April 9, 2024



Before proceeding with a purchase of own shares, a company (and its advisers) will need to consider the following issues:

  • distributable reserves ― the company must have sufficient distributable reserves to carry out the buyback. The most recent filed accounts should show sufficient distributable reserves to conduct the purchase. It may be necessary to restrict dividend payments in the period leading up to a share buyback to ensure there are sufficient distributable reserves
  • cash reserves ― in HMRC’s view, to effect a valid purchase, the company must make full cash payment on purchase. Therefore, cash reserves would also need to be carefully reviewed to ensure there is sufficient cash to carry out the buyback while also leaving adequate cash for the company’s working capital requirements. A possible workaround with this is for the exiting shareholder to loan the money back to the company but this can potentially breach the ‘connection test’, which is one of the requirements for the capital treatment. See below CTM17505 for more on the cash position
  • the company’s power to undertake the share buyback ― it is important to check a company’s articles of association and shareholders’ agreement for any restrictions or prohibitions on share buybacks. These can include pre-emption rights or similar provisions that restrict the transfer of shares, which may require shares to be offered to existing members before they can be transferred to any other party (including the company). If so, these may need to be amended accordingly prior to the repurchase
  • company law requirements ― it is essential that these are understood and adhered to for the purchase of own shares to be valid
  • HMRC clearance ― if seeking capital treatment for the relevant shareholder, applying for HMRC clearance in advance of the buyback to confirm their agreement with the tax treatment. Appropriate time should be built into the transaction timetable for this.

According to HMRC:

To effect a valid purchase the company must make full cash payment on purchase. The transfer of any other asset or the creation of a loan account because, say, the company does not have sufficient cash available does not represent payment. In such circumstances, the shares are not treated as cancelled and legal ownership remains with the vendor. The tax treatment following from an invalid purchase of own shares depends upon the actions taken (if any) to rectify matters. CTM17505

Legal considerations

There are strict legal requirements in the Companies Act regarding the purchase by a company of its own shares.

CA 2006, ss 658–737

Professional advisers who are unfamiliar with company law should obtain appropriate legal advice. Failure to satisfy the relevant requirements could make the transaction void and legally unenforceable. In addition, the company and its officers could be liable to sanctions and the adviser to a professional indemnity claim.

Always seek professional advice.

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