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So what are the uncertainties that HMRC is seeking to clear up?

The first uncertainty concerns holdings in "joint venture companies".  The SSE legislation contains a special rule for dealing with the activities of certain joint venture companies when considering whether a group is a trading group.  This rule provides for an apportionment of the activities of a "joint venture company" to the group (and a disregard of the relevant shareholding as an investment asset).  A "joint venture company" for these purposes is a company 75% of whose share capital is owned by five or fewer persons.  The group must hold at least 10% of the share capital of the joint venture company for this special rule to apply.

The business brief states that HMRC "is aware that some groups and their advisers take the view that the existence of this rule means that any investment in a joint enterprise that does not fall within the definition of a "joint venture company" will necessarily be treated as a non-trading activity when assessing whether a group is a 'trading group".

In fact, it would be fair to say that almost all groups and their advisers took this view.  HMRC does not.  HMRC's view is that where a group has an interest in a company that does not fall within the definition of a "joint venture company" (for example, because less than 10 per cent of the share capital is held by the group or because the joint venture company's share capital is not held by sufficiently few persons to qualify) then whether that holding represents part of the group's overall trading activities or constitutes a separate investment activity will depend on all the facts.  

The business brief goes on to state that where "the effective management of the joint enterprise is closely integrated with that of the group and it conducts a trade that is similar to or complements that of the wider group, then that would suggest that group's involvement in the enterprise does not represent a separate non-trading activity".

In a case where a group's holding does not qualify because it represents less than 10% of the share capital of the joint venture, it is not immediately obvious why effective management of such a minority holding would be closely integrated with that of the wider group (though of course there are exceptions).  In a case where a joint venture company is not a joint venture company because 75% of its share capital is not held by five or fewer persons then one wonders what the justification for the definition of "joint venture company" was in the first place.

The rules as they were previously understood, although restrictive, were clear and, if a group can organise its minority holdings so that they fall within the provisions of the special rule concerning joint venture companies, the analysis will continue to be clear.  Taxpayers should be wary of relying on this guidance alone given the uncertainties.

The second uncertainty concerns entities without a share capital.  The business brief states that HMRC would not automatically regard a group as having a non-trading investment activity simply because it has an interest in an entity that does not have issued share capital (and therefore cannot form part of a capital gains group). For example, if a trading group establishes operations in a foreign jurisdiction using a wholly owned corporation that does not have share capital (reflecting the local company law) then that venture should still form part of the trading activity of the group in considering whether the overall group is a "trading group".  This clarification is welcome. 

For the full text of the brief (which it is intended will be incorporated into HMRC guidance in due course) please click here.

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