Vodafone, the SSE and ‘tax avoidance’

In his 2002 Budget speech, Gordon Brown introduced the substantial shareholdings exemption (SSE), which had the clear policy objective of enabling UK-based trading groups to restructure and reinvest without being hindered by tax charges.

SSE is, of course, not relevant to the Vodafone sale of its Verizon interests, since that is a disposal by a Netherlands company of a US shareholding. However, Vodafone has confirmed that SSE would have applied to a direct disposal by the UK, and it is therefore nonsense to claim that UK tax has been ‘avoided’ on this deal. This is so self-evident to any tax specialist that it would not be worth commenting on, were it not for the very different view taken by some media commentators – and, notably, Margaret Hodge. In his blog on the BBC News website, Robert Peston said that ‘I have learned that the British taxman will not get a penny, which may prove to be controversial.’ After several exasperated responses on Twitter, he amended his blog to acknowledge the existence of SSE.

Meanwhile, Margaret Hodge said to The Guardian that ‘HMRC must begin an absolutely thorough investigation to make sure that UK taxpayers receive the maximum to which they are entitled’. Some have commented that the investigation should not take long.

I represented the CIOT on the consultation to introduce SSE. The clear policy aim was to facilitate commercial transactions without tax friction, provided the funds remained reinvested in active trading businesses. The broad theory is that profits earned by the subsidiary will have been taxed (and could have been paid out as tax-free dividends) so the gain, representing after-tax profits, should not suffer additional tax on disposal.

Two other points are worth remembering. The first is that individuals benefit from similar policy objectives, in the form of entrepreneur’s relief (albeit at 10%, not nil). The second is that, when the proceeds are paid out to Vodafone shareholders, they will pay tax at that point on any dividend or CGT disposal.

So no tax avoidance, no story? Tax advisers still have some way to go to convince the public – and some MPs.