A recent tribunal decision in John Boulting v HMRC provides an interesting insight into how HMRC evaluates Company Purchases of Own Shares (CPOS) . In this case they attempted to recharacterise the proceeds as an income distribution rather than a capital disposal.
The case highlights the importance of demonstrating that a share buyback is undertaken wholly or mainly for the benefit of the company’s trade, rather than primarily to benefit the departing shareholder.
Background
John Boulting owned 50 shares in PSC, the holding company of STG, which operated a training business.
In 2013, it was decided that John would retire as a director of PSC to allow his son to take the company forward with a new management strategy.
In February 2014, PSC was valued at approximately £34 million. However, the company only held around £5 million in cash reserves, which limited the amount it could pay John for his shares.
The parties agreed that:
- John would sell 8 shares back to PSC for approximately £5 million, based on a valuation of the business.
- He would gift 38 shares to his son.
- He would retain 4 shares to later pass on to his grandchildren.
HMRC granted clearance for the proposed CPOS in March 2014.
However, in the months that followed, PSC performed better than expected. Discussions with potential third-party purchasers suggested that a higher valuation multiple might apply.
By September 2014, PSC was revalued at £73 million, and a price of £600,000 per share was agreed for the 8 shares to be purchased by the company.
HMRC granted advance clearance under CTA 2010 s1044 confirming that the conditions in s1033 for capital treatment were satisfied.
Following John’s gift of 38 shares to his son, the share buyback took place in January 2015, with PSC purchasing 8 shares for £4.8 million.
HMRC Enquiry
HMRC opened an enquiry into John’s 2014–15 tax return in October 2016.
A closure notice was issued which treated the payment as a distribution subject to Income Tax, rather than Capital Gains Tax (CGT). This increased John’s tax liability by over £1 million.
HMRC’s Arguments
HMRC argued that the transaction did not qualify for capital treatment, for several reasons:
- Clearance was not binding
HMRC claimed the clearance was invalid because the share value used was materially greater than market value, and this had not been properly disclosed in the clearance application.
- Minority discount not applied
HMRC argued that the price paid did not reflect that John was selling a minority shareholding, meaning the share price should have been discounted.
- No genuine trade benefit
HMRC suggested the buyback was unnecessary because the business was already profitable and growing, and there was no clear evidence the transaction was required to benefit the company’s trade.
- Excessive payment
HMRC contended the amount paid was effectively compensation for John’s historic investment and risk, rather than a payment made mainly to benefit the company’s trade.
John appealed the decision to the First Tier Tribunal (FTT).
Tribunal Findings
The FTT ultimately ruled in favour of John.
Key findings included:
- The buyback benefited the trade
The tribunal found there had been board-level disputes regarding company investment plans. John’s exit allowed those disputes to be resolved and enabled the business to progress with its investment strategy.
This meant the share buyback benefited the company’s trade.
- The gift and buyback should be considered together
HMRC argued the CPOS should be assessed separately from the gift of shares to John’s son.
The FTT rejected this argument, stating the question was whether the payment for the 8 shares was made wholly or mainly to benefit the trade.
- No minority discount required
The tribunal recognised that a founder shareholder leaving the business would reasonably expect to receive the full value of their shares, without a minority discount.
The tribunal also noted that this would likely be the same value achieved if the business had been sold to a third party.
- Trade benefit can arise from combined actions
The FTT confirmed that a CPOS does not need to achieve the trade benefit on its own.
The statutory test simply requires that the purpose of the purchase is to benefit the company’s trade, even if that benefit arises alongside other actions.
- Payment was not remuneration
The tribunal rejected HMRC’s argument that the payment was intended to reward John for his historic investment.
Outcome
The tribunal allowed the appeal.
As a result:
- The payment was treated as Capital Gains Tax, rather than Income Tax.
- John was able to claim Business Asset Disposal Relief, significantly reducing the tax payable.
Our Thoughts
This case is particularly interesting because HMRC challenged whether the share buyback was genuinely undertaken to benefit the company’s trade.
In practice, many CPOS transactions occur when founding or ageing shareholders exit a business. These individuals may have been instrumental to the company’s success, making it difficult to separate personal benefit from commercial benefit.
This decision reinforces several important points:
- The commercial purpose of the transaction is critical.
- A clear trade benefit must be demonstrable.
- The transaction should be viewed in the context of the wider restructuring, not in isolation.
The key test is whether the company’s purpose in entering the buyback was wholly or mainly to benefit the trade.There must be a genuine commercial advantage to the company in removing the shareholder.
