Company Share Buybacks UK: Tax, HMRC Clearance & Process
Considering a company share buyback? Learn how UK share buybacks work, the tax implications, HMRC clearance process and how Cutts & Co can help.
Company Share Buybacks: A Guide to the Process, Tax and HMRC Clearance A company share buyback, also known as a purchase of own shares, can be an effective way for a shareholder to exit a private limited company, restructure company ownership or support succession planning. However, a share buyback is not simply a matter of the company paying a shareholder for their shares. There are important Companies Act requirements, tax implications, accounting considerations and HMRC rules that need to be considered before the transaction takes place. At Cutts & Co, we help companies and shareholders plan and implement share buybacks, including reviewing the tax position, considering whether capital treatment may be available, preparing HMRC clearance applications and assisting with the share buyback process. What Is a Company Share Buyback? A share buyback takes place when a company purchases some or all of its own shares from an existing shareholder. For example, a private limited company may have two shareholders and one wants to retire or leave the business. Instead of the remaining shareholder personally purchasing the departing shareholder's shares, it may be possible for the company to buy back the shares. The shares purchased by the company will generally be cancelled, which can increase the percentage ownership held by the remaining shareholders. For UK companies, purchases of own shares are principally governed by Part 18 of the Companies Act 2006. Why Would a Private Company Buy Back Its Own Shares? There are a number of reasons why a private company share buyback may be considered. These can include: a shareholder retiring from the business; a shareholder wanting to exit the company; succession planning; restructuring the ownership of a family company; resolving differences between shareholders; simplifying the company's share structure; buying out a minority shareholder; or allowing the company to fund a shareholder exit rather than the remaining shareholders funding the purchase personally. A share buyback can therefore be a useful business succession and shareholder exit planning tool. However, whether it is appropriate will depend upon the company's financial position, distributable reserves, share structure and the circumstances of the shareholders. How Does a Share Buyback Work? The precise share buyback process will depend upon the circumstances, but it will normally involve several distinct stages. 1. Review the Proposed Share Buyback Before proceeding, the company needs to establish exactly what it is trying to achieve. This will normally involve considering: who is selling the shares; how many shares are being purchased; the proposed purchase price; how the company will fund the buyback; the company's available distributable reserves; the company's articles of association; any shareholders' agreement; the shareholder's tax position; and what the ownership structure will look like after completion. Carrying out this work before agreeing the final transaction can help identify potential company law and tax problems with the share buyback. 2. Check Whether the Company Can Fund the Share Buyback A company cannot simply use its cash reserves to purchase its own shares without considering the relevant company law requirements. In many private company buybacks, the purchase will be funded from distributable profits. Other statutory routes can potentially be available depending upon the circumstances. It is therefore important to distinguish between the company having sufficient cash and having sufficient distributable reserves. These are not necessarily the same thing. The company's accounts, reserves and current financial position should therefore be considered before the share buyback proceeds. 3. Consider the Tax Treatment of the Share Buyback The tax treatment of a share buyback is one of the most important parts of the transaction. It should not automatically be assumed that the shareholder will simply pay Capital Gains Tax on the proceeds. Under the normal tax rules, amounts received from a company purchasing its own shares can potentially be treated as a distribution for Income Tax purposes. However, specific legislation can allow qualifying purchases of own shares to receive capital treatment, meaning the payment is instead treated as consideration for the disposal of the shares. Whether capital treatment is available depends upon detailed conditions concerning the company, shareholder and transaction. Share Buyback: Capital Gains Tax or Income Tax? The distinction between Capital Gains Tax and Income Tax on a share buyback can be extremely important. If the relevant statutory conditions are satisfied, the shareholder may be treated as disposing of their shares for Capital Gains Tax purposes. This can also mean considering whether any Capital Gains Tax reliefs are available to the shareholder. However, if the conditions for capital treatment are not satisfied, the tax treatment may be very different. For this reason, the tax consequences should ideally be considered before the share buyback agreement is completed or money is paid. What Are the Conditions for Capital Treatment on a Share Buyback? The conditions for receiving capital treatment on a purchase of own shares are detailed and should be reviewed against the actual facts of each transaction. Depending upon the circumstances, areas that may need to be considered include: whether the company meets the relevant trading requirements; how long the shareholder has owned the shares; whether the purchase is being made for the benefit of the company's trade; whether the shareholder's interest in the company will be substantially reduced; whether the shareholder remains connected with the company following the purchase; and the commercial reasons for the transaction. There are detailed statutory rules behind these tests, so a share buyback should not be structured using a generic checklist alone. HMRC Share Buyback Clearance An important part of many transactions is obtaining HMRC clearance for a share buyback. Where capital treatment is intended, it may be appropriate for the company to make an advance clearance application to HMRC before completing the transaction. The clearance application will ordinarily explain the proposed transaction and the relevant circumstances supporting the tax treatment being sought. Obtaining clearance can provide valuable certainty over the application of the relevant purchase of own shares rules. However, HMRC clearance does not replace the Companies Act requirements. The company must still ensure that the buyback itself is implemented correctly. 4. Review the Company's Articles and Shareholders' Agreement The company's existing documentation should be reviewed before the share buyback is implemented. This can include: articles of association; shareholders' agreements; statutory registers; share certificates; previous share transactions; and relevant company resolutions. A shareholders' agreement is particularly important. It may contain restrictions on share transfers, valuation provisions, pre-emption rights or other requirements that affect how the proposed shareholder exit should be implemented. 5. Prepare the Share Buyback Documentation Once the structure and tax position have been considered, the necessary share buyback documents can be prepared. Depending upon the transaction, these may include: a share buyback agreement; directors' resolutions or board minutes; shareholder resolutions; supporting company documentation; Companies House forms; and updates to the company's statutory registers. The order in which documents are approved, signed and completed can be important. 6. Complete the Share Buyback Once the necessary approvals are in place and any required tax clearance has been obtained, the share buyback can proceed to completion. The payment arrangements should be carefully considered before completion. Attempting to structure a buyback using deferred payments or multiple completion dates can introduce additional company law and tax complications. This is another reason why the transaction should be properly structured before agreements are signed or money changes hands. 7. Companies House and Post-Completion Requirements There is still work to be completed after the shares have been purchased. Depending upon the transaction, this can include: filing the required forms at Companies House; dealing with any applicable stamp duty; cancelling the purchased shares; updating the register of members; updating the company's statutory records; recording the transaction correctly in the company's accounts; and dealing with the shareholder's tax reporting requirements. The post-completion work should form part of the planning process rather than being treated as an afterthought. Common Share Buyback Mistakes A purchase of own shares combines company law, taxation and accounting requirements, which means apparently small errors can have significant consequences. Common problems include: assuming Capital Gains Tax treatment automatically applies; failing to seek HMRC clearance before completion where appropriate; insufficient distributable reserves; confusing available cash with distributable profits; failing to consider the company's articles of association; overlooking provisions in a shareholders' agreement; incorrectly sequencing the documentation and payment; agreeing deferred consideration without considering the implications; failing to complete the required Companies House filings; and failing to correctly update statutory records. It is normally much easier to structure a company share buyback correctly from the outset than to try to resolve problems retrospectively. How Can Cutts & Co Help With a Share Buyback? At Cutts & Co, we can help businesses and shareholders understand and manage the financial and tax aspects of a proposed share buyback. Our involvement can include: Share Buyback Feasibility and Planning We can review the proposed transaction, existing ownership structure, commercial objectives and financial position before the buyback proceeds. Share Buyback Tax Advice We can consider the potential Income Tax and Capital Gains Tax treatment of the share buyback and whether the relevant conditions for capital treatment appear to be satisfied. HMRC Share Buyback Clearance Applications Where appropriate, we can assist with the preparation and submission of an HMRC purchase of own shares clearance application before the transaction completes. Review of Distributable Reserves We can review the company's accounts and financial position to consider whether sufficient distributable reserves are available to support the proposed transaction. Share Buyback Planning and Implementation We can help establish the appropriate sequence for the transaction and work alongside the company's solicitor or other advisers where legal input is required. Post-Completion Accounting and Tax Once the transaction has completed, we can assist with the relevant accounting and tax treatment and coordinate the necessary post-completion requirements. Do You Need Advice on a Company Share Buyback? If you are considering buying out a shareholder, restructuring your company, planning a shareholder retirement or arranging an exit from a family business, a company share buyback may be an option. The key is taking advice early. Ideally, the share buyback tax position, HMRC clearance, distributable reserves and Companies Act requirements should all be considered before the transaction is completed.