In Boston Khan v HMRC [2021] EWCA Civ 624, the Court of Appeal agreed that a company purchase of its own shares was not part of a wider arrangement whereby the taxpayer acquired a controlling interest in the company. The conditions for capital treatment were not met and the repurchase was a distribution.
Mr Khan agreed to purchase a cash-rich company. Its owners (the vendor shareholders) wished to avoid the unfavourable tax treatment of taking a pre-sale dividend.
- In back-to-back transactions, he arranged to purchase the entire share capital of 99 shares for cash of £1.95m. Then, on the same morning, he arranged for the company to repurchase 98 of his 99 shares for the same amount.
- HMRC raised an Income Tax assessment of almost £600,000 on the £1.95m on the basis that he did not meet the qualifying five-year ownership condition for a Purchase of Own Shares to be treated as a capital disposal.
- The First Tier Tribunal (FTT) and Upper Tribunal (UT) dismissed his appeals agreeing that he had not met the minimum period of ownership requirements.
- Mr Khan appealed on the ground that the UT should have taken a purposive, Ramsay approach and looked at the sale and buyback of the shares as a single composite transaction and, in not doing so, had erred in law. He said he was merely a conduit for a company buyback of shares from the vendor shareholders.
The Court of Appeal (CoA), whilst having some sympathy, with Mr Khan agreed with the lower courts and dismissed the appeal:
- It is unusual for a taxpayer to rely on the Ramsay approach. This is usually invoked by HMRC to challenge tax avoidance. It is of general application but not all tax legislation is concerned with the overall effect of a series of related transactions viewed as one single composite transaction.
- In this case, the legal nature of the transaction which had a tax consequence i.e the share buyback, could not be found by looking at the connected transactions as a whole. The law requires the focus to be on the transaction which leads to the taxable distribution.
- However the transactions were viewed, they could not be re-characterised as a buyback arrangement made directly between the vendor shareholders and the Company, ignoring the role played by Mr Khan and disregarding his legal rights and obligations.
The opening line of the CoA decision neatly sums it up; “This is a cautionary tale, which illustrates all too graphically the importance of seeking specialist tax advice before entering into commercial arrangements that might have adverse tax consequences, however remote that risk might appear.”
Useful guides on this topic
Exit strategies: Index
Company owners have a number of options available to them when it comes to passing on their business or realising their investment.
Purchase of Own Shares
How can a company repurchase its share capital? What are the Companies Act requirements? What are the tax consequences for company and shareholder?
Purchase of own shares: Masterclass
A Checklist (Masterclass) for dealing with a Company Purchase of Own Shares.
External link
Boston Khan v HMRC [2021] EWCA Civ 624
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