Mark McLaughlin highlights HMRC’s apparently stricter application of the rules regarding company purchases of own shares by multiple completion.
The purchase by a company of its own shares (e.g., from a retiring or dissenting individual shareholder) is possible where company law requirements are met.
Tax treatment
For tax purposes, any payment in excess of the capital originally subscribed for the shares is normally a taxable income distribution, similar to a dividend.
However, there is a potential exception from this income tax treatment for unquoted trading companies. If certain conditions are satisfied, the individual vendor is normally treated as receiving a capital payment instead. Capital gains tax (CGT) treatment will often be more tax-efficient for the shareholder than an income distribution.
Buy now, pay later?
If the company has cashflow difficulties, it might be tempting to arrange the purchase of own shares such that all the shares are purchased immediately, with the company paying the vendor by periodic instalments. However, for a purchase of own shares to be valid under company law, the company must make full payment at the time of purchase.
If the company and shareholder agreed that the shares be bought back immediately, but that the shareholder lends part of the sale proceeds back to the company immediately after the purchase, this would pass the ‘substantial reduction’ test for CGT treatment, but there may be a problem with the ‘no continuing connection’ test if the loan back results in the vendor possessing an interest in the company of more than 30% of the combined issued share and loan capital.
In April 1989, the ICAEW issued Technical Release number 745 (TR745), following discussions with the Inland Revenue on various problems and issues arising from the company’s purchase of its own shares. The Revenue stated that as beneficial ownership of the shares passes at the date of contract, there is a disposal by the vendor for CGT purposes at that time, even though payments for the shares are made at later dates.
The Revenue’s comments In TR745 suggest that the company may enter into a single, unconditional contract to purchase the vendor’s shares, with different completion dates in respect of different blocks of shares within a single contract. The ‘substantial reduction’ test would only need to be considered at the date of contract, not on each completion. To pass the 30% ‘no continuing connection’ test, the vendor must lose beneficial ownership of the shares at the contract date. However, the Revenue’s comments in TR745 indicate that beneficial ownership of the shares is considered to pass at the date of the contract.
Moving the goalposts?
However, HMRC published guidance in February 2022 to ‘clarify’ its position regarding purchases of own shares and multiple completion contracts.
On the ‘no continuing connection’ test and the 30% threshold, HMRC considers that the word ‘possesses’ in the tax legislation refers to legal (as opposed to beneficial) ownership. Consequently, if the vendor remains a legal owner of ‘non-completed’ shares that exceeds the 30% limit, they will remain connected with the company, so they would not qualify for CGT treatment.
Practical tip
Disputes with HMRC about ownership and possession might be avoided if the phasing of the various share purchase completions can be structured such that the ‘substantial reduction’ and ‘no continuing connection’ tests are satisfied after completion in respect of the first phase.
