ANO - pre-ordained transactions avoided CGT losses being caught by pre-entry loss rules

In ANO (No1) Limited v HMRC [2019] UKFTT 406 (TC), the First-tier Tribunal (FTT) has held that a pre-ordained series of transactions implemented to avoid the application of Schedule 7A, Taxation of Chargeable Gains Act 1992 (TCGA), to pre-entry losses were effective.

Background

Schedule 7A, TCGA, restricts the use of capital losses accrued by a company before it joins a group, but does not restrict the use of a group's losses against the capital gains of a company which joins the group after the losses have accrued. 

ANO (No1) Limited (ANO) was the head of a loss-making group. It implemented a series of transactions with the intention of enabling the capital gains of companies in a group of companies (the O&H group) whose holding company was O&H Holdings Ltd (O&H), to be offset against the losses of companies in the group of companies whose holding company was headed by ANO (the ANO group).   

O&H was the parent company of a property development group which  disposed of some of its smaller companies, realising a capital gain against which no relief was available. Schedule 7A, TCGA, would prevent the OH group from acquiring a company with capital losses and offsetting those losses against the gains from the disposal of the smaller companies, but it would not prevent the offsetting of losses if a  group with capital losses acquired a group with capital gains. In such a situation, the capital losses of the acquiring group could be offset against the capital gains of the acquired group. 

The ANO group therefore implemented a series of transactions to offset the gains of the companies in the OH group against the ANO group's losses. 

If ANO had acquired the O&H group, it was accepted the transactions would not have been caught by Schedule 7A. However, this was not what had happened. The O&H shareholders were concerned about their group being acquired by a loss group and so the transactions involved the insertion of a new holding company, Style Services Group Limited (SSG), above ANO before SSG acquired the O&H group. SSG was wholly owned by the shareholders of the O&H group.

In order for the transactions to achieve the desired result, paragraph 1(7), Schedule 7A, needed to apply to ensure that the group headed up by SSG was treated the same as the ANO group, otherwise the ANO group losses would be restricted by the pre-entry rules contained in paragraph 1(6), Schedule 7A. 

HMRC issued a closure notice amending ANO's corporation tax return, stating that the losses of the ANO group were pre-entry losses to the SSG group and therefore the gains of the O&H group could not be offset against the losses of the ANO group. ANO appealed.  

FTT decision

The appeal was allowed. 

One of the conditions which has to be satisfied in paragraph 1(7), Schedule 7A, is that immediately after becoming the new principal of the ANO group, SSG 'had assets consisting entirely, or almost entirely, of shares comprised in the issued share capital of [ANO]' (paragraph 1(7)(b)(ii)). 

HMRC had relied on the Ramsay principle, to argue that paragraph 1(7)(b)(ii) was not satisfied because, when looking at the assets of the new holding company, SSG, immediately after it acquired ANO, you have to take into account the pre-ordained later step of the acquisition of the O&H group.

The FTT agreed with ANO. It noted that the language of Schedule 7A did not include any tax avoidance test and was specific enough so as to deny the use of losses in certain identified circumstances only.  

The FTT considered the relevant case law on the meaning of the word 'immediately', and agreed with ANO that it meant 'the very moment after', and concluded that 'immediately after' SSG acquired ANO, SSG had assets consisting almost entirely of the shares in ANO. The FTT was of the view that at least one purpose for the exemption from paragraph 1(6), granted by paragraph 1(7), is for situations where there will be planned and virtually certain further transactions in the shareholders and/or the assets of the new holding company after the acquisition.

The transactions therefore satisfied the conditions in paragraph 1(7), and as such, paragraph 1(6) did not apply and the losses were not pre-entry losses.  

Comment

This decision provides welcome clarity on the operation of paragraphs 1(6) and 1(7), Schedule 7A, TCGA, and when losses of a group which purchases a gain group will be considered pre-entry losses. 

It is also refreshing to note that the FTT was of the view that given the absence of any tax avoidance test in Schedule 7A and its detailed nature, it could not be construed as being suffused with the purpose of restricting the use of losses whenever a taxpayer implements arrangements designed to utilise them. On this occasion, HMRC's attempt to play its 'get out of jail' card and rely on the Ramsay principle was unsuccessful. 

The decision can be viewed here.