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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Distributions: purchase of own shares: application of the distributions legislation

CTA10/S1000 (1) B applies the distributions legislation to:

  • any distribution out of the assets of a company (whether in cash or otherwise), in respect of shares in the company,
  • except any part of the distribution that either,

 

  • represents a repayment of share capital,

 

  • is in exchange for new consideration received by the company.

Part of a payment by a company to redeem or purchase its own shares should be viewed as a repayment of share capital, and therefore not a distribution. Any new consideration received by the company when the purchase of own shares occurs is also excluded.

It is necessary to establish the amount of the share capital repaid when a company carries out a purchase of its own shares.

In order to do this it is necessary to look at the company’s share history. Particular points to consider are the issue of shares at a premium (see CTM17520) and a previous bonus issue (see CTM17530).

The position is complicated if the shares that are the subject of the purchase of own shares were issued in exchange for shares in another company.

It is necessary to establish the amount of new consideration the company received when issuing the shares that are the subject of the purchase of own shares.

The relevant legislation is in CTA10/S1115. Subsections (4) to (6) restrict new consideration derived from share capital in, or securities of, the same company. Hence, a company can recognise as new consideration the full value of shares in another company that it receives in exchange for the issue of fresh share capital or securities, see CTM15140.

Therefore, when a company receives shares in an acquired company in exchange for an issue of its own shares, the new consideration received by the first company is the market value of the shares in the acquired company.

This may result in the company receiving sufficient new consideration to establish a premium. If so, the premium is treated as part of the share capital when considering the amount of any repayment of share capital (CTA10/S1025 (1) and (2)).

Where a company is proposing to make a purchase of own shares, it may seek to agree the amount that will be a distribution. Officers do not need to agree figures in advance.

Method of calculation

When an unquoted company is involved it may be fairly simple to identify the issue price of the shares which are the subject of a purchase of own shares.

However, for quoted companies it may be less straightforward, or even impossible, to identify the issue price of shares involved. For example, a company may have issued unnumbered shares or the company may have made numerous issues, possibly at different premia.

In such cases any reasonable basis of calculation (such as averaging) of the issue price proposed by the company may be accepted, subject toCTM17520 and CTM17530.

Where CTA10/S1033 does not apply the distributions provisions will operate. The sale price in the vendor’s hands will represent:

  • in whole or part a return of subscribed capital (giving a CG disposal),

and

  • in part, an income distribution.

This income distribution will represent:

  • franked investment income in the hands of a UK resident company,

and

  • dividend income in the hands of other recipients.

Where the vendor is a dealer, however, see CTM17630.

If an officer believes a company is carrying out a purchase of own shares for tax avoidance purposes, and the tax at stake exceeds £50,000, the file should be referred to Clearance and Counteraction Team, Anti-Avoidance Group with a brief report.