Policy paper

Statement of Practice 2 (1982)

Published 21 February 1996

Statement of Practice 1 (1982)

TA 1988 s 219(1)(a) - the ‘trade benefit test’

1. The company’s sole or main purpose in making the payment must be to benefit a trade carried on by it or by its 75% subsidiary. The condition is not satisfied where, for example, the transaction is designed to serve the personal or wider commercial interests of the vending shareholder (although usually he will benefit from it) or where the intended benefit for the company is to some non-trading activity which it also carries on.

2. If there is a disagreement between the shareholders over the management of the company and that disagreement is having or is expected to have an adverse effect on the company’s trade, then the purchase will be regarded as satisfying the trade benefit test provided the effect of the transaction is to remove the dissenting shareholder entirely. Similarly, if the purpose is to ensure that an unwilling shareholder who wishes to end his association with the company does not sell his shares to someone who might not be acceptable to the other shareholders, the purchase will normally be regarded as benefiting the company’s trade.

Examples of unwilling shareholders are:

• an outside shareholder who has provided equity finance (whether or not with the expectation of redemption or sale to the company) and who now wishes to withdraw that finance
• a controlling shareholder who is retiring as a director and wishes to make way for new management
• personal representatives of a deceased shareholder, where they wish to realise the value of the shares
• a legatee of a deceased shareholder, where he does not wish to hold shares in the company

3. If the company is not buying all the shares owned by the vendor, or if although the vendor is selling all his shares he is retaining some other connection with the company - for example, a directorship or an appointment as consultant - it would seem unlikely that the transaction could benefit the company’s trade, so the trade benefit test will probably not be satisfied. However, there are exceptions, for example, where a company does not currently have the resources to buy out its retiring controlling shareholder completely but purchases as many of his shares as it can afford with the intention of buying the remainder where possible. In these circumstances, it may still be possible for the company to show that the main purpose is to benefit its trade. Also, the Commissioners for HM Revenue and Customs (HMRC) do not raise any objection if for sentimental reasons it is desired that a retiring director of a company should retain a small shareholding in it, not exceeding 5% of the issued share capital.

Annex

Applications for advance clearance under TA 1988 section 225

Procedure

If clearance under section 225 is desired the application should be sent to:

HMRC
Clearance & Counteraction Team
1st floor
22 Kingsway
London
WC2B 6NR

If clearance is also being sought under TA 1988 section 707 a single application may be made under both provisions and should be directed to the address given above with an extra copy of the application and enclosures. Such an application should open by stating clearly the provisions under which it is made and should be expanded to include any additional information needed for the application under the other provision.

Form of application - general

TA 1988 sections 219 to 229 contain conditions which must be satisfied before the tax treatment afforded by section 219 can apply. A comprehensive application which has regard to each of these conditions will remove the need for lengthy fact finding enquiries and enable the Commissioners for HMRC to come to a decision on the application with the minimum of delay.

To assist companies in preparing clearance applications under section 225 and to facilitate their consideration by the Commissioners for HMRC an outline of the basic information needed is given below. However, it is not an exhaustive list, and in giving the particulars of the relevant transactions required by section 225(2) the applicant must fully and accurately disclose all facts and circumstances material for the decision of the Commissioners for HMRC (section 225(5)).

In what follows, references to purchase of shares include references to repayment or redemption of shares.

It will be helpful if applications follow the order set out below, each item being expanded as necessary and any further information being added at the end.

Application for clearance under TA 1988 s 225(1)(a)

It should be stated at the outset whether the purchase of shares is regarded as falling within section 219(1) by virtue of (a) or (b). If the purchasing company has previously made any application under section 225 it will be helpful if the Commissioners for HMRC’s reference(s) can be quoted.

A. Purchase within TA 1988 section 219(1)(a)

1. The company

• (a) the name of the company making the purchase
• (b) its tax district and reference
• (c) confirmation that it is an unquoted company as defined in TA 1988 section 229(1)
• (d) its status, that is, ‘trading company’ or ‘holding company of a trading group’ within section 229(1) definitions or some other type of company not within the definitions

2. Groups

Where the company is a member of a group (see below):

• (a) the names of the group companies together with their tax districts and references
• (b) a statement or diagram showing the shareholding interests of each group company in other group companies

A group for the purpose of this paragraph is the largest 51% group to which the purchasing company belongs (TA 1988 section 222(9)), but the meaning of ‘group’ is extended, where appropriate, by TA 1988 section 222(10) and (12)).

3. The payment

• (a) details of the shares to be purchased, the name of their present owner, the purchase price and the method of payment
• (b) details of any other transactions between the company and the vendor at or about the same time
• (c) confirmation that the company’s Articles of Association allow it to purchase its own shares

4. Shareholders

• (a) a list of the current shareholders in the purchasing company, and where appropriate, in each company in a group as in 2 above, together with particulars (amount, class, dividend rights etc) of their current holdings
• (b) a statement of any relationships of the shareholders to each other
• (c) where the shareholder is the son or daughter of another shareholder, an indication that he or she is over 18 or else details of their age

5. Prior transactions

Particulars of any prior transactions or rearrangements to be carried out in preparation for the purchase.

6. Purpose and benefits

A statement of the reasons for the purchase, the trading benefits expected and any other benefits expected to accrue, whether or not to the purchasing company.

7. Conditions in TA 1988 section 219

Confirmation together with all relevant information that the purchase etc does not form part of a scheme or arrangement the main purpose or 1 of the main purposes of which is to enable the owner of the shares to participate in the profits of the company without receiving a dividend, or the avoidance of tax. Confirmation that the vendor will receive no other payment from the company, or details of any such payment to be made.

8. Conditions in TA 1988 sections 220 to 224

• (a) the present residence status of the vendor and any intended change (TA 1988 section 220)
• (b) the tax district, reference and National Insurance number of the vendor, or if not known his or her private address (TA 1988 section 220)
• (c) the period of beneficial ownership by the vendor of the shares to be purchased (TA 1988 section 220(5))
• (d) confirmation, if appropriate, that the vendor’s interest will be ‘substantially reduced’ (TA 1988 section 221(1))
• (e) confirmation, if appropriate, that the combined interests as shareholders of the vendor and his ‘associates’ (TA 1988 see section 227) will be substantially reduced (TA 1988 section 221(2))
• (f) confirmation, if appropriate, that the vendor’s interest as a shareholder in the group will be substantially reduced (TA 1988 section 222(1))
• (g) confirmation, if appropriate, that the combined interests as shareholders in the group of the vendor and his associates will be substantially reduced (TA 1988 section 222(3))
• (h) confirmation that the vendor will not, immediately after the purchase, be ‘connected with’ (see TA 1988 section 228) the company making the purchase or with any company which is a member of the same group as that company (TA 1988 section 223(1))
• (i) confirmation that the purchase is not part of a scheme or arrangement within TA 1988 section 223(2)

9. Accounts and other financial information

The application should be accompanied by:

• (a) copies of the latest available financial statements for the purchasing company and for any group companies (see paragraph 2 above), and in the case of a group the financial statements for the group
• (b) a note of any material relevant changes since the balance sheet date or confirmation that there are none
• (c) details of any loan or current account which the vendor maintains with the company or with any group company

B. Purchase within TA 1988 section 219(1)(b)

1. Company:

• (a) the name of the company making the purchase
• (b) its tax district and reference
• (c) confirmation that it is unquoted as defined in TA 1988 section 229(1)
• (d) its status, ie, ‘trading company’ or ‘the holding company of a trading group’ within the definitions in TA 1988 section 229(1), or some other type of company not within the definitions

2. Groups

Where the company is a member of a group (see A2 above):

• (a) the names of the group companies together with their tax districts and references
• (b) a statement or diagram showing the shareholding interests of each group company in other group companies

3. The payment:

• (a) details of the shares to be purchased, the name of the present owner, the purchase price and method of payment
• (b) details of any other transactions between the company and the vendor at or about the same time
• (c) confirmation that the company’s Articles of Association allow it to purchase its own shares

4. Inheritance Tax:

• (a) the name and date of death of the deceased
• (b) the reference of the deceased at the Capital Taxes Office
• (c) the amount of the outstanding tax and whether or not liability has been finally agreed
• (d) the extent to which the purchase price is to be applied in satisfaction of the tax liability
• (e) a full explanation of the circumstances in which there would be ‘undue hardship’ if the tax liability were to be discharged otherwise than through the purchase of own shares from this or another such company
• (f) the tax district and reference of the person to whom undue hardship would be caused or if not known the address of that person, and their National Insurance number

5. Accounts and other financial information

The application should be accompanied by:

• (a) copies of the latest available financial statements for the purchasing company and for any group companies (see paragraph A2 above), and in the case of a group the financial statements for the group
• (b) a note of any material relevant changes since the balance sheet date or confirmation that there are none

Applications for clearance under TA 1988 s 225(1)(b)

1. Company

• (a) the name of the company making the purchase
• (b) its tax district and reference

2. The payment

• (a) details of the shares to be purchased, the vendor, the purchase price and the method of payment
• (b) confirmation that the company’s Articles of Association allow it to purchase its own shares

3. Account and other financial information

• (a) Copies of the latest available financial statements for the purchasing company
• (b) A note of any material relevant changes since the balance sheet date or confirmation that there are none

4. A statement of the reasons why it is believed that the proposed payment does not fall within the provisions of TA 1988 section 219.

Note: the text of this statement is as it appears in IR 131 (August 2002).