Can it be right?

My client company has a large share capital in excess of £1 million. The shares were subscribed for at par in 1997. The company has a small amount of negative reserves and is unable to pay a dividend but does have cash resources.

I thought that the company could pay some of that cash to the shareholders using the new reduction of share capital procedures of the Companies Act 2006. However I am not sure of the correct tax treatment.

My concern arises from The Companies (Reduction of Share Capital) Order 2008. Paragraph 3 states that ‘a reserve arising from the reduction is to be treated for the purposes of Part 23 of the Act as a realised profit’.

There is not a simple repayment of the share capital but a reduction in the share capital that will create a reserve....