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Company purchase of own shares

How do I account for the return of share capital to a limited company?

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I have a Ltd company client which is run by 2 directors who are equal shareholders in the business at 50% each of the share capital of £1,000

Director A has agreed that Director B’s shares can be returned to the company for the sum of £120,000 which carries stamp duty of £600.

The purchase price will be paid to Director B in 5 equal instalments of £24k each on 31Jul20, 31Jul21, 31Jul22, 31Jul23 & 31Jul24. The stamp duty has been paid on the transfer date of 31Jul20.

They have taken legal advice and determined that this is the agreement they both want, and form SH03 has been filed at Companies House registering the purchase by the company of 500 of its own shares for a transfer price of £120,000. The ltd company is making all 5 payments.

Please can someone help me out with the bookkeeping entries?

  1. Stamp Duty – assumed that this can be treated as Professional fees: Dr Cost, Cr Bank £600
  2. Reduction of share capital – Dr Ord Share Cap £500, Cr Goodwill?
  3. Transfer price agreed – Dr Goodwill?, Cr Trade Creditors £120,000??
  4. 1st instalment paid £24,000 – Dr Trade Creditors ??, Cr Bank

Your help would be greatly appreciated.

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By Matrix
07th Aug 2020 16:15

I thought that it was not possible to perform a buyback using deferred consideration. Also that one of the entries would be against reserves. I will let the financial reporting experts comment in more detail.

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Replying to Matrix:
Psycho
By Wilson Philips
07th Aug 2020 17:23

Correct. Payment must be made in full (and, according to HMRC but with no obvious statutory authority, in cash). There is of course nothing to prevent the shareholder from immediately lending the consideration back to the company. That would of course probably scupper any thoughts of having the buyback treated as capital - but there might have been a solution to that.

As regards the accounting:

You can treat the Stamp Duty as you see fit - it will not be allowable for tax in any event. I would suggest the following journal entries:

Cr other creditors £120,000 (split <1 yr, >1yr)
Dr P&L reserve £120,000
Cr capital resdemption reserve £500
Dr issued share capital £500

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Replying to Wilson Philips:
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By Paul Crowley
07th Aug 2020 17:23

I am also of the opinion that full payment must be in cash, ie not the spare unwanted assets of the company.

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Replying to Paul Crowley:
Psycho
By Wilson Philips
07th Aug 2020 17:29

But, unlike HMRC, do you have any statutory or other support for that view?

I seem to remember arguments about whether, in the ordinary sense, the very word “payment” necessarily meant cash and that “payment” using any other form of asset was not actually payment.

FWIW I always advise clients to make full payment in cash in view of HMRC’s stance.

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Replying to Wilson Philips:
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By Paul Crowley
07th Aug 2020 18:24

No.

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Replying to Matrix:
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By cgeens
07th Aug 2020 17:58

Thanks for your comment. The lawyer confirmed deferred consideration with HMRC, so all above board.

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Replying to cgeens:
Psycho
By Wilson Philips
07th Aug 2020 18:04

Quote:
The lawyer confirmed deferred consideration with HMRC,

Rather cryptic. Can you confirm exactly what the lawyer “confirmed” with HMRC
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Replying to cgeens:
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By Paul Crowley
08th Aug 2020 15:15

Have you seen the correspondance? HMRC appear to be ignoring their own instructions to HMRC tax officers.
We would all love to see a redacted copy of such an agreement as suddenly we could all ignore HMRC tax manuals

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By paul.benny
07th Aug 2020 16:19

The entire amount paid to the exiting shareholder is a debit to reserves. There should be sufficient retained profits at the date of agreement to cover the total premium on purchase (ie £120,000 less the £500 nominal value - assuming there was no premium on issue). If not the transaction would appear to be unlawful.

The unpaid instalments are a creditor due <1 year and > 1 year. Can't comment on legality of the deferred consideration.

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Replying to paul.benny:
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By cgeens
07th Aug 2020 18:01

Thanks to everyone for your comments - all very helpful

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