Purchase of own shares from a corporate shareholder

United Kingdom
The High Court has reversed the decision of the Special Commissioners in Strand Futures and Options Limited v Vojak Subject to an appeal by the Inland Revenue, this case decides how a corporate shareholder is taxed on sums that it receives from a company that purchases its own shares from the corporate shareholder.

A company is not subject to tax on the Schedule F dividends that it receives. The issue that arose in this case was whether, in computing the capital gain or loss that arises on the disposal of the shares by the corporate shareholder, the amount of the Schedule F dividend should be excluded from the proceeds of sale. If the court could be persuaded that it should be excluded then the corporate shareholder would avoid paying any tax on the payment that it received.

Since April 1989, the Inland Revenue view has been that since the distribution does not suffer a corporation tax charge as income on the sum received then in computing the capital gain or loss arising on the disposal of the shares the sum received should not be excluded from the corporation tax on chargeable gains computation (s37 Taxation of Chargeable Gains Act 1992 excludes from the computation of the capital gain amounts that have been taxed as income).

The Special Commissioners upheld the line taken by the Inland Revenue but the High Court has reversed this and held that s208 Income and Corporation Taxes Act 1988 not only exempts Schedule F income distributions but also exempts from corporation tax distributions of a company that give rise to a capital gain.

Although the Inland Revenue has not yet reacted publicly to the decision it will be surprising if the Revenue do not lodge an appeal.

For further information, please contact:

Mark Nichols
Corporate Tax Partner
+44 (0) 20 7367 2051
mark.nichols@cms-cmck.com

Peter Bateman
Professional Support Lawyer
+44 (0) 20 7367 3145
peter.bateman@cms-cmck.com

Mike Boutell
Professional Support Lawyer
+44 (0) 20 7367 2218
michael.boutell@cms-cmck.com