Share this content
0
390

Share Buyback and Capital Treatment

Share Buyback and Share Purchase

Didn't find your answer?

Search AccountingWEB

Hi All

I am dealing with a company with 2 directors; one of whom is 100% shareholder too. The shareholder wants an exit from the business and the other director will become sole shareholder. However there are few complications

1. The shares have been valued at £500k with each share being worth £5k. The new shareholder does not have means to finance whole acquisition

2. The departing shareholder has director loan account in the region of £400k. He again does not have means to settle this

The departing shareholder is proposing the company buyback 80 shares and cancels them against overdrawn director loan account. The remaining 20 shares will then be bought by the other individual. The directors are not connected.

Whilst the treatment of proceeds from sales of 20 shares for departing shareholder is clear with ER being applicable, there is some uncertainty whether the BuyBack of 80 shares by the company will qualify him for Capital treatment. This is because the settlement for these shares is by way of clearing already overdrawn director loan account. Clearance will be obtained from HMRC but need to make sure this is something that will work. 

Also is there likely to be an issue if the shares are disposed off by combination of buyback and sale. There is no way the new shareholder will be able to finance the whole acquisition and current shareholder wants an exit from the business.

I shall be grateful for any thoughts. 

 

Replies (12)

Please login or register to join the discussion.

avatar
By Tax Dragon
23rd May 2019 09:06

kashpat wrote:

Clearance will be obtained from HMRC.

You've answered your own question. This is what you have to do.

I don't see HMRC giving clearance, mind. Whether you hold 20/20 shares or 100/100, you are still a 100% shareholder.

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
23rd May 2019 09:36

The "solution" is of course for the other director to buy the 20 shares first. However, I still don't see HMRC giving clearance since - in their view - payment for the buyback needs to be made in cash. (Although again not unresolvable if the company can get its hands on some cash for a short time.)

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
23rd May 2019 09:48

Big if, on those numbers. And, even if, I doubt clearance will be forthcoming. But seeking clearance remains the answer to the question.

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
23rd May 2019 10:12

If the company were able to obtain short-term bank funding for instance (ignoring the “if” at the beginning of this sentence) what in particular causes you concern?

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
23rd May 2019 11:56

I'd be interested to see HMRC's commentary on s1033(2)(b)(ii), but... "This content has been withheld because of exemptions in the Freedom of Information Act 2000".

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
23rd May 2019 21:03

Director 1 wants to retire. Director 2 can afford to buy only 20% of the shares. Company borrows to buy the remaining 80%. That doesn’t sound like a tax avoidance arrangement to me and HMRC have readily given clearance for similar transactions. So I’d be more surprised if they refused.

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
23rd May 2019 21:23

The natural thing to do would be to forego the repayment of the debt, as indeed is posited by the OP. Instead, the company is borrowing to pay its debtor. Why is it doing that? Better tax outcome.

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
23rd May 2019 21:28

Why would it be a better tax outcome? As. I noted above, HMRC consider that payment needs to be made in cash. There appears to be no statutory authority for that but if that’s their view then it does lessen the chances of getting clearance.

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
23rd May 2019 21:39

You've lost me. I'm saying the chances of clearance are lessened, you're saying they're lessened, do we differ?

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
23rd May 2019 21:55

You’re suggesting that foregoing the debt in satisfaction would result in a better tax outcome - why?

What I’m saying is that your suggestion would lessen the chances of clearance compared to my suggestion - assuming all other conditions were met I’d be surprised if clearance were not given.

Your suggestion would probably not receive clearance. I’d be surprised if mine did not - that is where we differ.

Sorry - just re-read your post which I’d misunderstood. You seem to be suggesting that raising cash to pay off the debtor is being done only for tax reasons. Well, HMRC’s view that a buyback must be paid for in cash is based on their interpretation of company law. Therefore, the proposed arrangement is required under company law, and has nothing to do with tax avoidance.

Thanks (1)
Replying to Wilson Philips:
avatar
By Tax Dragon
23rd May 2019 22:11

Yep, I'd run with that as an argument.

Thanks (1)
avatar
By Vile Nortin Naipaan
23rd May 2019 10:46

Norfolk v Chance.

Thanks (0)
Share this content