What is a Company Purchase of Own Shares by multiple-completion contract?
Where a shareholder exits a business, and subject to there being sufficient reserves, a company can repurchase the shares from the exiting shareholder. However, all of the consideration is required to be paid in cash at completion – i.e. no part can be left outstanding as a debt owed by the company.
Where the company cannot afford to purchase its own shares for cash in full, multiple-completion contracts have been used as a workaround. This allows for the disposal and payment of the shares in tranches, over a period of time. Multiple-completion contracts typically involve the shareholder giving up beneficial entitlement to all shares at the time of the contract. Legal title in the shares then passes in tranches over time (at each ‘completion’), and subject to the company having the available reserves and cash at each stage. The shares to which the vendor retains legal title may also convert to worthless ‘deferred shares’ in advance of the completion of the transfer of legal title.
What has been the HMRC’s view previously?
Provided the beneficial ownership of all the shares was disposed of at completion, and the uncompleted tranches were converted into non-voting shares, HMRC have historically accepted that the capital treatment can apply (subject to other conditions being met). This ensured that the resulting disposal by the shareholder would be eligible for Capital Gains Tax rather than being assessed to higher income tax rates as a dividend.
How has this changed?
HMRC have changed their view on this in new guidance published by the Chartered Institute of Taxation. This means that, in HMRC’s view, the capital treatment will now only apply in very limited circumstances when using multiple-completion contracts (generally when, after the first tranche disposal, the seller retains a holding of less than 30% of the company, including the later tranches), otherwise dividend tax rates will apply. Practically, it means the use of multiple-completion contracts for this purpose is now in doubt.
What does this mean?
Where companies can’t afford to make full payment in one go, alternative structuring options are available to secure capital treatment. These structures are likely to have other tax and administration costs and introduce complexity to an otherwise straightforward transaction. This changes the landscape for companies, shareholders and professionals alike.
More worryingly, HMRC appear to have taken the view that legal ownership overrides beneficial ownership in this instance. This goes against a fundamental principle in tax and is unheard of. It poses the question of whether HMRC may take this approach to challenge other seemingly established structures? Food for thought which is bound to send the tax profession into a spin!
How can I find out more?
See below link to the CIOT website to see HMRC’s guidance in more detail and get in touch with us to discuss wider option, if required.
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