that no counteraction notice ought to be served about the transaction or transactions.

(5) The notification must be given within 30 days of receipt of the particulars, or, if subsection (2) applies, of all further information required. 702 Effect of clearance notification under section 701

(1) This section applies if the Commissioners for Her Majesty's Revenue and Customs notify a person under section 701 that they are satisfied that a transaction or transactions, as described in the particulars provided under that section, were or will be such that no counteraction notice ought to be served about the transaction or transactions.

(2) No such notice may be served on the person in respect of the transaction or transactions.

(3) But the notification does not prevent such a notice being served on the person in respect of transactions including not only the ones to which the notification relates but also others.

(4) The notification is void if the particulars and any further information given under section 701 about the transaction or transactions do not fully and accurately disclose all facts and considerations which are material for the purposes of that section. 703 Power to obtain information

(1) This section applies if it appears to an officer of Revenue and Customs that a person may be a person to whom section 684 (person liable to counteraction of income tax advantage) applies in respect of one or more transactions.

(2) The officer may serve a notice on the person requiring the person to give the officer information in the person's possession about the transaction or, if there are two or more, about any of them.

(3) That information must be information about matters which are relevant to the question whether a counteraction notice should be served on the person.

(4) Those matters must be specified in the notice under subsection (2).

(5) That notice must require the information to be given within such period as is specified in it.

(6) That period must be at least 30 days.

[704 – repealed] Appeals

705 Appeals against counteraction notices

(1) A person on whom a counteraction notice has been served may appeal …1 on the grounds that—

(a) section 684 (person liable to counteraction of income tax advantage) does not apply to the person in respect of the transaction or transactions in question, or (b) the adjustments directed to be made are inappropriate.

(2) Such an appeal may be made only by giving notice to the Commissioners for Her Majesty's Revenue and Customs within 30 days of the service of the counteraction notice.

(3) On an appeal under this section that is notified to the tribunal, the tribunal may—

(a) affirm, vary or cancel the counteraction notice, or (b) affirm, vary or quash an assessment made in accordance with the notice.

(4) But the bringing of an appeal under this section does not affect—

(a) the validity of the counteraction notice, or


(b) the validity of any other thing done under or in accordance with section 698 (counteraction notices), pending the determination of the proceedings. [706 to 711 repealed]


Annex F Current CT ICTA 1988 Legislation

Cancellation of corporation tax advantages from certain transactions in securities 703 Cancellation of corporation tax advantage

(1) Where—

(a) in any such circumstances as are mentioned in section 704, and (b) in consequence of a transaction in securities or of the combined effect of two or more such transactions,

a company is in a position to obtain, or has obtained, a corporation tax advantage, then unless it shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable corporation tax advantages to be obtained, this section shall apply to it in respect of that transaction or those transactions.

(2) For the purposes of this Chapter a corporation tax advantage obtained or obtainable by a company shall be deemed to be obtained or obtainable by it in consequence of a transaction in securities or of the combined effect of two or more such transactions, if it is obtained or obtainable in consequence of the combined effect of the transaction or transactions and the liquidation of a company.

(3) Where this section applies to a company in respect of any transaction or transactions, the corporation tax advantage obtained or obtainable by it in consequence thereof shall be counteracted by such of the following adjustments, that is to say an assessment, the nullifying of a right to repayment or the requiring of the return of a repayment already made, or the computation or recomputation of profits or gains, or liability to corporation tax, on such basis as the Board may specify by notice served on it as being requisite for counteracting the corporation tax advantage so obtained or obtainable.

[(4)–(8) repealed]

(9) The Board shall not give a notice under subsection (3) above until they have notified the company in question that they have reason to believe that this section may apply to it in respect of a transaction or transactions specified in the notification; and if within 30 days of the issue of the notification that company, being of opinion that this section does not so apply to it, makes a statutory declaration to that effect stating the facts and circumstances upon which his opinion is based, and sends it to the Board, then subject to subsection (10) below, this section shall not apply to it in respect of the transaction or transactions.

(10) If, when a statutory declaration has been sent to the Board under subsection (9) above, they see reason to take further action in the matter—

(a) the Board shall send to the tribunal a certificate to that effect, together with the statutory declaration, and may also send therewith a counter-statement with reference to the matter; (b) the tribunal shall take into consideration the declaration and the certificate, and the counter- statement, if any, and shall determine whether there is or is not a prima facie case for proceeding in the matter, and if it determines that there is no such case this section shall not apply to the company in question in respect of the transaction or transactions;

but any such determination shall not affect the operation of this section in respect of transactions which include that transaction or some or all of those transactions and also include another transaction or other transactions.

[(11) repealed]

(12) This section applies whether the corporation tax advantage in question relates to a chargeable period ending before or after the commencement of this Act, but nothing in this section shall authorise the making of an assessment later than six years after the accounting period to which the corporation tax advantage relates; and no other provision contained in the Corporation Tax Acts shall be construed as limiting the powers conferred by this section.


704 The prescribed circumstances

The circumstances mentioned in section 703(1) are as follows (and in this section references to “the section 703(1) company” are references to the company referred to in that section)—

A—

That in connection with the distribution of profits of a company, or in connection with the sale or purchase of securities being a sale or purchase followed by the purchase or sale of the same or other securities, the section 703(1) company receives an abnormal amount by way of dividend, and the amount so received is taken into account for any of the following purposes—

(a) any exemption from corporation tax, or (b) the setting-off of losses against profits or income, or (c) the giving of group relief, or

[(d) repealed]

(da) the application of franked investment income for the purpose of regulations made under section 32 of the Finance Act 1998

[B repealed]

C—

(1) That the section 703(1) company receives, in consequence of a transaction whereby any other person—

(a) subsequently receives, or has received, an abnormal amount by way of dividend;

[(b) repealed]

a consideration which either—

(i) is, or represents the value of, assets which are (or apart from anything done by the company in question would have been) available for distribution by way of dividend, or (ii) is received in respect of future receipts of the company, or (iii) is, or represents the value of, trading stock of the company, and the section 703(1) company so receives the consideration that it does not pay or bear tax on it as income.

(2) The assets mentioned in sub-paragraph (1) above do not include assets which (while of a description which under the law of the country in which the company is incorporated is available for distribution by way of dividend) are shown to represent a return of sums paid by subscribers on the issue of securities.

OR

D—

(1) That in connection with the distribution of profits of a company to which this paragraph applies, the section 703(1) company so receives as is mentioned in paragraph C(1) above such a consideration as is therein mentioned.

(2) The companies to which this paragraph applies are—

(a) any company under the control of not more than five persons, and (b) any other company which does not satisfy the conditions that its shares or stocks or some class thereof (disregarding debenture stock, preferred shares or preferred stock), are included in the official UK list, and are dealt in on a recognised stock exchange in the United Kingdom regularly or from time to time,

so, however, that this paragraph does not apply to a company under the control of one or more companies to which this paragraph does not apply.

(3) Subsections (2) to (6) of section 416 shall apply for the purposes of this paragraph.

OR

E—

(1) That in connection with the transfer directly or indirectly of assets of a company to which paragraph D above applies to another such company, or in connection with any transaction in securities in which two or more companies to which paragraph D above applies are concerned, the section 703(1) company receives non-taxable consideration which is or represents the value of assets available for distribution by such a


company, and which consists of any share capital or any security (as defined by section 254(1)) issued by such a company.

(2) So far as sub-paragraph (1) above relates to share capital other than redeemable share capital, it shall not apply unless and except to the extent that the share capital is repaid (in a winding-up or otherwise), and, where section 703 applies to a company by virtue of sub-paragraph (1) above on the repayment of any share capital, any assessment to corporation tax under subsection (3) of that section shall be an assessment to corporation tax for the accounting period in which the share capital is repaid.

(3) In this paragraph—

“assets available for distribution” means assets which are, or apart from anything done by the company in question would have been, available for distribution by way of dividend, or trading stock of the company; “non-taxable”, in relation to a section 703(1) company receiving consideration, means that the recipient does not pay or bear corporation tax on it as income (apart from the provisions of this Chapter); “share” includes stock and any other interest of a member in a company;

and the reference in sub-paragraph (2) above to the repayment of share capital include references to any distribution made in respect of any shares in a winding-up or dissolution of the company. 705 Appeals against Board's notices under section 703

(1) Any company to which notice has been given under section 703(3) may within 30 days by notice to the Board appeal on the grounds that section 703 does not apply to it in respect of the transaction or transactions in question, or that the adjustments directed to be made are inappropriate.

[(2) –(4) repealed]

(5) On an appeal under subsection (1) the tribunal shall have power to cancel or vary a notice under subsection (3) of section 703 or to vary or quash an assessment made in accordance with such a notice, but the bringing of an appeal shall not affect the validity of a notice given or of any other thing done in pursuance of that subsection pending the determination of the proceedings. [705A to 706 – repealed] 707 Procedure for clearance in advance

(1) The following provisions shall have effect where in pursuance of this section a company furnishes to the Board particulars of a transaction or transactions effected or to be effected by it, that is to say—

(a) if the Board are of opinion that the particulars, or any further information furnished in pursuance of this paragraph, are not sufficient for the purposes of this section, they shall within 30 days of the receipt thereof notify to that company what further information they require for those purposes, and unless that further information is furnished to the Board within 30 days from the notification, or such further time as the Board may allow, they shall not be required to proceed further under this section; (b) subject to paragraph (a) above, the Board shall within 30 days of the receipt of the particulars, or, where that paragraph has effect, of all further information required, notify that company whether or not they are satisfied that the transaction or transactions as described in the particulars were or will be such that no notice under section 703(3) ought to be given in respect of it or them;

and, subject to the following provisions of this section, if the Board notify it that they are so satisfied, section 703 shall not apply to it in respect of that transaction or those transactions.

(2) If the particulars, and any further information given under this section with respect to any transaction or transactions, are not such as to make full and accurate disclosure of all facts and considerations relating thereto which are material to be known to the Board, any notification given by the Board under this section shall be void.

(3) In no event shall the giving of a notification under this section with respect to any transaction or transactions prevent section 703 applying to a company in respect of transactions which include that transaction or all or some of those transactions and also include another transaction or other transactions.


708 Power to obtain information

Where it appears to the Board that by reason of any transaction or transactions a company may be a company to which section 703 applies, the Board may by notice served on it require it, within such time not less than 28 days as may be specified in the notice, to furnish information in its possession with respect to the transaction or any of the transactions, being information as to matters, specified in the notice, which are relevant to the question whether a notice under section 703(3) should be given in respect of it. 709 Meaning of “corporation tax advantage” and other expressions

(1) In this Chapter “corporation tax advantage” means a relief or increased relief from, or repayment or increased repayment of, corporation tax or the avoidance or reduction of a charge to corporation tax or an assessment to corporation tax or the avoidance of a possible assessment thereto, whether the avoidance or reduction is effected by receipts accruing in such a way that the recipient does not pay or bear corporation tax on them, or by a deduction in computing profits or gains.

(2) In this Chapter—

“company” includes any body corporate; “securities”— (a) includes shares and stock, and (b) in relation to a company not limited by shares (whether or not it has a share capital) includes also a reference to the interest of a member of the company as such, whatever the form of that interest; “trading stock” has the meaning given by section 163 of CTA 2009; “transaction in securities” includes transactions, of whatever description, relating to securities, and in particular—

(i) the purchase, sale or exchange of securities; (ii) the issuing or securing the issue of, or applying or subscribing for, new securities; (iii) the altering, or securing the alteration of, the rights attached to securities;

and references to dividends include references to other qualifying distributions and to interest.

(3) In section 704—

(a) references to profits include references to income, reserves or other assets; (b) references to distribution include references to transfer or realisation (including application in discharge of liabilities); and (c) references to the receipt of consideration include references to the receipt of any money or money's worth.

(4) For the purposes of section 704 an amount received by way of dividend shall be treated as abnormal if the Board or the tribunal, as the case may be, are satisfied—

(a) in the case of a dividend at a fixed rate, that it substantially exceeds the amount which the recipient would have received if the dividend had accrued from day to day and the recipient had been entitled only to so much of the dividend as accrued while the recipient held the securities, so however that an amount shall not be treated as abnormal by virtue only of this paragraph if during the six months beginning with the purchase of the securities the recipient does not sell or otherwise dispose of, or acquire an option to sell, any of those securities or any securities similar to those securities; or (b) in any case, that it substantially exceeds a normal return on the consideration provided by the recipient for the relevant securities, that is to say, the securities in respect of which the dividend was received and, if those securities are derived from securities previously acquired by the recipient, the securities which were previously acquired.

(5) For the purposes of subsection (4)(a) above securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference in the total nominal amounts of the respective securities or in the form in which they are held or the manner in which they can be transferred, and for those purposes rights guaranteed by the Treasury shall be treated as rights against the Treasury.

(6) For the purposes of subsection (4)(b) above—

(a) if the consideration provided by the recipient for any of the relevant securities was in excess of their market value at the time the recipient acquired them, or if no consideration was provided


by the recipient for any of the relevant securities, the recipient shall be taken to have provided for those securities consideration equal to their market value at the time the recipient acquired them; and (b) in determining whether an amount received by way of dividend exceeds a normal return, regard shall be had to the length of time previous to the receipt of that amount that the recipient first acquired any of the relevant securities and to any dividends and other distributions made in respect of them during that time.


Annex G Impact Assessment

Please see the Consultation Stage impact assessment for this package of proposals.

Documents

Simplifying Transactions in Securities Legislation · · 2014-10-163. Proposal 1: Refocus the Transactions in Securities legislation to target tax avoidance 9 ... the nature of