Substantial Shareholdings Exemption: The £10 million Tax Quirk

Substantial Shareholdings Exemption law technicalities cost one business £10 million on tax. How one simple oversight cost a business £10 million in tax, and how to learn from their mistake.

Substantial Shareholdings Exemption
Substantial Shareholdings Exemption

The Case

Earlier this year, the company M Group was forced to pay £10 million in taxes. They were deemed to have wrongfully claimed Substantial Shareholdings Exemption. 

This result is a fantastic case study that highlights just how technical tax law is and demonstrates the little-known significance of dormant subsidiaries.  

M Group traded under the name ‘Medinet.’ The business was extremely successful and attracted interest from potential buyers, but these buyers were put-off by unresolved tax-enquiries.  

To resolve this M Group set up a subsidiary, ‘Newco’ and transferred Medinet’s trades and assets into this new business. They then sold Newco for around £55 million and claimed that the gains were non-taxable under Substantial Shareholdings Exemption. 

HMRC rejected the claim and M Group became liable for £10 million. 

Deciding the Ruling

The ruling was decided principally by one small piece of tax law. 

Substantial Shareholdings Exemption offers tax relief where one company sells a subsidiary that they own significant shares in (typically at least 10% of shares). However, this relief only takes effect when a group owns the shares for at least 12 months.

M Group cited a rule that specified that if one company (Newco) receives an asset from another group company (Medinet) and the asset was continually used for trade, the asset has legally been owned by the former company for the combined period of ownership. 

M Group argued Newco legally owned the trade and assets received from Medinet for over 12 months. 

HMRC disagreed, arguing the Substantial Shareholdings Exemption claim was invalid because the group itself hadn’t existed for 12 months. Newco only existed for 11 months. Therefore, the group only existed for 11 months. Thus, the special rule didn’t apply. 

The tribunal agreed with HMRC’s interpretation of the law. They ruled against M Group, solidifying a previously untested aspect of SSE rules. 

If M Group waited one more month to sell or had set up a dormant subsidiary, they could have saved £10 million. 

Substantial Shareholdings Exemption and Dormant Subsidiaries

This ruling illustrates the importance of an overlooked means of efficient tax planning: dormant subsidiaries.  

If there’s a chance you may sell your business soon, you could benefit greatly by setting up a dormant subsidiary.  

This means setting up another business and incorporating it as part of a group that includes your active business.  

If you choose to hive-down and sell, you can transfer your trades and assets to the dormant subsidiary. Then you can claim Substantial Shareholdings Exemption and save potentially thousands in tax. A subsidiary can sit until needed without risking a heavy tax burden. 

The M Group case demonstrates how even large businesses can make costly oversights and the vital importance of expert advice. Businesses of all sizes can learn from the ruling.  

Book a consultation today to find out how we can help you avoid those hard-to-spot tax pitfalls. Simply give us a call at 01772 788200 to contact us.

Kind regards Ilyas