We reported in May 2021 on the decision of the First-tier Tribunal (‘FTT’) in M Group Holdings Ltd. The facts and the technical point are explained in our earlier briefing, but the nub of the matter is that a company was fixed with a tax charge of over £10 million on a disposal even though HMRC agreed that no tax would have been payable if the company had had, by foresight or even by oversight, a dormant subsidiary.
The FTT were bemused that HMRC had ‘failed to identify a policy reason why Parliament would want to exclude a stand-alone company that sets up a subsidiary, hives down its business and sells the shares in the subsidiary but at the same time provide for SSE relief in identical circumstances except that the original trading company already had a dormant subsidiary.’ Nonetheless, despite the outcome being ‘odd and arbitrary’ the FTT felt obliged to agree with HMRC that that was what the law said.
The company’s appeal to the Upper Tribunal (‘UT’) in [2023] UKUT 213 (TCC) has failed. The UT addressed the supposed anomalousness of the position head-on by saying that it was clear from the consultation document which had preceded the change in law that the amendment in question was intended to address ‘de-grouping and the SSE relief as applicable to divisionalised businesses traded in a group’. The proposals were therefore ‘expressly contemplated in the context of a group’.
The UT went so far as to say that the appellant company ‘was a stand-alone company in the contested period, which is in a different position to a company that has a dormant subsidiary as it is considered for tax purposes to be a group of companies. There may be tax advantages and disadvantages to both structures.’
Expressly, therefore, the UT saw nothing anomalous in the relief being available to a company with a single dormant subsidiary but not to a stand-alone company, in the process rejecting Counsel’s novel and ingenious argument that a singleton company could be considered to be a member of a group which had but a single member.
The advice we gave in 2021 therefore stands: any standalone company hoping to secure SSE on the future sale of a business needs to constitute itself a member of a group at least one year before the sale. Forming a dormant subsidiary with £1 of share capital should do the trick. We had previously suggested that it might be more prudent to ensure that the subsidiary has a taxable source of income by having it place a few pounds on deposit; though this will now need to be balanced against the impact that this may have on the rate of corporation tax payable by the main company.
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