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HMRC internal manual

Company Taxation Manual

Distributions: general: repayment of share capital: share capital/share premium reduction

Under section 641 Companies Act 2006 a company may reduce share capital or share premium (under section 610(4)) either by order of the court or by special resolution supported by a directors’ solvency statement (pursuant to sections 642 and 643.). A reserve so created may, in certain circumstances, be distributable under the Companies (Reduction of Share Capital) Order 2008 (SI2008/1915). That order enables unlimited and private limited companies in certain circumstances to treat the reserve for company law purposes as realised profit. This profit may be distributed immediately, or left in reserve. The reserve may be used to pay a dividend or make some other form of distribution.

If a payment from the reserve is by way of dividend, it will be a distribution under CTA10/S1000 (1) A.

If the payment is made from the reserve and does not take the form of a dividend, the tax treatment will depend on whether the recipient is charged to corporation tax on the amount.. If so,, CTA10/S1027A treats the payment as if made from any other realised profit. The payment may therefore be a distribution under CTA10/S1000 (1) B even though it originates in share capital. (CTA10/S1027A was inserted by F(3)A10/SCH3, but is retrospective in its effect.)

If the recipient is charged to income tax, CTA10/S1027A does not apply. Where the payment is made from a reserve, it will usually be a distribution under CTA10/S1000 (1) B and potentially subject to the exceptions in CTA10/S1000 (1) B (a) and (b), for example where the reserve is subsequently used to fund a redemption of share capital. Where a distribution is subsequently made from the reserve, no part of this will be treated as representing a repayment of capital for the purposes of CTA10/S1000 (1) B exception (a) in respect of the shares whose reduction or cancellation was the means of creating it. For example, if 5000 ordinary £1 shares are cancelled and their nominal value is taken to a reserve treated as realised profit, any subsequent payment from the reserve will not be treated as a repayment of capital on those particular shares. However, if that reserve is then used to fund the redemption of other shares, the redemption proceeds will be treated as a repayment of capital on those shares, except for any redemption premium, applying CTA10/S1000 (1) B.

Where payments are made following a reduction in share capital or share premium without passing through a reserve, the reduction will not form part of the realised profit of the company in company law terms and will not be treated as a CT distribution. Instead the payment will be treated as a repayment of share capital and may be a capital distribution within TCGA92/S122 - see CG57800 onwards for further guidance on capital distributions. If difficulties arise in determining how payments received are treated refer to CTISA (Technical) - see ’Technical Help’ on the left bar. Treatment of the payment as a capital distribution does not affect the application of the ‘transactions in securities’ legislation, which can still apply in circumstances involving a reduction of share capital or share premiums. See CTM36805.