Share buyback capital treatment query

part of the amount loaned back to company - problem of more than 30% loan capital

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I have a client company which had 3 equal shareholder directors.   One left and company bought back his share for £30k.     To help Company cashflow he agreed for £12k to be paid in instalments over 30 months.   In order to try to get capital treatment,  the whole £30k was paid to him and he loaned back the £12k.   What I had forgotten about was that being owed over 30% of the companys loan capital is treated as a connection to the company and so it looks like the whole £30 k  will need to be treated as a distribution.    

Wondered if anyone could think of any way round it.  Now theyve done the transactions its too late but it might have been better not to have done the loan back and at least the £18k paid up front might have qualified for capital treatment.   Kicking myself.

If anyone has any ideas I would be grateful.

 

Replies (22)

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By Ruddles
11th Jan 2018 15:41

Did you also forget about applying to HMRC for clearance, or did you consider it not worthwhile?

Why do you think that the £18k might have qualified for capital treatment?

As well as kicking yourself, you may want to look out your PI policy.

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Replying to Ruddles:
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By barberbuzz
11th Jan 2018 21:31

I did apply for clearance but they wanted to do the transaction quickly so we didnt get hmrc response in time.
I had warned them it could be treated as a distribution

I thought the 18k would have qualified for capital treatment if no loan on the remainder as then he would have been unconnected. But maybe the instalments paid would mean he was still treated as connected in any case

If so then i dont see that i could have advised them a better course of action anyway
Thanks for your input

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Replying to barberbuzz:
By Ruddles
11th Jan 2018 22:13

Well, for starters, company law requires an own purchase to be paid in full, in cash, at the time.

What you could have considered was a multiple completion buyback.

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Replying to Ruddles:
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By Portia Nina Levin
12th Jan 2018 10:42

Quote:

Well, for starters, company law requires an own purchase to be paid in full, in cash, at the time.

No it doesn't. It's just that HMRC think that is what company law requires that is the problem. See the DG Roof Bond (non-tax) case though.

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Replying to Portia Nina Levin:
By Ruddles
12th Jan 2018 11:15

OK - forget the cash bit, but payment needs to made in full at the time. Which is the point that I was making - no idea why I added the point about cash as it's irrelevant.

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Replying to Ruddles:
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By Portia Nina Levin
12th Jan 2018 11:25

I think in DG Roofbond the point was that payment could be made by satisfaction in the form of assets, and whilst a debt may not have been involved in that case, if it wasn't commentators have speculated that the creation of a debt is satisfaction in the form of an asset.

I don't dispute the point though that, in practice, there must be actual payment, because that is what HMRC still require. I just don't think there company law analysis still holds.

Incidentally, the OP does say that the payment was made and then loaned back in this case.

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Replying to Portia Nina Levin:
By Ruddles
12th Jan 2018 11:31

It's an interesting concept. Company law requires that payment be made at the time of purchase. I can understand such payment being in the form of assignment of a 3rd party debt, but it is very counter-intuitive (to me at least) to suggest that deferring actual payment by creating a debt between seller and purchaser is in itself payment.

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Replying to Portia Nina Levin:
By Ruddles
12th Jan 2018 12:36

Yes, but the loan back is what has scuppered the capital treatment. The discussion had moved on to thoughts about what might have happened had only part of the payment been made at the time.

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Replying to Ruddles:
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By barberbuzz
12th Jan 2018 12:22

I had wondered about that. He only had one of 3 shares. But if we had increased the number of shares first then he could have sold them in stages.

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Replying to barberbuzz:
By Ruddles
12th Jan 2018 12:30

Yes he could. Why did you stop wondering?

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By barberbuzz
12th Jan 2018 12:58

I didn't stop wondering. But they wanted to do the transaction quickly which didn't help.
Fortunately, treating as a distribution doesn't actually make much difference to the tax in their case because of very little higher rate tax involved.
In fact if he hadn't taken other dividends in the year it would have been preferential not to be treated as a capital transaction.

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Replying to Ruddles:
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By barberbuzz
12th Jan 2018 19:36

Just another thought on the selling of shares in tranches. Am I right that on resigning as a Director at the time of the Buyback, ER would not have been allowed on the later disposals?

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Replying to barberbuzz:
ALISK
By atleastisoundknowledgable...
12th Jan 2018 21:09

Quote:

I had warned them it could be treated as a distribution

In writing?

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Replying to atleastisoundknowledgable...:
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By barberbuzz
12th Jan 2018 22:58

Yes thankfully

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By barberbuzz
11th Jan 2018 21:38

...

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By Justin Bryant
12th Jan 2018 11:18

Companies Act 2006 s691 requires ‘shares be paid for on purchase’. HMRC’s view is that the transaction must be in cash. BDG Roof-Bond Ltd v Douglas (2000) obiter suggested payment by assets allowed – whether this is correct has not been confirmed. However, should the company not have sufficient funds HMRC will allow the vendor to lend the consideration back to the company immediately after purchase subject to the ‘connection’ rule. Tax Bulletin 21 also allows the issue of bonus shares prior to purchase thereby increasing the number of shares

http://www.accountingweb.co.uk/business/finance-strategy/share-buy-backs...

“It is, however, possible to make a contract under which successive tranches of shares are to be purchased on specified dates.”

https://www.taxadvisermagazine.com/article/purchase-own-shares-and-multi...

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By barberbuzz
12th Jan 2018 12:28

Thanks everyone for your comments. Its a shame that the company didnt have any other amounts owing. So of course the loan back from the ex Director/Shareholder was then over 30% of the companies amounts owing.
But maybe if they hadnt done the loan and simply paid him that part of the £30k in instalments it would still be treated as an amount owing to him.
In which case it would only really have been solved by increasing the numbers of shares and then selling in tranches. Hindsight.......

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By barberbuzz
12th Jan 2018 15:03

What would help is if the 12k that was loaned back and being repaid in monthly instalments could be recategorised as simply distributions when the payments are made as it would split his payments into more tax years and reduce higher rate tax.

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By Portia Nina Levin
12th Jan 2018 15:08

Is that what happened?

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Replying to barberbuzz:
By Ruddles
12th Jan 2018 15:28

So - you're suggesting that he sold his shares back to the company for £18k, and subsequently received dividends in respect of shares that had already been cancelled? That's innovative.

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Replying to Ruddles:
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By barberbuzz
12th Jan 2018 18:56

Sorry I realise that it cant be a buyback in instalments. So they have to have the loan in order for it to be a buyback. So the whole £30k would presumably have to be treated as a distribution in the year of the buyback.
That would have been a helpful innovation though!

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Replying to barberbuzz:
By Ruddles
12th Jan 2018 18:53

I see.

But, as noted above, company law requires full payment at the time of the buyback. I'm not convinced that the argument that the creation of a debt constitutes payment is a tenable one.

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