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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Distributions: purchase of own shares: introduction

Part 18 of the Companies Act 2006 permits companies to purchase and redeem their own shares provided certain conditions are satisfied, a power originating in Companies Act 1981.

The rule used to be that, when a company purchased its own shares, the shares were immediately treated as cancelled. The company’s accounts show a reduction in issued share capital matched by a capital redemption reserve.

The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations, SI2003/1116 enabled from 1 December 2003 listed companies to hold their own shares (‘in treasury’) and the Companies Act 2006 (Amendment of Part 18) Regulations 2013, SI2013/999 extended the ability to do so to all companies, public and private, subject to certain exceptions. This means companies can hold the shares and sell them for cash (to raise funds or under an option scheme) or transfer them for the purposes of employee share schemes.

To effect a valid purchase the company must make full cash payment on purchase. The transfer of any other asset or the creation of a loan account because, say, the company does not have sufficient cash available does not represent payment. In such circumstances, the shares are not treated as cancelled and legal ownership remains with the vendor. The tax treatment following from an invalid purchase of own shares depends upon the actions taken (if any) to rectify matters.

If the amount the company pays on redemption or purchase exceeds the amount of capital originally subscribed for the shares (see CTM15350) a distribution will arise under CTA10/S1000 (1) B, see Moody v Tyler (2001) 72TC536. The distribution may arise when a purchase of own shares is made by either a quoted company or, alternatively, by an unquoted company where any of the conditions of CTA10/S1033 and following (exempt purchase of own shares) are not satisfied - see CTM17510.