Liability to tax on distribution held for less than an hour

The taxpayer bought the entire share capital – 99 shares – in a company for £1.95m. The company then immediately bought 98 shares for £1.95m. The taxpayer said it was a trading transaction and the aim was to wind up the company within two years. The deal was in effect financed by the company; the taxpayer had owned the buyback shares for less than one hour. As an alternative he said the transaction should be treated as the acquisition of a single share.

HMRC said the proceeds represented a distribution of company assets and assessed the taxpayer to income tax on the basis that he had received a distribution of £1.95m (the buyback proceeds) from the company. The taxpayer argued that he should instead be taxed on the true substance of the transaction which was that he had received one share in the company less the...