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Company Purchase of Own Shares (continuation for taken2often)

Practical Issues
PinkDalek
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Company Purchase of Own Shares (continuation for taken2often)

#400292

Postby PinkDalek » March 30th, 2021, 11:27 am

I have replied here on Taxes as the diversion over at Pensions - Practical Problems has probably gone on long enough. (The topic is here viewtopic.php?p=393097#p393097 for reference as I'm not about to repeat everything that has been said so far).

Prior links have included:

https://www.legislation.gov.uk/ukpga/2010/4/part/23/chapter/3/crossheading/purchase-of-own-shares
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/796707/seeking_clearance.pdf
https://www.taxadvisermagazine.com/article/purchase-own-shares

taken2often's latest reply at Pensions is repeated below and my reply (here at Taxes) follows:

taken2often wrote:To PinkDalek
I was not going to respond, but you created the need for all this extra dialog. You may have a wide knowledge of these matters, but others do not. I have read the 2010 Act and I cannot identify any part of it, that relates to our situation. It is very complicated to deal with very complicated situations. It seemed to relate to exemption and indicated that a company may make an application.
We were very uncomplicated Two controlling Directors with equal shareholding. The transaction was subject to capital gains if applicable. You are probably right that a nil return should have been made, but that would be no offence under Self Assessment. The penalty would be, the false manipulation of the share value, to avoid CG. If that had taken place This is why our Account always provided the share value and the transaction noted in the company minutes.

As it is the company has now been closed and no doubt well scrutinised, before closure was approved.


I have some knowledge from recent experience, yes, but I really am struggling to explain my concerns.

The issue does not concern Corporation Tax. The relevance of that section of the act is clearly explained in the article https://www.taxadvisermagazine.com/article/purchase-own-shares from which I provided an extract which I'll repeat:

CTA 2010 s 1000 provides that where a company buys back its own shares from an individual shareholder an income distribution occurs. Most share buy backs will therefore result in an income tax charge arising on the distribution, and to the extent that the proceeds exceed the repayment of share capital an income tax charge will arise at the shareholder’s marginal dividend tax rate.

As I understand it the transactions should not have been treated as disposals for Capital Gains Tax purposes by the two individual shareholders. I am not disputing what your accountants have done regarding the valuations, Companies House filings and, presumably, the payment of Stamp Duty each time there was a buy back over the last 20 years. Nor that the company has been "closed" (dissolved or whatever). I have not suggested there's been a false manipulation of the share value.

Nor did I intend to suggest a successful clearance application would have been available to you anyway to get CGT treatment. I included that link to show why I though it would not.

What I am suggesting is the shareholder(s) have failed to report the transactions on their Tax Returns as being subject to Income Tax.

What I would suggest, should you so wish, is that you review what your accountants (dare I ask if they are specialists in this field) advised with regards to how you should reflect the buy backs on your Tax Returns or were they not involved on that aspect? I am asking as, in particular, you have suggested that you may one day go down the same route with what you describe as "Top company".

If anyone else has been following our exchanges at Pensions and is able to comment further, either in support of your position or mine, that might assist!

I may be wrong on all this or we may not have the full picture.

bluedonkey
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Re: Company Purchase of Own Shares (continuation for taken2often)

#400308

Postby bluedonkey » March 30th, 2021, 12:12 pm

I think amongst all the excellent points you make, the last one will probably end up being most germane: not getting the full picture with sufficient technical details to come to a conclusion.

genou
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Re: Company Purchase of Own Shares (continuation for taken2often)

#400329

Postby genou » March 30th, 2021, 1:27 pm

bluedonkey wrote:I think amongst all the excellent points you make, the last one will probably end up being most germane: not getting the full picture with sufficient technical details to come to a conclusion.


It would have to be quite a clever technical detail. There used to be a wheeze where the proceeds of a share buy back could avoid IT, and only get charged to CGT, but that involved the shares being held inside a trust. IIRC that loophole was closed around 97/98. The liability to Income Tax here is crystal clear.

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Re: Company Purchase of Own Shares (continuation for taken2often)

#400344

Postby bluedonkey » March 30th, 2021, 2:13 pm

genou wrote:
bluedonkey wrote:I think amongst all the excellent points you make, the last one will probably end up being most germane: not getting the full picture with sufficient technical details to come to a conclusion.


It would have to be quite a clever technical detail. There used to be a wheeze where the proceeds of a share buy back could avoid IT, and only get charged to CGT, but that involved the shares being held inside a trust. IIRC that loophole was closed around 97/98. The liability to Income Tax here is crystal clear.

Sure. Also, the apparent group structure may be mistakenly described, perhaps what has happened is some reorg enabling tax-free funds flow from subs to holding co ... or ...
I shouldn't persist in posting because we really aren't going to get to the bottom of it.

taken2often
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Re: Company Purchase of Own Shares (continuation for taken2often)

#400457

Postby taken2often » March 30th, 2021, 11:03 pm

Thank you for your reponse's. But we are no clearer than before. The rules in the act are a dogs breakfast. They must have a purpose and relate to some scheme that was not approved by HMRC. In fact when you you look through the whole thing the main purpose seems to be establishing the true worth of the shares. This where most fiddles would occur. There also seem to be various classes of individuals who may have received shares as income or a bonus or whatever. So HMRC would like to know the background to these transactions. There was also strange relationship issues where the individual having once sold the shares would have no further connection to the company. No-where was there any mention of Controlling Directors
disposing of their shares to the company. Why you would expect me to pay income tax on the transfer sale of my property. We do audited accounts to inform HMRC of our transactions. The only income going into the company was interest and the only expenses, tax, Accountants fees and the share disposal. It would be very clear even to a trainee inspector that the company was being liquidated over a period of years in an orderly manner until there was nothing left. Then closed. They may even have checked our personal tax affairs as directors for the past 7 years before approving the closure
Who knows.

chris
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Re: Company Purchase of Own Shares (continuation for taken2often)

#400598

Postby chris » March 31st, 2021, 1:42 pm

From my reading of the rules in making it a capital distribution rather than subject to income tax, it would seem to be very clear, even to a trainee inspector, that the fact that there was a year-on-year sale of shares to the company, leading the the company's dissolution, that this was not wholly or mainly for the benefit of the trade and that it was clearly for the avoidance of tax. Therefore it would be subject to this section and subject to income tax. Just because the company has been dissolved, does not close the case for HMRC and in theory, the 6 year time limit may not apply either, especially if the same method is applied to Top-Company.

However, T2O is convinced that he is right and nothing you tell him will make him deviate from this belief. He may get away with it, he may not. One thing is for sure, that we will never get to know!

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Re: Company Purchase of Own Shares (continuation for taken2often)

#400601

Postby PinkDalek » March 31st, 2021, 1:52 pm

chris wrote:... does not close the case for HMRC and in theory, the 6 year time limit may not apply either, ...


If I may add (my bold underlining)?:

SALF411 - Enquiries into Tax Returns: time limits for discovery assessments
https://www.gov.uk/hmrc-internal-manuals/self-assessment-legal-framework/salf411

Section 34(1)

In any case of incomplete disclosure without careless or deliberate conduct the time limit for a discovery assessment is not later than 4 years after the end of the tax year to which it relates.

Section 36(1) and (1A)

In any case involving a loss of tax brought about carelessly, the time limit for making a discovery assessment is not later than 6 years after the end of tax year to which the assessment relates.

The time limit for making a discovery assessment is not later than 20 years after the end of the tax year to which it relates where the loss of tax is: ...

melonfool
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Re: Company Purchase of Own Shares (continuation for taken2often)

#400604

Postby melonfool » March 31st, 2021, 2:08 pm

It would be very clear even to a trainee inspector that the company was being liquidated over a period of years in an orderly manner until there was nothing left.


If this was the case, and you didn't make that clear in your original postings, then your suggestions were entirely irrelevant to my post because my company is not in the process of liquidation, I didn't suggest it was, and I also do not have a Top Company to effect such transactions with.

Mel

PinkDalek
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Re: Company Purchase of Own Shares (continuation for taken2often)

#400605

Postby PinkDalek » March 31st, 2021, 2:30 pm

melonfool wrote:
It would be very clear even to a trainee inspector that the company was being liquidated over a period of years in an orderly manner until there was nothing left.


If this was the case, and you didn't make that clear in your original postings, then your suggestions were entirely irrelevant to my post because my company is not in the process of liquidation, ...


Interesting (although not relevant to your OP at Pensions it may, conceivably, have been a runner for the future) in that t2o talks of the company being liquidated over a period of years.

Maybe this is loose terminology but, if not, was the company in Members Voluntary Liquidation (from a date unknown) and these regular payments to the shareholders were a series of interim capital distributions (over some 20 years??? which would be unusual in the extreme)?

Which doesn't match what we've been told so far anyway regarding the need to value each year etc and the prior mention of the shareholders disposing of their shares to the company.

Perplexing and as t2o has said Who knows. Other than maybe their accountants.

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Re: Company Purchase of Own Shares (continuation for taken2often)

#400675

Postby genou » March 31st, 2021, 8:33 pm

PinkDalek wrote:
Perplexing and as t2o has said Who knows. Other than maybe their accountants.


They must have been bloody clever accountants. t2o states that the only income of the company was interest - so it was not a trading company. He also states that the "liquidation" took years, so I can't see any point at which his holding in the company was substantially reduced. There's no way these transactions qualified for capital treatment.

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Re: Company Purchase of Own Shares (continuation for taken2often)

#400717

Postby taken2often » March 31st, 2021, 11:36 pm

The value of the company came from Trading and corporation tax paid. It is then classed as Shareholder funds. The shareholders then have a whole range of options as to how they use these funds. 20 years ago we had no idea what we would do, but for good reasons the company had to stop trading Then both directors had health problems. You are all making the presumption that had we actually supplied the information about company self purchase it would have been refused. There is no doubt these rules had a purpose but they are not logical in relation to our situation. They are designed to flush out fraud and tax avoidance.

We could have paid a dividend each year and kept it within our personal tax allowance, not that much difference between that and CG allowance. We were also classified as Entrepreneurs. The whole point of starting a business is to get the benefits and this is one way of taking them.

As it is I have a lot of CG loses to soak up over the next few years, and I may be closing the second company, which will be done in the most tax efficient way.

Its all getting a bit boring now


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