Company law permits a company to buy back its own shares in certain conditions. (This is, by the way, to be distinguished from a ‘reduction of share capital’ to which different rules and a different tax treatment apply).
Where on a buyback of shares the amount paid by the company exceeds the amount originally subscribed for them on issue, the excess may be chargeable either to Income Tax or to Capital Gains Tax, depending on the circumstances. It’s possible to seek advance clearance from HMRC as to which tax applies, and it is usual to do so. Of course, such a clearance may be relied on as against HMRC only if all relevant information has been fully and accurately disclosed.
HMRC have helpfully set out in a guidance note (styled SP2/82) some specific factual information that must be provided in any application for such clearance. But they also say that the information they request ‘is not an exhaustive list, and in giving the particulars of the relevant transactions required by section 225(2) the applicant must fully and accurately disclose all facts and circumstances material for the decision of the Commissioners for HMRC.’ Which is fair enough, except that it is left to the applicant to work out for himself what ‘facts and circumstances’ beyond those specifically listed by HMRC would be regarded as ‘material’. There are echoes here of ‘uberrima fides’, a doctrine of insurance contracts under which, broadly, the insured must disclose all information potentially relevant to the risk even though the insurer may not have specifically asked for it.
In particular, nothing is said in SP2/82 about the repurchase being at market value.
It’s reasonable to suppose that if the company is buying shares back for a price that is manifestly and deliberately more than they are worth, that should be disclosed: and one would expect HMRC to say that ‘income’ treatment would apply in such a case. But what if the company believes that the buyback price equates to market value but HMRC, having given the clearance, subsequently come to the conclusion that it doesn’t?
That was exactly what happened in Boulting [2020] EWHC 2207 (Admin). HMRC declined to be bound by the clearance: the company sought a declaration from the court that the clearance was binding: the court declined to express an opinion, saying that it was a matter to be dealt with through the normal tax appeal process. Expect, therefore, to see a First-tier Tribunal case on the point at some time.
Meanwhile, to minimise the risk of HMRC reneging on any clearance, it is important that the basis on which the buyback price has been arrived at is disclosed, so that any doubts may be raised by HMRC before rather than after clearance is given. Ideally, the price will be based on an independent professional valuation; but whatever the basis, disclosure should be made.
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