Purchase of Own Shares

We have already referred to what can happen when shareholders in a Company fall out and identified some mechanisms which can be put in to enable matters to be resolved. However, shareholders may not have the resources to buy out a dissident co-shareholder. In these circumstances the option of having the company purchase some of its own shares can be useful. The Companies Acts provides that in certain circumstances a company is able to use its own cash to buy back its shares. If the money comes from capital then the rules are extremely complex but if there are profits available for distribution which can be used then instead of being used to pay out dividends these monies can be used to fund a purchase of own shares. On a cautionary note however this payment mechanism can be treated by the Inland Revenue in a similar manner to other share distributions. This means that the company could pay advance corporation tax on the distribution while it may in the fullness of time be able to offset this liability against mainstream corporation tax this could in the meantime cause cashflow problems. The monies received from the shares can also be treated as taxable income in the hands of the seller of shares in addition to any capital consequences which could arise through the sale. It is therefore to be recommended that anyone contemplating selling their shares back to the company should first consult professional advisers to secure Inland Revenue approval that the sale of shares will not be taxable in this manner through utilising certain exemptions which can be available. Although it can take about six weeks for clearances to be obtained this formal planning will avoid any nasty shocks later.

Anyone requiring further information on company purchases of own shares should contact Morinne Macdonald.