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HMRC internal manual

Company Taxation Manual

Distributions: general: inadvertent distribution

There are sometimes occasions where a transfer of assets between a company and a member is inadvertently caught by CTA10/S1000 (1) G. If it is clear that there was no intention that there be a distribution and the parties made reasonable efforts to carry out the transaction at market value by using a professional valuation then the distribution may be unwound.

For example, if a company wishes to sell a building to a member the directors might have a professional valuation carried out to find the market value for the transfer. The transfer is then carried out at that market value which is, say, £1 million. Subsequently, the parties agree with the District Valuer Services that the open market value at the date of transfer was £1.2 million. There is a distribution of £200,000 but this has arisen inadvertently. When making the transfer the company had taken reasonable steps to ensure that the consideration equalled the market value of the asset.

There are two ways of unwinding the distribution:

  1. The member can repay to the company the difference between the eventually agreed value and the amount actually paid for the asset.
  2. The transaction can be reversed completely with the asset being returned to the company and the money being repaid to the member.

In the latter case, however, there are two conditions:

  1. Written agreement that the reversal of the transaction will not affect the tax treatment of any other matters that might otherwise be consequentially affected. For example, if the member had received rent from the building in the example above, the agreement must be that the member remains chargeable to tax in respect of that rent and does not attempt to argue that it was really the income of the company.
  2. The transfer must be capable of reversal. For example, following the example above, if part of the building (such as a flat) had already been sold then the transaction cannot be reversed as the member no longer owns the whole asset and so cannot return it to the company.

Analogous treatment may be applied where a distribution has arisen when an asset has inadvertently been transferred at overvalue to a company by a member.

But the treatment is not available if any of the following apply:

  • there is attempted (or actual) avoidance, or
  • there was always an intention that the transfer should not have been at open market value, or
  • no professional valuation was obtained.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000) .