M Group Holdings Limited v The Commissioners of HMRC

For the substantial shareholding exemption, a group under paragraph 15A of Schedule 7AC to the Taxation of Chargeable Gains Act 1992 must contain more than one company. A stand-alone company is not a group of one.

Paragraph 15A(3) extends the deemed ownership period only for periods when the transferred asset was used for a trade by a company that was then a member of the group. The provision is directed to transfers within a corporate group, not to economically equivalent stand-alone structures. A statutory time limit is not unjust or absurd merely because a taxpayer misses it by a short period. Words will be read into legislation only where the stringent conditions for correcting an obvious drafting error are met.

The appellant transferred its trade and assets to a wholly owned subsidiary on 30 September 2015 and sold the subsidiary on 27 May 2016. It claimed that the gain was exempt under the substantial shareholding exemption.

The appellant accepted that it had held the subsidiary for only 11 months. It argued that paragraph 15A extended the deemed holding period to an earlier period when it had been a stand-alone company, either because a stand-alone company could constitute a group or because paragraph 15A(3) imported only the asset-use requirement. It also argued that words should be read into paragraph 15A(2)(d). The FTT dismissed the appeal. The Upper Tribunal considered the meaning and purpose of section 170 and paragraphs 15A and 26 of Schedule 7AC.

1. Appeal dismissed. The appellant was not a member of a group during the contested period.

2. The ordinary and natural meaning of “group”, read with section 170 and paragraph 26, requires more than one company. Section 170(3) describes a group formed by a principal company and its subsidiaries. The statutory context distinguishes a group of companies from a stand-alone company. The reference to a “holding company” and the separate definitions of “trading company” and “trading group” reinforce that conclusion.

3. Paragraph 15A(3) refers to all the elements of paragraph 15A(2)(d). The deemed holding period therefore requires the asset to have been used for the purposes of a trade by a company that was, at the time of use, a member of the relevant group. The temporal requirement cannot be separated from the use requirement.

4. The purpose of paragraph 15A, confirmed by its heading and the relevant explanatory and consultation materials, is to extend the exemption for transactions within groups where trading assets have been transferred within the group before disposal. It does not provide a general relief for stand-alone companies or depend on continuity of economic ownership alone.

5. The resulting distinction between a stand-alone company and a company with a subsidiary was not absurd or unjust. Bright-line holding-period requirements are common in tax legislation. The Tribunal could not adopt a wider construction merely because the taxpayer would have qualified had the sale occurred later.

6. The stringent conditions for correcting an obvious drafting error were not met. Parliament deliberately used the concept of group membership, and the proposed additional words would extend the relief beyond the statutory purpose and could produce unintended results.

The appeal failed on all three grounds.

• Upper Tribunal (Tax and Chancery Chamber): appeal dismissed on all grounds.
• First-tier Tribunal (Tax Chamber): the appellant’s appeal against HMRC’s refusal of substantial shareholding exemption was dismissed in [2021] UKFTT 69 (TC).