Key tax case highlights the risks of not seeking advice when conducting a share buyback
Key tax case highlights the risks of not seeking advice when conducting a share buyback, says Haslers
Tax advisers at Loughton-based accountancy firm, Haslers Chartered Accountants, have said that the recent case of Khan v HMRC has highlighted the growing need for advice when companies consider a share buyback.
A share buyback is a commonly used financial tool that allows for the re-acquisition by a company of its own shares so it can return money to shareholders. Share buybacks are commonly used by businesses during sales, winding up or where a key stakeholder intends to leave the business.
If handled correctly then share buybacks can benefit from tax relief under the Corporation Tax Act 2010, which could make a deal considerably more tax efficient.
However, in the case of Khan v HMRC, held at the First Tier Tribunal, this relief was disregarded as the judge rejected an appeal that the sale was a disposal of trading stock.
The taxpayer (Khan) had tried to take over a company with the view to winding it up and set about purchasing shares so that they could be sold back to the business. This action was taken after previous attempts to sell the company had been unsuccessful.
Paul Reynolds, Tax Partner at Haslers, said: “Under the original agreement the company would buy back the vendors’ share and sell some to Khan. Concerned vendors feared that they wouldn’t be able to claim Entrepreneurs’ Relief in this situation and so Khan came to an agreement to buy the shares directly and then sell them back to the company.
“Although Khan viewed this as a trading transaction eligible for the relief, the FTT doesn’t believe this meets the criteria and has said that HMRC was correct to tax the share buyback as a company distribution to the taxpayer.”
Paul said that this was a clear example of where seeking additional advice could have clarified matters for various parties and ensured that they all remained eligible for their respective tax reliefs.
“The sale or transfer of shares can lead to substantial tax liabilities and so it is essential that businesses and shareholders speak to an adviser when structuring a deal,” added Paul.
“There are a variety of reliefs on offer, some better known than others, so the right advice and support could help taxpayers save thousands of pounds.”
If you would like to know more about Hasler’s specialist tax services, please contact us.