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Share Premium account reduction

We are working with a firm of Solicitors who are advising our client on a Share Premium account reduction in order to create distributable reserves.  In effect, a £100,000 share premium account is to be written down under new CA rules and credited directly to reserves.  The client will then declare a pre year end dividend using those reserves.

My questions are:

1.  Are there any general observations or warnings to be considered.

2.  Is this tax neutral, ie. no effect for tax as direct to reserves.

3.  What is the accounting entry / disclosure and is there any online guidance.  I'm led to believe that the journal is simply debit share premium and credit direct to balance sheet reserves.

All help, guidance very much appreciated.

Thank you

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By johnt27
22nd Mar 2012 13:28

Capital reduction

I'm intrigued about your capital reduction as there is no mention of share capital. Under s641 of the Companies Act 2006, which is where the new powers to reduce capital come from, a company can reduce it's share capital and related reserves without going down the formal routes required under CA85.

1. So my first observation would be - is the share premium and share capital being reduced or not?

In terms of procedure, the directors need to pass a special resolution and make a solvency statement to state that the company can pay it's debts now and in the foreseeable future. If the company should fail to meet this commitment then the directors are personally liable.

Any capital reduction does impact on the shareholders in terms of CGT/IHT planning due to increased base costs (see below) and the ability to, for example, gift shares to children.

2. For tax there is no effect for the company or shareholders of a capital reduction as all base costs etc are transferred to the shareholders remaining holdings.

3. Your accounting treatment is correct - this is an adjustment in reserves and you will need to disclose in the financial statements that the directors passed a special resolution to reduce capital.

Hope this helps.

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By johnt27
22nd Mar 2012 13:30

I forgot to add - make sure you check the company's M&A's as some don't allow capital reductions under the new procedures. Hopefully the solicitors might have checked this!

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By ilyas11
06th Jun 2013 16:23

corporation tax or tax credit

Is there are any implication in terms of corporation tax, as company is using this reserve to pay out dividends ?, which will have tax credit attached to it ?

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