Ken Moody considers the all-important ‘trade benefit test’ when considering a company purchase of own shares.
A company purchase of own shares (POS) has always seemed to me a bit of an oddity for tax purposes. The consideration paid for the buy-back is a distribution for both company law and income tax purposes, like a dividend. However, if certain tests (at CTA 2010, ss 1033–1042) are met, we pretend that the payment is a capital distribution in respect of shares (within TCGA 1992 s 122).
As many readers will be aware, an HMRC statutory clearance procedure applies, for which further guidance is provided by HMRC’s statement of practice SP2/82.
Back to basics
There are two fundamental conditions A and B, which introduce the relevant legislation. Condition B does not concern us here, while Condition A is the trade benefit test, meaning
