TiS: Subsidiary reserves and future profits and time limits clarified

The case involved individual shareholders who received a repayment of share capital following a bonus issue of shares. HMRC argued this gave rise to an Income Tax advantage within the scope of the TiS rules.

A central aspect of the dispute was the level of distributable reserves that were available at the relevant time, as the group structure included a wholly owned subsidiary with distributable reserves. The appellants argued that only the parent company’s own reserves were relevant and that subsidiary reserves should be disregarded (the transaction took place before the 2016 legislative changes that clarified this position).

There was also disagreement over whether future profits could be taken into account in assessing the availability of distributable reserves. The repayment of capital was originally satisfied by a debt that was subsequently repaid using cash received, primarily in the form of dividends from the subsidiary, after the repayment of capital.

The tribunal concluded that the distributable reserves of a wholly owned subsidiary could be regarded as assets available to the parent company for these purposes.

It rejected the argument that only the parent company’s own reserves were relevant and instead focused on whether, in practice, the subsidiary’s reserves could be made available to the parent. As the subsidiary was wholly owned and there were no legal or commercial impediments to the payment of dividends, the subsidiary’s distributable reserves were treated as accessible to the parent.

While this point has since been clarified beyond doubt by legislative changes, the tribunal’s approach is notable as it reinforces the importance of considering commercial reality, rather than adopting a narrow view of corporate groups.

The tribunal also addressed whether future profits could be taken into account when assessing the level of distributable reserves available.

The FTT concluded that it is not appropriate to consider debt consideration without reference to the mechanism by which the debt may be discharged. Where future profits are reasonably expected to arise and would then be available for distribution, they can form part of the overall reserves analysis. The tribunal was clear, however, that this requires a realistic and evidencebased assessment, rather than reliance on speculative projections.

This aspect of the decision reflects a more commercial approach to reserves, particularly in situations where profits accrue over time or where transactions span accounting periods. This highlights the need to think more broadly about timelines and future receipts when considering the applicability of the TiS rules.

Finally, the tribunal considered the relevant time limit for HMRC to make an assessment under the transactions in securities provisions.

HMRC argued that a six-year time limit applied, as this is the timeline specifically set out in the TiS legislation. The tribunal disagreed and held that the normal four-year time limit was applicable as the statutory conditions required to extend the assessment period were not satisfied and that section 698 (ITA 2007) did not, of itself, justify a longer window.

It should be noted that this transaction took place before the 2016 legislative changes to the TiS rules. For transactions occurring on or after 6 April 2016, the legislation now provides that an assessment can be made ‘at any time’, regardless of any time limit that would otherwise apply. This new wording in the legislation was not considered by the tribunal in the Oscroft case but does now appear to override the normal four-year time limit. HMRC would need to have opened the enquiry within the required six year period.

Oscroft highlights three points of ongoing relevance:

• A reminder that subsidiary reserves may be treated as available to a parent where they can realistically be accessed – even in transactions before the legislative changes;
• Future profits can be relevant when assessing distributable reserves, provided expectations are wellfounded; and
• Due to a change in the rules in 2016, HMRC can now issue an assessment under the TiS rules at any time, provided an enquiry was opened within six years.

Together, these points underline the value of a factdriven and commercially grounded approach when analysing distributable reserves and legacy transactions.

For further information please contact:

• Hannah Barraclough
• Nathan Potton