HMRC has clarified its position on the purchase of own shares legislation in CTA 2010 s 1033 where the transaction is effected through a multiple completion contract and where the seller, immediately after the purchase, remains connected with the company.
The ‘connection’ point is key because, on a usual share buy-back, for example, the seller must not be connected with the company immediately after the buy-back if capital treatment is to apply – in other words for the proceeds to be treated as a capital receipt rather than a distribution.
By virtue of CTA 2010 s 1062(2)(a), the seller remains connected with a company as long as it ‘possesses’ or is entitled to acquire more than 30% of the ordinary share capital of the company.
HMRC’s view is that the word ‘possesses’ refers to legal, rather than beneficial, ownership. This means that, even though beneficial ownership of all the shares may transfer on a sale under a multiple completion contract on the date of that contact, legal ownership will be retained until completion of the sale. The seller will therefore remain connected until completion.
Although HMRC had given clearances in the past where the connection test had not been met due to retained legal ownership, the update confirms that ‘going forward HMRC will apply the connection test as described above which may result in some applications being rejected’. In essence, HMRC will adopt a strict interpretation of the legislation.
Commenting on the news, Pete Miller (The Miller Partnership), said: ‘We understand that HMRC must follow the letter of the law, but that it is unfortunate (to say the least) that it does not see this as a matter of sufficient importance for them to approach ministers to suggest a change in the legislation to put us back to where we all thought that we were.’
HMRC has clarified its position on the purchase of own shares legislation in CTA 2010 s 1033 where the transaction is effected through a multiple completion contract and where the seller, immediately after the purchase, remains connected with the company.
The ‘connection’ point is key because, on a usual share buy-back, for example, the seller must not be connected with the company immediately after the buy-back if capital treatment is to apply – in other words for the proceeds to be treated as a capital receipt rather than a distribution.
By virtue of CTA 2010 s 1062(2)(a), the seller remains connected with a company as long as it ‘possesses’ or is entitled to acquire more than 30% of the ordinary share capital of the company.
HMRC’s view is that the word ‘possesses’ refers to legal, rather than beneficial, ownership. This means that, even though beneficial ownership of all the shares may transfer on a sale under a multiple completion contract on the date of that contact, legal ownership will be retained until completion of the sale. The seller will therefore remain connected until completion.
Although HMRC had given clearances in the past where the connection test had not been met due to retained legal ownership, the update confirms that ‘going forward HMRC will apply the connection test as described above which may result in some applications being rejected’. In essence, HMRC will adopt a strict interpretation of the legislation.
Commenting on the news, Pete Miller (The Miller Partnership), said: ‘We understand that HMRC must follow the letter of the law, but that it is unfortunate (to say the least) that it does not see this as a matter of sufficient importance for them to approach ministers to suggest a change in the legislation to put us back to where we all thought that we were.’
