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Treatment of proceeds of share purchase.
I have a client, A Ltd. The shareholders set up B Ltd to purchase shares in A Ltd owned by retiring A Ltd shareholders. The purchase of shares by B Ltd is funded by loans from A Ltd. B Ltd owns 8% of A Ltd shares.
A Ltd wishes to buy back A Ltd shares held by B Ltd. I assumed this would be a straightforward purchase of own shares with the purchase proceeds exceeding amounts subscribed for shares, being treated as a distribution, as provided for in CTA 2010, s 1000(1)B. Distributions between UK resident companies are generally regarded as tax neutral. CTA 2009, s 931A states, assuming conditions are met, that the distribution is ‘exempt’.
HMRC’s statement of practice 4/1989 says that it regards such purchases as being of a capital nature. HMRC took the case Vojak v Strand Options [2004] STC 64, which it eventually won. While this case involved the pre-CTA 2009 distributions regime, following this decision CTA 2009, s 931RA was introduced stating that ‘the fact that a dividend or other distribution is exempt does not prevent it from being taken into account in the calculation of chargeable gains’, appearing to legislate HMRC’s interpretation in the context of CTA 2009, Part 9A.
Should the purchase proceeds less costs be treated as a chargeable gain subject to corporation tax, or is the distribution exempt from corporation tax on distributions but is still subject to corporation tax as a capital gain?
CA 2006, s 691 requires that the shares purchased must be paid for on purchase. Does this mean that the A Ltd shares must be paid for in cash or would it be acceptable to set off the loan between A Ltd and B Ltd?
Readers’ views would be appreciated.
Query 20,003 – Jez.
Remedy where contractor will not supply CIS paperwork.
My client is a construction industry scheme (CIS)-registered builder often used as a subcontractor by other contractors.
Last year he raised an invoice to the main contractor for labour at £15,000, of which £12,000 was due to the client after a CIS deduction at 20%.
My client received payment of £12,000. But the main contactors ignored his requests to provide a CIS deduction statement which he can offset against his own CIS liabilities (arising on payments to his own subcontractors).
Could readers advise on the relief available where the client does not expect to receive the paperwork confirming the deduction? It seems that reporting the main contactor to HMRC would be sensible, however I am more concerned about my client’s financial position, with HMRC (understandably) not acknowledging a deduction, leaving him out of pocket.
Query 20,004 – Goliath.
Relief available for property losses.
I am considering the tax position of a small property investment company. Although the affairs are straightforward I am uncertain as to the principles concerning the order of relief of different types of losses.
The company, incorporated in 2018, owns one mortgaged UK residential property let to an unrelated tenant. The figures for the year ending 31 January 2022 are: profit from a property business: £8,300; NTLR deficits arising in the period: £5,200; qualifying donations: £100.
The following balances are brought forward from the previous 12-month period: property business losses: £2,700; NTLR deficits: £900.
It seems that there are enough losses to cover the property profit in 2022 and there will also be some losses/deficits carried forward.
What is less clear is the point of principle as to the order of using brought forward property losses, current-year NTLR deficits and previous-year NTLR deficits.
Readers’ comments would be greatly appreciated.
Query 20,005 – Belsha.
Margin sale, exempt or standard rated?
I act for a client who has recently purchased land from a farmer for £5m – his intention is to build houses on the land and sell them. No VAT was charged on the land sale.
My client has gained an unexpected windfall – there are some pig cabinets on the land, which my client will be able to sell at an auction for a six-figure sum. However, I am getting conflicting advice about VAT. My view is that pig cabinets are standard rated – unless exported – but our tax partner says that no VAT will be payable on the sales because no input tax was claimed by my client when they were purchased. And then another colleague says that we should work out a ‘cost price’ for the cabinets – using any method that is fair and reasonable – and then pay some output tax with the second-hand margin scheme.
Query 20,006 – Peppa.
