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Substantial shareholdings
The Inland Revenue has recently published Statement of Practice SP5/2002: Exemptions for companies' gains on substantial shareholdings, covering the application of the anti-avoidance provision in paragraph 5 of Schedule 7AC to the Taxation of Chargeable Gains Act 1992 (Exemptions in case of substantial shareholding).
Substantial shareholdings
The Inland Revenue has recently published Statement of Practice SP5/2002: Exemptions for companies' gains on substantial shareholdings, covering the application of the anti-avoidance provision in paragraph 5 of Schedule 7AC to the Taxation of Chargeable Gains Act 1992 (Exemptions in case of substantial shareholding).
Paragraph 5 prevents any of the exemptions in Schedule 7AC from applying where certain, clearly defined conditions are met. In addition, a series of illustrative examples of the application of the provision will appear in the Revenue's Capital Gains Manual.
Substantial shareholdings: Revenue interpretations
The December issue of Tax Bulletin will contain an article on how the Revenue interprets the meaning of various terms relating to taper relief and exemptions for disposals by companies with substantial shareholdings. These terms form part of legislation contained in Schedules 8 and 10 to the Finance Act 2002. Extracts from the article are reproduced below, but readers should refer to the full article on www.inlandrevenue.gov.uk/news/index.htm.
In the course of, or for the purposes of, a trade
The Revenue accepts that an activity is carried on in the course of, or for the purposes of, a trade if it is carried on in the process of conducting or preparing to carry on the trade. So, for example, where a company renegotiates an ongoing trading contract relating to its trade, this will be an activity undertaken in the course of its trade. It will be clear in most cases whether an activity that a company undertakes is carried on in the course of, or for the purposes of, its trade or not. But similar transactions can be undertaken for different reasons depending on the facts.
For instance, a company may buy some land. If the company is a property developer and buys the land as trading stock, or it is a manufacturer and buys it to provide a site for a factory it intends to build to house its manufacturing process, the buying of the land would probably count as a trading activity. However, if a company buys the land so as to earn future rental income, or for potential capital growth, the buying of the land would not normally be a trading activity.
Normally, making an investment that yields investment income would not count as a trading activity. However, there are a number of circumstances where such activities could be undertaken in the course of, or for the purposes of, a company's trade.
An investment may be so closely related to the conduct of a trade that it effectively forms an integral part of the trade. For example, a travel agent may be required to keep a fixed level of cash on deposit for bonding requirements. Or a company might receive a large payment, perhaps from selling a shareholding or on the completion of a major contract, and earmark the funds for some particular trade purposes, such as to meet some demonstrable trading liability or expand the trade in the near future. The short-term lodgement of such surplus funds, for example in an interest-bearing deposit account or in bonds or equities, could count as a trading activity. Alternatively, the company may intend distributing the monies received to its members. Depending on the facts, temporarily investing such funds until they can be distributed could count as being an activity undertaken for the purposes of the company's trade, since paying out the profits generated by a trade can count as a trading activity. This would be the case, for example, where the payment of an annual dividend depended on a meeting of the company's shareholders. Whether or not making and holding investments are part of a company's trading activities is a question of fact that can be determined only by reference to all the relevant circumstances.
Preparing to carry on a trade
The trading activities here may include one or more of: developing a business plan for carrying on the trade, acquiring premises, hiring staff, ordering materials and incurring pre-trading expenditure for the purposes of the trade to be carried on.
Acquiring or starting to carry on a trade
Trading activities here include assessing the potential viability of a trade which the company, group or subgroup is considering carrying on and other such activities, even though they are not directly preparatory to the carrying on of the particular trade under consideration. So a company, group or subgroup which has surplus cash that it intends to use to acquire a trade, or to start up one from scratch, which is actively evaluating a number of possible trades may be engaged in trading activities. However, such activities are trading activities only if an acquisition is made, or a new trade is commenced, as soon as is reasonably practicable in the circumstances.
Surplus trading property
The Revenue has been asked how property owned by a company and surplus to its immediate business requirements should be dealt with. Each case would need to be considered in light of the facts. For example, the following do not necessarily indicate a non-trading activity:
* letting part of the trading premises;
* letting properties that are no longer required for the purpose of the trade in question, where the company's objective is to sell those properties;
* subletting property where it would be impractical or uneconomic in terms of the trade to assign or surrender the lease. For example, the benefit derived from disposing of the lease may be outweighed by the reverse premium payable;
* the acquisition of property (whether vacant or already let) where it can be shown that the intention is that it will be brought into use for trading activities.
Shares and other assets held otherwise than as investments
Companies may acquire shares or other assets for reasons other than investment. For example, companies may be paid in shares instead of cash as fees for services rendered or work carried out. Once such shares have been acquired the reasons for retaining them will need to be considered in order to determine whether or not their retention means that a company has non-trading activities. Among other issues, the Revenue needs to know the reasons why the shares were taken in settling a trade debt and whether they can reasonably be turned into cash or otherwise exchanged to meet trading requirements.
A company may have to hold shares in another company as a pre-requisite to trading, for example companies may be expected to own shares in a trade organisation. In such cases, the Revenue would want to know the reasons for holding such a share in order to determine whether the holding was a trading activity.
Where there is doubt, and certainty is required, Revenue Inspectors will respond to requests for their view in accordance with Inland Revenue Code of Practice 10 and this article.
