Readers’ forum: 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]...