Hi all. Please please help because my mind has suddenly gone blank. We have done a company reconstruction using the capital reduction route as opposed to the liquidation route. One of the issues is to repay share capital in OLD company (and hence cancel shares) by issuing shares in a NEWCO to the same shareholders and in the same proportion as in the old company. The scheme has been approved by HMRC, I just can't think what journals to put through to reflect this in the accounting records of both companies. I would be most grateful for your assistance.
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So the old company is being wound up and struck off? I assume that must be the case if its share capital is being repaid.
Sounds like you're not using the capital reduction route, but purchase of own shares, or you wouldn't a capital redemption reserve. Anyway, in OLD it's simply reorganising the details of share capital to A and B (assuming no new issues). In HOLD, debit investment with the value of Oldco, credit share capital with nominal value of shares issued, credit share premium with the difference. Then, if the B shares were just repaid, dr share capital + share premium as appropriate, cr cash. If they were purchased by the company, dr share capital, cr CRR with the nominal; dr P & L, cr cash with amount paid.
Now I'm a bit lost - we're creating a third company (non-group)?
At this point, HOLD doesn't have a trade, just an investment in OLD. Is it another share for share into NEWCO?
What was the consideration for the shares in Newco - the shares in HOLD? In which case it's the same as before: dr Investment with the value of HOLD, cr share capital with the nominal value, cr share premium with the difference. But you say NEWCO is non-group - so how are the shares in it paid for?
Sorry, tax isn't my subject, but if a company issues shares in exchange for other shares, then the consideration for the shares issued must be the value of the shares acquired. So you either create them with a nominal value equal to the value of the company acquired, or you have a share premium.
Tax versus accounts
This sounds like a demerger although I am still slightly confused as to the full mechanics of what is going on here.
You may find there are differences between the tax rules and accounts treatment, particularly on the share values.
The TCGA 1992 rules on company reconstructions generally treat the cost of the shares as remaining the same in the shareholders' hands i.e. split the base cost of original OLD shares pro rata between remaining shares in HOLD and Newco
However, for accounts purposes, you cannot treat the new shares as issued for book /nominal values - as TerryD says, in the accounts, you must use market values and credit any difference between share nominal values and net asset market values to share premium. The values of the individual trading assets stay at book values - not sure if this means you end up here with a goodwill figure in the balance sheet of Newco?
Hope this helps. There is a good section on demergers in Bloomsbury's Tax aspects of the Purchase and Sale of a private company's shares.