Our detailed responses to the questions in the consultation document are set out below.

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1 Corporate Tax Team HM Treasury 1 Horse Guards Road London SW1A 2HQ By SSEConsultation@hmtreasury.gsi.gov.uk 18 August 2016 Dear Sirs, Reform of the Substantial Shareholdings Exemption We are writing on behalf of the British Private Equity and Venture Capital Association ( BVCA ), which is the industry body and public policy advocate for the private equity and venture capital industry in the UK. With a membership of almost 600 firms, the BVCA represents the vast majority of all UK based private equity and venture capital firms, as well as their professional advisers. While our membership is primarily focused on private equity and venture capital, a significant number of other members are active in infrastructure, debt and real estate. These types of alternative funds are a growing source of finance for investment by businesses. We are responding to the consultation issued on 26 May 2016 concerning potential amendments to the Substantial Shareholdings Exemption ( SSE ), which could improve the simplicity, coherence, and international competitiveness of the framework. The SSE rules are currently both more restrictive and more subjective than other competing systems. Therefore, we would welcome amendments in the rules which would broaden the scope of the SSE and provide objective clarity as to when the SSE would and would not apply. Any additional anti-avoidance measures considered necessary to protect HMT s position should also be very objective in application in order to not reintroduce subjectivity in a different form. Having a competitive set of rules which is simple and certain in application would help encourage business establishment and investment in the UK particularly in the Private Equity sector and would represent a positive development which is very much needed in the aftermath of the Brexit referendum vote. We also believe that a competitive set of rules would encourage direct investment into UK investee companies. Our detailed responses to the questions in the consultation document are set out below. If you require any further information or wish to discuss please do not hesitate in contacting me. Yours faithfully, David R. Nicolson Chairman of the BVCA Taxation Committee British Private Equity & Venture Capital Association 5 th Floor, Chancery House, Chancery Lane, London, Wc2A 1QS T +44 (0) F +44 (0) bvca@bvca.co.uk

2 Executive Summary - The use of holding companies amongst private equity ( PE ) investors is a common consideration. The requirement for intermediate holding companies are typically driven by a number of commercial / economic reasons including, but not limited to: (i) bringing various fund partnerships and other co-investors together into a single investing vehicle governed by a recognised corporate law regime; and (ii) simplify banking arrangements. Whilst taxation is not typically a motivating factor for inclusion of intermediate holding company structures, the associated taxation considerations of inclusion of holding companies are important. - From a tax perspective the UK, as a holding company jurisdiction, has many attractive benefits as a territory for holding companies such as the dividend exemption, absence of dividend withholding tax, and one of the largest network of bilateral tax treaties in the world. - However, historically the complexity and subjectivity of the SSE rules above and beyond competing regimes has discouraged the use of UK holding companies. - Typical areas of concern with the existing SSE rules in the context of PE investments relate to the following areas: o Uncertainty and complexity in determining the trading status of investing groups in the context of a PE fund complex. o Rigidity caused by the definition of a substantial shareholding, for example in the case o of staggered disposals. Group definition for SSE purposes where group entities exist without ordinary share capital or partnerships are interposed in group structures. - We would recommend that the UK moves towards a full participation exemption system similar to that available in competing holding jurisdictions such as the Netherlands or Luxembourg. - We consider that this would increase the level of UK holding structures used in PE investments as a result of increased tax certainty. Encouraging the use of UK holding companies through improving access and clarity in the SSE rules should have both fiscal and economic benefits for the UK as a whole, and for the UK PE market (and associated professional advisor population) in particular. - To the extent a comprehensive participation exemption is not available, we have set out areas of potential amendment to the existing rules which may reduce the level of subjectivity, uncertainty and complexity in their application and/or broaden the scope of the SSE s application. However, our strong recommendation would be to adopt a comprehensive participation exemption and we have explained the rationale for this further below. - We would caution against any policy simplifications that are introduced along with new antiavoidance measures which simply reintroduce the initial complexity elsewhere in the rules. Question 1: To what extent does the SSE currently meet its objectives of i) encouraging rational decision making on restructuring and the disposal of trading entities within a group, and ii) reducing incentives to adopt complex offshore holding company structures? The SSE regime has provided some level of comfort in encouraging restructuring and disposal of trading entities via tax neutrality. However, the rigidity of the rules and uncertainty surrounding their application has meant that the regime is considerably different and typically less attractive than competing participation exemption regimes in other jurisdictions. The introduction of the SSE has had some impact in improving incentives to locate holding companies in the UK. However, as noted below, the complexities and limitations around the current regime are such that it cannot compete effectively as a full/comprehensive participation 2

3 exemption. Whilst difficult to be precise, we would expect that a vast majority of offshore holding companies in typical pan-international PE structures are non-uk, such as Luxembourg or the Netherlands. Given the treaty network coverage, the now practically comparable dividend exemption regimes and CFC regimes, and that the UK s corporate laws are in many respects seen as more flexible, there seems to be a real opportunity to encourage structures to be set-up in the UK through a simplified gains participation regime. For example, where a group is looking to establish a holding structure to cover a wide range of activities globally, the lack of a complete participation exemption for capital gains on the sale of shares held in the UK creates a significant incentive to establish offshore holding structures. A significant driver of this is the level of certainty that can be obtained in relation to the tax treatment of any future planned disposals at the time when the investment is made or being considered. Question 2: What complexities arise in practice for domestic or foreign headed groups in applying the SSE? The primary issues which we consider relevant for PE investors are summarised below. More detailed discussion of particular points is provided later in this document where such points are specifically targeted by the consultation questions. Determining trading status The investing and investee conditions restrict the application of the SSE to situations where the investor and investee group are both trading both pre and post disposal. This creates complexity in determining non-trading activities and whether the trading test are met. From a group perspective, activities are typically considered all business related. Therefore distinguishing trading and non-trading activities for SSE is typically a challenging and subjective exercise. This problem is exacerbated when evaluating the investee group, as activities between the investor and investee group (such as intra-group lending) can potentially create non-trading activities at investee level (note this is irrespective of the fact that intra investor group activities are disregarded when assessing the trading status of the investor group, and intra investee group activities are disregarded when assessing the trading status of the investee group). Additionally, it is challenging to determine whether non-trading activities undertaken by a group are substantial. Although HMRC guidance is useful in this respect, there is a fundamental lack of certainty as to what sort of level of non-trading activity would actually lead to a group failing the trading test as a result of substantial non-trading activities. A large number of groups have significant non-trading activities for standard business purposes, e.g. real estate holdings. The current rules can lead to such non-trading activities leading to the SSE not being available on disposals. This position has led to complex restructurings intended to ensure that either the SSE or some other non-uk exemption is available in respect of share disposals. In addition, it is sometimes difficult to assess the trading status in the context of non-uk companies, where relevant responsible persons for those operations are unfamiliar with the trading / investment distinction, with such terminology more common place in a UK tax environment. 3

4 Determining the investor group Many PE investors have master holding structures which own multiple investments in different jurisdictions and in different business sectors. Therefore, identifying and monitoring the trading status of the investor group is inherently challenging and burdensome. This complexity is driven from the technical tests around the group definition and then identifying activities across these multiple investments which may taint, or otherwise, the SSE trading conditions. This, combined with the ambiguity noted above in respect of trading status, has led to PE funds adopting holding structures in regimes with more straight-forward comprehensive participation exemptions or structuring their investments in more complicated ways to help gain certainty around these tests. Determining the investee group There are several issues which regularly arise in determining the investee group for SSE purposes in the context of PE investments: i. It is not uncommon in many PE backed structures to have various stakeholders (e.g. PE fund, co-investors, vendors, management, finance providers) investing at different levels in the structure in different instruments for commercial reasons (e.g. shareholder debt, other subordinated debt, convertible debt, preference shares, different classes of ordinary shares). This can create complexity in identifying the investee group for the purposes of identifying underlying trading activities that are taken into account when considering the overall trading status of the investee company. For example, the different types of investors and instruments can break the SSE grouping at different levels, which means the tracing through to the underlying trading activities does not flow up to the investee company. The Qualifying Joint Venture rules (Paragraph 24 Schedule 7AC TCGA 1992) are quite narrow in their construction and often cause uncertainty in their application particularly where the co-investors are funds or other collective investment vehicles. The inability to trace through Joint Ventures ( JVs") of JVs also creates uncertainty. ii. Many PE backed groups are multi-jurisdictional and comprise entities which do not have ordinary share capital or have other atypical structural features. Such entities can potentially break the SSE group, resulting in a misrepresentative analysis of the group s trading activities, even though fundamentally the group s operations may be wholly trading in nature. Failing the SSE due to these technicalities around the group tests seems inconsistent with the policy behind the exemption s application and the safe guards to protect against avoidance situations. Timing of tests The need to satisfy the trading tests immediately after the disposal event also creates uncertainty. On an exit by a PE fund it is not uncommon for the holding structure to remain in place (e.g. where the structure holds other investments) or because for commercial reasons there is a need to retain an interest in the investee company (e.g. because there is a sell down rather than full exit to introduce new capital providers). In the situation of an IPO there may be a requirement to retain a minority interest in the listed vehicle for a period of time sometimes years. Specific areas of concern: i. Last trading subsidiary test (s3(3)): whilst this provides for the investor immediately afterwards test to be satisfied in certain situations where the main exemption tests in this 4

5 ii. iii. regard are failed, this is very narrow and does not naturally fit a situation where there is a multiple tiered holding structure that may need to be kept in place after exit. Minority interests: the group tests, narrow Qualifying JV rules, and substantial shareholding condition do not lend themselves to minority holdings that come about by virtue of perfectly commercial situations. It seems odd, and against the policy behind the rules, that on a staggered disposal the SSE tests would not apply where they would on a full exit. The narrowness of the rules make it difficult to assess whether SSE might apply on a future disposal, at the time the investment is made. In particular, we have seen examples where the SSE status of a group changes through time. For example, due to a part disposal of a business the trading status of the remaining group can be tainted either because (a) the remaining group has the wrong composition of trading activities itself; or (b) sales consideration is sufficiently large that interest earnt on this money skews the trading income test. Question 3: In what additional situations do you consider the SSE should be available for substantial share disposals and how does this compare to the availability of equivalent exemptions in overseas jurisdictions? We would welcome a removal of the trading status test for both the investee and investing groups. It is not clear what circumstances of avoidance the Government is concerned about in retaining those tests given other general and targeted anti-avoidance rules that now target schemes involving the enveloping of assets. This element of the rules injects significant subjectivity and uncertainty into investment decisions. We consider the risk associated with this uncertainty to be one of the primary weaknesses in the SSE rules in comparison to competing regimes. We comment below on participation exemption regimes in Luxembourg, The Netherlands and Ireland. Holding companies in these jurisdictions are commonly used in PE investment structures in part due to the clarity and breadth of the participation exemptions available which we consider to be superior to the SSE regime. Ireland As noted above, our very strong preference would be for a movement towards a comprehensive participation exemption regime. However if this is not practicable consideration could be given to the Irish shareholding exemption regime, which provides for a marginally simplified regime that broadly requires: - The investor company having a minimum shareholding in the investee company of at least 5% for a continuous 12 months in a three year period prior to the disposal. This three year look back without the immediately after test helps staggered disposals. - The investee company carrying on a trade, or the business of the investor company, its investee company and their 5% investee companies, taken together as a whole must consist wholly or mainly of the carrying on of trade or trades. This is a much more relaxed and straight-forward look through test. - The investee company, at the time of the disposal, being resident in an EU member state, a territory with which Ireland has a double tax treaty in force or a territory with which Ireland has double tax treaty which has yet to come into force. 5

6 There are conditions where this exemption does not apply. The most significant condition where this exemption does not apply is where the shares derive the greater part of their value from Irish land. Whilst the exemption is broadly similar to the UK regime, the investor and investee company conditions test enables more groups to utilise the exemption. Further, the trading test is lower. The requirement is that the group is wholly or mainly carrying on a trade, which broadly is interpreted as having trading activity making up at least 50% of the group. Therefore, non-trading activity of up to 50% would not adversely impact the applicability of the regime. In most multi-asset institutional funds, the non-trading activity is unlikely to be 50% of the group. In summary, whilst the Irish exemption regime has a number of features that compare favourably to the UK, in the context of PE fund investments it still does not provide the full flexibility which would be desirable. As such, we provide below a summary of equivalent regimes in Netherlands and Luxembourg. Netherlands The Dutch participation exemption regime broadly applies where a 5% minimum shareholding is held prior to the disposal and either a motive test or a reasonable tax or asset test is satisfied. In general, the motive test is met if the shares in the subsidiary are not merely held for the returns that can be expected from typical asset management. However, even if failed, the participation exemption can apply if a reasonable tax or asset test is met. The reasonable tax test is applied in relation to the entity being disposed of and is generally met where the investee company is subject to a tax rate of 10% on the comparable Dutch profits. The asset test is satisfied where more than half of the assets of the entity being disposed of are used in the course of the business of the company. Luxembourg The Luxembourg participation exemption applies where shares in the company being disposed of have been held for 12 months, and represent either at least 10% of the capital of the company or a cost of 6m. The company being disposed of must also be fully subject to tax or tax resident in an EU member state covered by the EU Parent-Subsidiary Directive. The regime applies to both passive and active companies and so shareholdings in real estate companies are typically exempt. The Luxembourg regime is widely made use of in the non-civ funds sector. Both the Luxembourg and Dutch regimes are very straight-forward, simple to administer, and provide certainty on an exit event. The low shareholding thresholds tend to eliminate the concerns around staggered disposals and the anti-avoidance checks do not lead to significant technical uncertainty compared to the SSE equivalents. 6

7 Question 4: To what extent could reform of the SSE impact on the likelihood of groups locating holding companies in the UK, and what are the potential benefits from an economic and fiscal perspective? We would expect a relaxation and/or clarification of the SSE rules to lead to a material increase in the use of UK holding companies in PE investment structures. This should increase UK tax revenues in respect of profits required to be retained in the UK in respect of financing/holding activities. Additionally we would expect a material increase in demand for UK employees and professional services which should indirectly increase UK tax revenues and be beneficial to the UK economy in general. Further, we would note that many PE deal staff are located in the UK and use UK fund vehicles. The ability to complete the holding structure within the UK would significantly strengthen the UK s position as a key jurisdiction for the global PE industry. Question 5: To what extent do you agree with the parameters set out for a comprehensive exemption? We would very much welcome a comprehensive exemption on gains arising from share disposals in the UK subject to the parameters outlined at point 4.8 of the consultation document, to the extent this resulted in an a broadening and simplification of the rules. However, we would suggest that HMT considers the inclusion of the outlined parameters in the new rules in light of items that are already covered by existing anti-avoidance rules as doing so may introduce additional complexity and uncertainty and continue to make SSE uncompetitive compared to its peers. Question 6: To what extent do you consider that a comprehensive exemption for gains on substantial share disposals, that imposes fewer conditions on the nature of the companies involved in the transaction, could address the concerns raised in the previous chapter? Relaxing and simplifying the rules in ways to address the concerns and complexities noted above should increase the attractiveness of the UK as a location for situating holding companies in PE investment structures. While we understand the concerns raised in the consultation and the design parameters intended to underpin the rules we would recommend care is taken in considering the introduction of new anti-avoidance rules. Any proposed changes should be considered holistically in order to ensure that complexity and constraints removed from the SSE rules are not simply reintroduced elsewhere in the tax system. See further comments below. Question 7: To what extent could the avoidance risks, including enveloping risks, inherent in a comprehensive exemption be dealt with through anti-abuse provisions? There is a balance between the perceived competitiveness of the SSE regime and the level of complexity and uncertainty in the rules. The danger with introducing new anti-avoidance rules is that they create uncertainty of application and reduce the level of perceived competitiveness. 7

8 We would suggest that HMT should carefully consider the amount of tax at stake when introducing new anti-avoidance rules. To the extent additional rules are considered necessary the circumstances in which they apply should be clearly defined and also that the policy behind the rules is also clearly articulated to aide with interpretation. We would also recommend that existing anti-avoidance rules around enveloping are considered both in terms of whether they already cover perceived areas of concern or whether changes to those rules instead of complicating the SSE rules could better serve the specific areas targeted. Question 8: Do you consider that the benefits of a comprehensive exemption would be materially reduced if a trading condition was retained at the investee level? Please provide any relevant examples to support this. We consider maintaining the trading condition at the investee level would materially weaken any revisions to the rules in comparison to competing regimes. For example, real estate holdings do not currently qualify for the SSE and as such non-uk jurisdictions with broader participation exemption regimes are typically preferable as locations for holding companies. As noted above, the group definitions and Qualifying JV tests necessary to establish trading status of investees also throw up a number of uncertainties and ambiguities. Consequently there is currently uncertainty in the application of the SSE rules in terms of determining trading status. As a result, when investments are being considered, non-uk jurisdictions are commonly chosen to establish holding platforms as there is often certainty at the time of the investment that a capital gains exemption will typically be available at exit regardless of the profile of the investment at that time. Question 9: Are there alternative tests at the investee level that would still provide sufficient protection against abuse? We understand HMT s concern that removing the investee trading status test and/or broadening the definition of trading activates to a business activities test could potentially increase the risk of the enveloping of assets to benefit from the SSE. We believe there are overwhelming benefits associated with the simplification and broadening of the SSE regime. However, if such protective measures were considered necessary, this could be achieved by the inclusion of clear and specific anti-avoidance rules such as the following: - Identification of specific bad asset classes where it was clear from outset that SSE would not be available. - Identification of bad transactions where a particular motive or intention would deny the availability of SSE. Question 10: What benefits would there be in focusing the investing and investee conditions on the companies involved in the transaction? How could such a change be protected from abuse? The primary difficulty with the current SSE rules is the interpretation and application of the trading tests at investing and investee level. While focussing on the legal entities which are party to any transaction would likely reduce the uncertainty on this point, we would not consider this to be an 8

9 effective method given that such an approach may lead to significant distortions where the entities party to the transaction do not mirror the broader profile of the investor and/or investee groups. We do not consider that the investor test should be maintained in any form in order for the SSE rules to be competitive. If an activity requirement is to be maintained, we consider that it should apply only to the investee, and that such requirement should be changed to a more broad and defined business test, coupled with a removal of the structural rules around groupings and Qualifying JVs Question 11: Are there changes that could be made to the definition of qualifying activity that would help to better deliver the SSE s policy objectives while maintaining sufficient protection against abuse? Our preference would be to move towards a comprehensive exemption. However, if this is not considered practicable fiscally or in terms of policy design, our preference would be option 3 outlined in the consultation, which is the removal of investor activity requirements plus an expansion of investee requirements to encompass business activities. A clear example of the likely effect of this change would be that gains arising from wholly owned real estate companies disposed of by a UK holding platform would be exempt from UK tax. We consider that the UK already has an established and robust CFC anti-avoidance regime with which to protect its domestic tax base in this scenario. In terms of defining the scope of an expanded activities requirement, our preferred option would be an extension to encompass all business activities. Business in this context is a widely recognised concept in UK tax law and as such there should be a relatively high level of clarity around this point. We would consider it preferable that this is not restricted to particular classes of business, but if this is considered necessary a comprehensive list of either qualifying on non-qualifying business activities should be made available and kept under review. Additionally, in the absence of a comprehensive exemption, we would welcome a relaxation of the non-trading threshold requirement in the current rules. For example, a wholly or mainly test could be used which mirrors the rules in Ireland. This would enable many multi-asset institutional funds to qualify on the basis that non-trading/non-qualifying activities are unlikely to represent as much as 50% of the group, whereas their liquid asset requirements means that they are likely to fail a test based on the current indicative 20% or less of non-qualifying activities. Question 12: In what situations does the definition of a substantial shareholding prevent large and long-term investments benefitting from the SSE? What is the case for these situations being accommodated? In certain asset classes such as infrastructure investment, a shareholding that would not be considered substantial under the SSE rules may represent a significant monetary value. In many cases such investments are likely to be intended to be long term and do not represent trading activity. Such investments not falling within the SSE does not appear to align with the broader policy objectives. We would therefore recommend that a monetary investment floor could be introduced for investments not currently considered substantial. 9

10 Question 13: What other substantive reforms could be considered to make the SSE simpler, more coherent and more internationally competitive? In order to improve the coherence and competitiveness of the regime with other areas of UK tax law we would welcome a change to the de-grouping charge rules for intangible fixed assets ( IFA ) to align with the s179 TCGA position. There is currently an asymmetry whereby de-grouping charges arising from IFA transfers are not sheltered by the SSE as per the s179 position for chargeable assets. This mismatch does not appear to fit with the broader policy direction. Question 14: Is there a case for reform of the SSE to be targeted towards the funds sector? How could SSE-qualifying funds be defined for this purpose? Ongoing tax policy change globally is leading to disruption in the relative attractiveness of various tax regimes for PE investment holding structures. Commonly, funds with UK operational substance have not chosen to use the UK as a holding company location due to uncertainty over the application of the SSE rules. It therefore appears an opportune moment to seek to reduce this uncertainty and improve the competitiveness of the regime, as this could result in significant onshoring of holding structures due to the ongoing policy shifts. As discussed earlier in this response, we would anticipate such activity to have beneficial fiscal and economic consequences for the UK. We do not consider a move towards SSE-qualifying funds to be a preferable strategy as this would likely introduce additional complexity into the rules. In the first instance we would recommend that the SSE rules are broadened and simplified such that certainty as to whether the regime will apply on a future disposal or part disposal at the time an investment is being considered or made. Question 15: To what extent does the SSE s focus on ordinary share capital in determining the members of a group create complexity or lead to results that are inconsistent with the policy objective? The SSE group framework is based on a 51% economic relationship between members which is defined by reference to ownership of ordinary share capital. This can create distortions in the application of the policy as certain types of entities can lead to an SSE group being broken. An example of this is a US Limited Liability Corporation (LLC) that is constituted in such a way that its capital, is not regarded as issued share capital by HMRC. In situations where an LLC exists in a group the trading activities carried on either by the LLC or its own subsidiaries would, based on the group definition, be disregarded for the purposes of determining the trading status of the whole group. Therefore the trading status of the whole group may be distorted. Another potential technical issue arises in respect of partnerships. Partners in a partnership typically own an interest in the partnership's assets rather than the assets themselves. The consultation document states that shareholdings held through partnerships within an SSE group will be disregarded as a result. We consider that the lack of clarity around the impact of partnerships and entities without share capital should be resolved in order to improve the level of clarity in the SSE rules. This could be 10

11 achieved by revising the rules establishing grouping for SSE purposes to be based on economic interest only and treating partnerships interposed in groups as transparent. Question 16: In what situations could delays in the sale of a residual shareholding result in the loss of SSE treatment, and how should this be rectified? In certain circumstances, shares are disposed of in a staggered manner such that the shareholding falls below 10% over a year before the final disposal. Alternatively, an investment may fall below 10% because of an additional issue of shares to an outside investor, in circumstances where there is at that time no intention to sell. Additionally, the investor trading status test can be failed where the last trading subsidiary of a group is disposed of regardless of changes in overall shareholding. There seems no policy reason why the SSE should be denied in such circumstances when the disposal does eventually take place. We would therefore recommend that the substantial shareholding requirement is reduced and /or qualified as a minimum monetary about and the window in which the substantial shareholding can be established is increased from 2 years to 6 years. Question 17: In what situations can the post-sale trading requirement create issues that are not accommodated by the existing winding-up provisions? There are two main examples of the post-sale trading requirement causing difficulties in a windingup situation which do not appear to fit within the intention of the policy. Where a holding company sells its last or only trading subsidiary the main exemption is not available because the investor company fails the post-sale trading condition. However, where the holding company is wound up as soon as is reasonably practicable after the disposal, HMRC has agreed in non-statutory clearance applications that the subsidiary exemption is available. We would suggest that the wording of the legislation is clarified to confirm SSE should apply in these scenarios. This would align with the HMRC position indicated in numerous non-statutory clearances. Where an investee company is being wound up it generally fails the post-sale trading requirement and so the subsidiary exemption has to be relied upon. However, the subsidiary exemption is only available in such situations for liquidation distributions that occur within 2 years of the investee company ceasing to trade. Where the winding-up takes more than 2 years liquidation distributions may arise after the 2 year time limit has expired, for which the SSE would not be available. We would suggest that the wording of the legislation is revised to provide that the SSE is available in situations where the investee company is wound up as soon as is practicable (i.e. in accordance with legal and regulatory considerations). Additionally, as noted previously, issues may arise in respect of staggered disposals and investment structures with enduring use or multiple tiers of holding companies. Removing the investor test would address the main issues in these circumstances and the two examples noted immediately above. 11

12 Question 18: Are there other areas of the SSE legislation that you consider to be ambiguous or producing outcomes that are inconsistent with the policy intention? Intra-group lending In assessing the investee group trading status, intra-group lending may create complication. Surplus funds may arise within companies that are lent intra-group to meet funding requirements in other companies rather than distributed. Such lending may be regarded as a non-trading activity and may therefore worsen the SSE position of the Group. It would appear to be a more reasonable approach to disregard such lending in determining trading status for SSE purpose such that it represents neither a trading nor a non-trading activity. We understand HMRC has taken this position in the past but would welcome clarification. JVs or JVs In determining whether a group is trading the SSE rules allow a proportion of the activities of any JV entities in which it has an interest to be included in the analysis in certain circumstances. However, if such a JV entity also has an interest in a further JV entity, the rules may not permit the activities of the second JV to be taken into account when considering the broader group. Therefore, although the second JV may also be a trading company, its activities cannot be taken into account in determining whether the group qualifies as a trading group. Furthermore, the investment in the second JV is potentially treated as a non-trading investment which will impact negatively on the SSE analysis. This result does not seem to be the broader intention of the policy. As such, we would welcome revisions to negate such situations or clarification as to the purpose behind the existing rules. Joint ventures that are part of the same group In circumstances where two group members are owners in a JV and each member owns precisely 50%, either of the group members owning a proportion of the JV and the group as a whole will not be able to include the activities of the JV entity in determining trading status. Subsequently, HMRC guidance has been updated to state that, in such a situation the normal intragroup rules apply such that all the activities of the JV are taken into account rather than only a proportion of the activities. We would welcome a revision of the rules themselves in order to avoid any future uncertainty on this point. Paragraph 3 and section 13 attribution Where non-resident company gains are attributed under s13 TCGA, it appears clear that the SSE will be available to exempt such gains if the qualifying criteria are met. However, the same rules appear infer a requirement that the disposing company is UK tax resident. The deeming provision at s13 (11A) does not appear comprehensive in reapplying SSE in such situations. We would welcome a revision to the rules in order to ensure that s13 (11A) explicitly applies to gains arising in such circumstances where the SSE applies. 12

13 Deferred consideration If the consideration for a disposal of shares includes an earn-out / deferred consideration then the eventual realisation of that earn-out will not qualify for SSE. Under the Marren v Ingles principle, an earn-out is treated, when calculating the consideration for the disposal of the shares, as a standalone right. Its estimated value at the time of the disposal is added to any cash consideration received, and this total consideration is potentially eligible for SSE (subject to satisfaction of the usual SSE qualifying tests). However, the subsequent realisation of the earn-out is treated as a disposal of the right, and a gain or loss can arise at that point, depending on whether the actual amount received under the earnout is more or less than its estimated amount at the time of disposal of the shares. That subsequent gain or loss is a gain or loss on the disposal of a right, not on the disposal of shares, and so cannot in principle qualify for SSE. It is not clear to us why, as a matter of policy, there is this disparity between the tax treatment of the share disposal and subsequent earn-out consideration received. 13