Most readers will be aware of the legislation that allows the proceeds of a company purchase of own shares to be treated wholly as a capital payment, regardless of the fact that any amounts repaid would, otherwise, be a distribution for tax purposes (CTA 2010 s 1033 et seq.). There are a number of requirements that must be met for capital treatment, one of which is that the individual shareholder receiving the payments must not be connected with the company immediately after the transaction (CTA 2010 s 1062). For these purposes, a person is connected with the company if they hold:
more than 30% of the company’s issued ordinary share capital;
more than 30% of the aggregate of the company’s loan stock and all issued share capital (i.e. ordinary share capital and other share capital); or
more than 30% of the voting power of the company.
One of the requirements of company law for a company purchase of own shares is that the shares must be paid for in cash at the time of the buy-back. Company law, however, does not have any requirements as to any connection between the shareholder and the company following the transaction.
In some cases, the company does not have enough money to buy back the relevant shares in one tranche. In order to comply with both company law and tax law, we have hitherto been able to resolve such issues by ‘multiple completion’ buybacks. For company law purposes, the shares are bought back in small tranches over a period of time, so that each tranche is affordable by the company on completion. For tax purposes, the relevant shareholder agrees at the time of the buyback of the first tranche to give up all rights associated with the shares – i.e. rights to dividends, rights to assets on a winding up and voting rights – so that they no longer have beneficial ownership of the shares. For many years, this has been accepted by HMRC as satisfying the relevant conditions for tax purposes, as the shareholders did not have any beneficial rights in respect of the shares from the moment that the first tranche of shares was bought back.
Unfortunately, CTA 2010 s 1062 refers to the possession of shares, loan stock and voting power. HMRC’s view is that possession is a reference to legal ownership, not to beneficial ownership, which means that a person who retains more than 30% of the company’s ordinary share capital (for example) following the first tranche of a multiple completion buy back would still legally own more than 30% of the ordinary share capital of the company, so that they would remain connected with the company for the purposes of s 1062.
We understand that this has been HMRC’s official view for many years. For some reason, however, for the last several years this aspect has been overlooked, such that clearances for capital treatment on multiple completion transactions have been granted when, according to HMRC’s analysis, the technical conditions were not satisfied. HMRC has, however, recently ‘rediscovered’ its original analysis and is now enforcing it, so that multiple completion transactions where shareholder retains legal ownership of more than 30% of the ordinary share capital of a company will not be granted clearance, on the basis that the shareholder remains connected with the company.
Helpfully, HMRC has agreed that transactions for which clearance was previously granted on the ‘incorrect’ basis will not be disturbed.
We believe that there are technical arguments that HMRC is incorrect to analyse the concept of possession in s 1062 as referring to legal ownership. These arguments are being developed and will be presented to HMRC in due course, in the hope that they will change its mind. We have also suggested that, if there is any doubt, this is an area where there has not been a change in policy over company purchases of own shares, so this should be a strong candidate for a legislative change to put matters back to where we all thought they were for the last however many years. Unfortunately, HMRC does not have any strong appetite for putting such a change to ministers. Obviously, of course, representative bodies, such as the CIOT, may consider making budget recommendations directly.
In the meantime, it seems that companies have two options. Firstly, the company purchase of own shares could be structured to ensure that the connection test is satisfied, by buying back more shares in the first tranche to keep the holding to 30% or less. Another suggestion that has been made is for legal ownership of the shares to be transferred to a nominee. While TCGA 1992 s 60(1) states that the actions of a nominee will be treated as the actions of the person who beneficially holds the shares, we believe that the beneficial owner of the shares in these cases would be the company, not the shareholder, so that the transfer of legal ownership to a nominee may be effective in satisfying the connection test.
Most readers will be aware of the legislation that allows the proceeds of a company purchase of own shares to be treated wholly as a capital payment, regardless of the fact that any amounts repaid would, otherwise, be a distribution for tax purposes (CTA 2010 s 1033 et seq.). There are a number of requirements that must be met for capital treatment, one of which is that the individual shareholder receiving the payments must not be connected with the company immediately after the transaction (CTA 2010 s 1062). For these purposes, a person is connected with the company if they hold:
more than 30% of the company’s issued ordinary share capital;
more than 30% of the aggregate of the company’s loan stock and all issued share capital (i.e. ordinary share capital and other share capital); or
more than 30% of the voting power of the company.
One of the requirements of company law for a company purchase of own shares is that the shares must be paid for in cash at the time of the buy-back. Company law, however, does not have any requirements as to any connection between the shareholder and the company following the transaction.
In some cases, the company does not have enough money to buy back the relevant shares in one tranche. In order to comply with both company law and tax law, we have hitherto been able to resolve such issues by ‘multiple completion’ buybacks. For company law purposes, the shares are bought back in small tranches over a period of time, so that each tranche is affordable by the company on completion. For tax purposes, the relevant shareholder agrees at the time of the buyback of the first tranche to give up all rights associated with the shares – i.e. rights to dividends, rights to assets on a winding up and voting rights – so that they no longer have beneficial ownership of the shares. For many years, this has been accepted by HMRC as satisfying the relevant conditions for tax purposes, as the shareholders did not have any beneficial rights in respect of the shares from the moment that the first tranche of shares was bought back.
Unfortunately, CTA 2010 s 1062 refers to the possession of shares, loan stock and voting power. HMRC’s view is that possession is a reference to legal ownership, not to beneficial ownership, which means that a person who retains more than 30% of the company’s ordinary share capital (for example) following the first tranche of a multiple completion buy back would still legally own more than 30% of the ordinary share capital of the company, so that they would remain connected with the company for the purposes of s 1062.
We understand that this has been HMRC’s official view for many years. For some reason, however, for the last several years this aspect has been overlooked, such that clearances for capital treatment on multiple completion transactions have been granted when, according to HMRC’s analysis, the technical conditions were not satisfied. HMRC has, however, recently ‘rediscovered’ its original analysis and is now enforcing it, so that multiple completion transactions where shareholder retains legal ownership of more than 30% of the ordinary share capital of a company will not be granted clearance, on the basis that the shareholder remains connected with the company.
Helpfully, HMRC has agreed that transactions for which clearance was previously granted on the ‘incorrect’ basis will not be disturbed.
We believe that there are technical arguments that HMRC is incorrect to analyse the concept of possession in s 1062 as referring to legal ownership. These arguments are being developed and will be presented to HMRC in due course, in the hope that they will change its mind. We have also suggested that, if there is any doubt, this is an area where there has not been a change in policy over company purchases of own shares, so this should be a strong candidate for a legislative change to put matters back to where we all thought they were for the last however many years. Unfortunately, HMRC does not have any strong appetite for putting such a change to ministers. Obviously, of course, representative bodies, such as the CIOT, may consider making budget recommendations directly.
In the meantime, it seems that companies have two options. Firstly, the company purchase of own shares could be structured to ensure that the connection test is satisfied, by buying back more shares in the first tranche to keep the holding to 30% or less. Another suggestion that has been made is for legal ownership of the shares to be transferred to a nominee. While TCGA 1992 s 60(1) states that the actions of a nominee will be treated as the actions of the person who beneficially holds the shares, we believe that the beneficial owner of the shares in these cases would be the company, not the shareholder, so that the transfer of legal ownership to a nominee may be effective in satisfying the connection test.
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