Ken Moody looks at the interaction between a company purchase of own shares and the employment-related securities rules, which may have unexpected and unwelcome results.
A gain arising on a company purchase of own shares (PoS) is taxed either as a dividend or a capital gain. So, what have the employment-related securities rules got to do with it?
Company purchase of own shares
A private company may purchase its own shares from a shareholder (under CA 2006, s 690), provided it has the reserves to do so, on completion of the relevant formalities. In that sense, it is similar to a payment of a dividend, and indeed the tax position is that the payment for the shares is treated as an income tax distribution, unless capital treatment (under CTA 2010, ss 1033-1043) is available.
The latter tax treatment will usually be preferable, of course, because if capital gains tax entrepreneurs’ relief is available, the gain is taxable only at 10%.
Employment-related securities
However, if the shareholder is or has been an employee or director, the shares will almost invariably be employment-related securities (ERS). Moreover, private company shares will usually fall within the ‘restricted securities’ rules within the ERS regime (ITEPA 2003, Pt 7, Ch 2), though this is perhaps a matter for debate where the only restriction is the directors’ right to refuse to register a transfer of shares (article 26(5) of the CA 2006 model articles for a private company).
The disposal of restricted securities for consideration is a ‘reportable event’ (under ITEPA 2003, s 427(3)(c)), which must be notified using the online ERS service. This does not necessarily mean that any tax is payable, though this depends upon a complex formula which is designed to tax any value which passes to the employee when restrictions are lifted or expire. However, for the purposes of this article, suffice it to say that if the only restrictions are within the company’s Articles of Association (i.e. are not personal to the employee) and the same restrictions apply both on acquisition and disposal, such as transfer restrictions, the result of the formula will be zero amount chargeable.
