Purchase of own shares definition

View the related Tax Guidance about Purchase of own shares

Purchase of own shares ― overview

Purchase of own shares ― overviewCompanies Act 2006 allows a company to repurchase its own issued share capital, provided certain conditions are met. This type of transaction is sometimes referred to as a ‘share buyback’ or a ‘purchase of own shares’.The repurchased shares can either be immediately cancelled, which is typically the case, or they may in some circumstances be retained by the company (effectively ‘in treasury’). If the shares are retained, companies can sell them for cash (to raise funds or under an option scheme) or transfer them for the purposes of employee share schemes. These shares, referred to as ‘treasury shares’, are dealt with in further detail in the Treasury shares following a share buy back guidance note.The tax treatment for the shareholders in a company on a purchase of own shares will fall into one of two categories ― either the ‘income treatment’ or the ‘capital treatment’. Under the income treatment, the purchase is dealt with as an income distribution (ie a dividend). However, there is an exception for buybacks made by unquoted trading companies where, provided certain conditions are met, the seller is instead treated as making a capital disposal. See the Income treatment for purchase of own shares and Capital treatment for purchase of own shares guidance notes for further details.An advance clearance procedure is available to obtain certainty on HMRC’s view of the tax treatment of the buyback. This

HMRC clearance applications ― overview

HMRC clearance applications ― overviewThere are three main types of clearances available:•statutory clearances•non-statutory clearances•statutory approvalsHMRC will usually respond within 30 days for statutory clearance applications and within 28 days for non-statutory clearances, though this can take longer in more complex cases. Companies and their advisers should note that it is possible for clearance to take much longer than the normal turnaround. Indeed, in ‘Delays ahead’ in Taxation, 4 March 2021, 18, Pete Miller discusses his own recent experience of delays in HMRC granting statutory clearance under TCGA 1992, s 138, sometimes even in the case of simple reconstructions. Advisers should be aware of the potential of encountering similar delays with HMRC and factor these into the relevant transaction timetable.Statutory clearancesStatutory clearances are clearance procedures provided for in the legislation. There are a number of statutory clearances available. Some of these are dealt with regularly by tax advisers and so these are covered in more detail below.Clearances under the following provisions should be sent in a single letter to HMRC’s Clearance and Counteraction Team:•CTA 2010, s 1091 (demergers), see the Demerger clearances guidance note•CTA 2010, s 1044 (purchase of own shares), see the Purchase of own shares

A–Z of common adjustments to trading profits

A–Z of common adjustments to trading profitsWhy are adjustments to profit important?When calculating the profits of a trade, it is necessary to consider whether the expenses posted to the income statement are deductible for tax purposes. If not, the expenses must be added back to the profit in order to calculate the income tax or corporation tax liability (as appropriate).As there are many different trades which each incur a wide variety of expenditure that may require adjustment, a huge body of case law has evolved to supplement the fundamental principles set out in statute. The relevant concepts are explained in the Adjustment of profits ― overview guidance note.The table below lists some of the more common adjustments, together with links to additional sources of information including other guidance notes, Simon’s Taxes and HMRC’s manuals. Whether costs are allowable or not in practice often depends upon the specific trade in question and the surrounding facts. The table below should be used as a guide only.Navigation tip: press ‘Ctrl + F’ to search for a particular term within the table.Item of expenditureUsual tax treatmentFurther detailsAAdvertising hoardingsMore permanent structures used for advertising treated as capital, therefore disallowableSales, advertising and marketing; Simon’s Taxes B2.462; BIM42550Archives and record of business historyUsually deductible, akin to advertisingBIM42501BBad and doubtful debtsAllowable for traders. Dealt with under the loan relationships regime for companiesSimon’s Taxes B2.410; BIM42701Bank errors ― funds lostCurrent account deposits lost through bank

Statutory clearances

Statutory clearancesAvailable statutory clearancesA number of clearance procedures are provided for in the legislation. Only some of these are dealt with regularly by tax advisers and so it is only these most common clearance procedures that are covered in more detail below. A full list of the statutory provisions where advance clearance can be applied for can be found on the GOV.UK website.Clearances under the following provisions should be sent in a single application to HMRC’s Clearance and Counteraction Team.Please click on the links where indicated for further guidance on drafting the relevant clearances:CTA 2010, s 1091DemergersSee the Demerger clearances guidance noteCTA 2010, s 1044Purchase of own sharesSee the Purchase of own shares clearances and reporting guidance noteITA 2007, s 247(1)(f)EIS shares ― acquisition by new companySee the Enterprise investment scheme deferral relief and Gain deferred through EIS becomes chargeable guidance notesCTA 2010, s 748 / ITA 2007, s 701Transactions in securitiesSee the Transactions in securities clearances guidance noteTCGA 1992, s 138(1)Share exchangesSee the Paper for paper treatment clearances guidance noteTCGA 1992, s 139(5)Reconstructions

Purchase of own shares clearances and reporting

Purchase of own shares clearances and reportingIn situations where capital treatment applies to the repurchase of a company’s own shares, it is possible to obtain advance clearance from HMRC. The same clearance procedure may also be used for a repayment or redemption of shares. Regardless of whether advance clearance is sought, taxpayers seeking to treat amounts received from selling shares back to the company as capital must report details to HMRC within 60 days of the share buyback. For details of the conditions for capital treatment, see the Capital treatment for purchase of own shares guidance note.Clearance applicationsAn application for clearance must:•be in writing•include full details of the proposed share repurchaseUsually the application should be submitted to HMRC’s Clearance and Counteraction Team. The clearance application can be submitted by post or email. Further details can be found on the GOV.UK website. It is possible to submit the

Summary of main types of company reorganisation

Summary of main types of company reorganisationThis guidance note summarises some of the ways in which companies may reorganise their activities and some of the key tax considerations.DemergersGroups may want to split out their activities for many different reasons. There may be conflicting interests between shareholders, legal reasons to separate a trade out from the rest of the group with corporate protection, or it may be the only way for a purchaser to be able to buy certain parts of the business.The term ‘demerger’ covers several possible structures:•statutory demerger•demerger by way of reduction of share capital (often referred to as a capital reduction demerger)•demerger by Insolvency Act 1986, s 110 demerger (also known as a liquidation demerger)There are tax provisions which should enable certain tax advantages, mainly that for tax purposes a qualifying distribution is exempt and as such there is no income tax for the shareholder.For more information see the following guidance notes:•Demergers ― overview•

Income treatment for purchase of own shares

Income treatment for purchase of own sharesThe tax treatment for the shareholders in a company on a purchase of own shares will fall into one of two categories ― either the ‘income treatment’ or the ‘capital treatment’.For shareholders who are UK resident individuals, the income treatment will apply by default to the repurchase. However, where the buyback is carried out by an unquoted trading company and specific conditions are met, the seller is treated as receiving a capital payment instead (ie the capital treatment applies). See the Capital treatment for purchase of own shares guidance note for further details on when the capital treatment can apply.For shareholders who are not UK resident individuals, only the income treatment can apply as one of the conditions that must be satisfied under the capital treatment is for the shareholder to be UK resident. Though see Simon’s Taxes D6.613 for commentary on the potential infringement on EU freedom of capital that this condition may represent (at least in the case of purchases made prior to 1 January 2021).For a corporate shareholder, it is likely that the distribution will fall within one of the dividend exemptions, and as a result the entire amount received on the buyback is brought into tax as a chargeable gain (ie the capital

Capital treatment for purchase of own shares

Capital treatment for purchase of own sharesFor unquoted trading companies only, the amount received by a shareholder on selling his shares back to the company may be treated as capital, rather than as a distribution, provided certain conditions are met.For an illustration of how the gain or loss is computed under the capital treatment, see Example 1.This treatment only applies to purchases of own shares by unquoted trading companies that are not 51% subsidiaries of a quoted company, or to purchases of own shares by unquoted holding companies of a trading group. For these purposes, the definition of unquoted company includes companies listed on the Alternative Investment Market or those dealt in on the Unlisted Securities Market. A ‘trading company’ is a company whose business consists wholly or mainly (ie greater than 50%) of carrying on a trade or trades, and a ‘trading group’ is a group the business of whose members, taken together, consists wholly or mainly of carrying on a trade or trades. The trading status is tested at the date that the share buyback takes place. For the meaning of what constitutes a trade, see the Badges of trade guidance note. However, the dealing in shares, securities, land or futures is specifically excluded from being a trade for these purposes. It should be noted that the definition of trading company differs for the purposes of business asset disposal relief (formerly known as entrepreneurs’ relief) which requires a higher threshold of trading activities (80%). Therefore, it is

Effective profit extraction ― overview

Effective profit extraction ― overviewExtraction of companies’ profits will result in a tax charge and often national insurance contributions (NIC) being levied. Careful planning is crucial. This is generally a complicated exercise as there are many different factors to consider. As well as considering the tax impact of the chosen profit extraction strategy, it is important not to lose sight of the commercial, legal or long-term implications.BackgroundProfits within a company will be taxed under corporation tax. Once profits are extracted, they are subject to taxation again in the hands of the individual owner. The rate and timing of the tax / NIC liability depends on the chosen method of profit extraction.For further guidance on the calculation of corporation tax, see the Computation of corporation tax guidance note.Summary of profit extraction optionsThere are a number of methods for an owner of a company to extract profit. These can be regarded as primarily falling into two categories: capital and income. These will often result in capital gains tax or income tax consequences, and the choice of profit extraction method may be specifically chosen according to the consequences.CapitalThe following are the methods generally used to extract capital, usually when the business has ceased, the owner has retired or is passing the business on to others:•informal winding up, see the Informal winding up guidance note•purchase of own shares, see the Purchase of own shares ― overview guidance note•liquidation, see the Tax implications

Stamp duty ― basic rules

Stamp duty ― basic rulesIntroduction and scopeStamp Duty is a tax on documents and has existed for over 300 years. During the latter part of the 20th century, and in particular following the introduction of Stamp Duty Land Tax (SDLT), the scope of Stamp Duty has been narrowed significantly.The documents which are now within the scope of Stamp Duty are broadly confined to:•instruments relating to stock or marketable securities•instruments transferring an interest in a partnership the assets of which include stock or marketable securities•instruments which transfer UK land and buildings where the contract was entered into before SDLT was introduced and which are not within the SDLT regimeIn practice, by far the most common circumstance where stamp duty is encountered is on stock transfer forms for the purchase of unquoted shares in UK registered companies.The stamp duty statute is spread over many years, the most important legislation being the Stamp Act 1891 and FA 1999, Sch 13.HMRC manual references are to the Stamp Taxes on Shares Manual (STSM).On 21 July 2020, the Government issued a call for evidence inviting views on the design for a new framework for stamp duty and stamp duty reserve tax which will help inform a broader long-term modernisation of the regimes. The consultation closed on 13 October 2020 and a summary of responses was published on 20 July 2021.