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Transactions in securities consultation response document


The measure

A consultation response document is published summarising responses to the consultation document published 31 July 2009. The consultation document considered whether a package of proposals aimed at simplifying the transactions in securities legislation would fulfil the twin aims of revenue protection and simplicity, whilst providing clear benefits for taxpayers. It is acknowledged that this anti-avoidance legislation is extremely complex, unnecessarily cumbersome, and no longer has the desired effect.

The transactions in securities legislation was originally introduced to enable HMRC to counteract certain income tax avoidance which turned taxable income into exempt capital gains (prior to the introduction of capital gains tax). Following the introduction of capital gains tax it has facilitated counteraction of a range of transactions in shares and other financial securities that seek to convert income into capital to exploit differences in the way such items are taxed.

The proposals for changes to the transactions in securities legislation in the July consultation document were welcomed by nearly all respondents and contributors.

For income tax, the proposals to change the legislation included narrowing the scope of the legislation so that only transactions undertaken with a main purpose of obtaining a tax advantage are included. It also included proposals to repeal two of the circumstances in which the legislation applies as they are no longer relevant. The stated intention was to replicate the same changes for corporation tax where possible.

It is announced that the proposals to change the rules for income tax are being further developed in light of a number of points raised by respondents as part of the consultation. Key areas where changes are expected to the original proposals are around using the definition of a close company for the definition of 'relevant company', the fundamental change in ownership rule and a possible repeal of the preliminary stages of the counteraction process. HMRC is still of the view that an additional test focused on the commerciality of a transaction within the scope of the rules will not significantly improve the clarity or simplicity of the legislation. However, comments made during consultation on the use of a new purpose test based on tax avoidance will be borne in mind when guidance on the application of the new legislation is drafted.

Requests were made during consultation that the transactions in securities legislation is repealed in full for corporation tax purposes and replaced with more targeted legislation for any examples of situations which HMRC believe would fall within the current transactions in securities legislation.

It is announced in the consultation response document that for corporation tax, one of the circumstances (Circumstance A) will be repealed. Further work will be carried out to consider any further repeals to be made for corporation tax purposes, eg of other circumstances in line with the narrowing of the income tax rules, or of the transactions in securities legislation in its entirety.

Who will be affected?

Any person (e.g. a company, individual, trust) obtaining a UK tax advantage in consequence of a transaction in securities or the combination of a transaction in securities and the liquidation of a company, where:

  • the transaction falls into one of the prescribed circumstances;
  • where it cannot be shown that the transaction in securities is effected for bona fide commercial reasons or in the ordinary course of making or managing investments; and
  • where a main or one of the main purposes of the transaction was gaining a tax advantage.

When?

For income tax, the proposals are being developed following the feedback from the consultation process for inclusion in Finance Bill 2010 or for publication shortly afterwards.

For corporation tax, it is intended that the repeal of Circumstance A for corporation tax is included in Finance Bill 2010 or published shortly afterwards. Any corporation tax changes will be made to the transactions in securities legislation which is being rewritten for inclusion in the Corporation Taxes Act 2010. However, such changes may be deferred until after Finance Bill 2010.

Our view

The proposal in the consultation document to bring together all four conditions that have to be met for the transactions in securities legislation to apply is welcome. It will make it clearer to taxpayers and their advisers who are not familiar with the current scheme that the provisions do not have to be considered unless the main purpose or one of the main purposes is to obtain a tax advantage.

Nevertheless we would not expect this change to result in any material reduction in the number of transactions for which the legislation needs to be considered, nor to the types or number of transactions that will be caught, since the scope of the legislation is not narrowed by this change. Consequently we would not expect these changes to either increase certainty for taxpayers or affect the amount of work that they need to do in this area.

The retention of the ability to obtain a clearance and good quality guidance dealing with the most commonly encountered situations that the legislation may be relevant to will be essential.

We welcome the introduction of a fundamental change of ownership rule as this should reduce the number of transactions that need to be cleared. However, as currently drafted there are likely to be a number of commercial transactions that will not satisfy the new rule, and in respect of which clearance will continue to be needed.

It was proposed in the original consultation document to make clear that the transactions in securities legislation only applies for corporation tax purposes where the tax advantage relates to corporation tax on a company's income and not to its chargeable gains. However, until this consultation has been completed and any changes made, clearances may be required where there is doubt as to whether the legislation applies to a dividend that is exempt following Finance Act 2009. The repeal of Circumstance A for corporation tax purposes should put beyond doubt that the transactions in securities legislation cannot apply to unusually large dividends falling within the dividend exemption.

Circumstances within Condition A are likely to be very limited for companies following the introduction of the dividend exemption in Finance Act 2009 and the substantial shareholding exemption in Finance Act 2002. However, the original consultation document proposed such a change to the Shadow ACT regulations.

It is our view that the transactions in securities legislation should be repealed in its entirety for corporation tax.