Corp Tax - Chapter 25

Question 1

Income Treatment

Answer 1

Receipt is dividend

Question 2

Capital Treatment

Answer 2

Chargeable Gain @ 10%/20%

Question 3

Legal requirement

Answer 3

Sufficient distributable reserves
Power in the articles of association
Shares must be paid for when purchased.

Question 4

Accounting treatment

Answer 4

Debit the P&L reserve
Credit the capital redemption reserve

Question 5

Income Treatment

Answer 5

The dividend will be the amount received on the share buy-back less the original subscription price of those shares. The subscription price is normally the same as the nominal value of the shares.

Amount rec’d X
Less orig price X
Dividend X

Original Subs
Sales proceeds = original price X
Actual cost X
Gain

if not original then sale will create a capital loss or gain.

Question 6

Capital Treatment criteria

Answer 6

unquoted trading companies that are not 51% subsidiaries of a quoted company, or to purchases of own shares by unquoted holding companies of a trading group.

i. It must wholly or mainly benefit the trade carried on by the company
a. the vendor must be resident in the UK at the time of the purchase;

b. the vendor must have owned the shares for at least five years (this is
reduced to three years if acquired as a result of a death,

c. there must be a substantial reduction in the vendor’s shareholding < 75%

d. following the buy-back, the vendor must be unconnected with the
company < 30%

Question 7

Advance clearance from HMRC can be applied for as to whether the capital treatment applies. HMRC have ???? days in which to raise any queries on the clearance application or give clearance. HMRC also require notification of the details of the transaction within 60 days.

Answer 7

30

Question 8

Substantial Reduction Test

Answer 8

25%

Question 9

Nominal value test

Answer 9

Before the buyback owned ?/? of the company

After = owned - buy back / current total - buy back

If > 25% big enough reduction

Question 10

Distributable profits test- before

Answer 10

the profits available for distribution before the buyback are the sum of:

• the distributable profits;
• a statutory addition of £100;
• dividends on fixed rate preference shares; and
• the proceeds used to buy back the shares which exceed the distributable profits immediately before the buy-back (where applicable).

Question 11

Distributable profits test- after

Answer 11

• the distributable profits left after the buy-back (if any);
• a statutory addition of £100; and CTA 2010, s.1038(4)
• dividends on fixed rate preference shares.

Question 12

The Connection Test

Answer 12

They possess, or are entitled to possess, more than 30% of the:
* issued ordinary share capital;
* loan capital; or
* voting power.

OR

2. They are entitled to receive more than 30% of the assets that would be distributable to the equity holders on a winding up of the company.

Question 13

Treasury Shares

Answer 13

A company is legally allowed to purchase its own shares without having to cancel them. Such shares are known as ‘treasury shares’

Although the shares are not cancelled by the company, they will be treated as cancelled for tax purposes. The company will not be treated as becoming a member of itself.

The share capital of the company will be treated as reduced by the nominal value of the shares bought back. Where the shares are later disposed of by the company, the company will be treated as having issued new shares.

If the consideration received on sale is less than the nominal value of the shares, the shares will be treated as having a nominal value equal to the amount of consideration received.

Where the consideration received on sale exceeds the nominal value of the shares, the shares will be treated as being issued at a premium.

This treatment does not apply if the amount paid for the repurchased shares is taken into account in calculating the trading profits of the company.