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.
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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.
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.
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.
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.
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.
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.
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.
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...
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.
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.