PART VI COMPANY DISTRIBUTIONS, TAX CREDITS ETC
CHAPTER III MATTERS WHICH ARE NOT DISTRIBUTIONS FOR THE PURPOSES OF THE CORPORATION TAX ACTS
Purchase of own shares
219 Purchase by unquoted trading company of own shares.
M1(1)
References in the Corporation Tax Acts to distributions of a company shall not include references to a payment made by a company on the redemption, repayment or purchase of its own shares if the company is an unquoted trading company or the unquoted holding company of a trading group and either—
(a)
the redemption, repayment or purchase is made wholly or mainly for the purpose of benefiting a trade carried on by the company or by any of its 75 per cent. subsidiaries, and does not form part of a scheme or arrangement the main purpose or one of the main purposes of which is—
(i)
to enable the owner of the shares to participate in the profits of the company without receiving a dividend, or
(ii)
the avoidance of tax; and
the conditions specified in sections 220 to 224, so far as applicable, are satisfied in relation to the owner of the shares; or
(b)
the whole or substantially the whole of the payment (apart from any sum applied in paying capital gains tax charged on the redemption, repayment or purchase) is applied by the person to whom it is made in discharging a liability of his for inheritance tax charged on a death and is so applied within the period of two years after the death;
and in sections 220 to 224—
“the purchase” means the redemption, repayment or purchase referred to in subsection (1)(a) above; and
“the vendor” means the owner of the shares at the time it is made.
(2)
Where, apart from this subsection, a payment falls within subsection (1)(b) above, subsection (1) above shall not apply to the extent that the liability in question could without undue hardship have been discharged otherwise than through the redemption, repayment or purchase of shares in the company or another unquoted company which is a trading company or the holding company of a trading group.
220 Conditions as to residence and period of ownership.
M2(1)
The vendor must be resident and ordinarily resident in the United Kingdom in the year of assessment in which the purchase is made and if the shares are held through a nominee the nominee must also be so resident and ordinarily resident.
(2)
The residence and ordinary residence of trustees shall be determined for the purposes of this section as they are determined under section F169 of the 1992 Act for the purposes of that Act.
(3)
The residence and ordinary residence of personal representatives shall be taken for the purposes of this section to be the same as the residence and ordinary residence of the deceased immediately before his death.
(4)
The references in this section to a person’s ordinary residence shall be disregarded in the case of a company.
(5)
The shares must have been owned by the vendor throughout the period of five years ending with the date of the purchase.
(6)
If at any time during that period the shares were transferred to the vendor by a person who was then his spouse living with him then, unless that person is alive at the date of the purchase but is no longer the vendor’s spouse living with him, any period during which the shares were owned by that person shall be treated for the purposes of subsection (5) above as a period of ownership by the vendor.
(7)
Where the vendor became entitled to the shares under the will or on the intestacy of a previous owner or is the personal representative of a previous owner—
(a)
any period during which the shares were owned by the previous owner or his personal representatives shall be treated for the purposes of subsection (5) above as a period of ownership by the vendor, and
(b)
that subsection shall have effect as if it referred to three years instead of five.
(8)
In determining whether the condition in subsection (5) above is satisfied in a case where the vendor acquired shares of the same class at different times—
(a)
shares acquired earlier shall be taken into account before shares acquired later, and
(b)
any previous disposal by him of shares of that class shall be assumed to be a disposal of shares acquired later rather than of shares acquired earlier.
(9)
If for the purposes of capital gains tax the time when shares were acquired would be determined under any provision of Chapter II of Part IV of the F11992 Act (reorganisation of share capital, conversion of securities, etc.) then, unless the shares were allotted for payment or were comprised in share capital to which section 249 applies, it shall be determined in the same way for the purposes of this section.
221 Reduction of vendor’s interest as shareholder.
(1)
M3If immediately after the purchase the vendor owns shares in the company, then, subject to section 224, the vendor’s interest as a shareholder must be substantially reduced.
(2)
M4If immediately after the purchase any associate of the vendor owns shares in the company then, subject to section 224, the combined interests as shareholders of the vendor and his associates must be substantially reduced.
(3)
The question whether the combined interests as shareholders of the vendor and his associates are substantially reduced shall be determined in the same way as is (under the following subsections) the question whether a vendor’s interest as a shareholder is substantially reduced, except that the vendor shall be assumed to have the interests of his associates as well as his own.
(4)
M5Subject to subsection (5) below, the vendor’s interest as a shareholder shall be taken to be substantially reduced if and only if the total nominal value of the shares owned by him immediately after the purchase, expressed as a fraction of the issued share capital of the company at that time, does not exceed 75 per cent. of the corresponding fraction immediately before the purchase.
(5)
The vendor’s interest as a shareholder shall not be taken to be substantially reduced where—
(a)
he would, if the company distributed all its profits available for distribution immediately after the purchase, be entitled to a share of those profits, and
(b)
that share, expressed as a fraction of the total of those profits, exceeds 75 per cent. of the corresponding fraction immediately before the purchase.
(6)
In determining for the purposes of subsection (5) above the division of profits among the persons entitled to them, a person entitled to periodic distributions calculated by reference to fixed rates or amounts shall be regarded as entitled to a distribution of the amount or maximum amount to which he would be entitled for a year.
(7)
M6In subsection (5) above “profits available for distribution” has the same meaning as it has for the purposes of Part VIII of the M7Companies Act 1985, except that for the purposes of that subsection the amount of the profits available for distribution (whether immediately before or immediately after the purchase) shall be treated as increased—
(a)
in the case of every company, by £100, and
(b)
in the case of a company from which any person is entitled to periodic distributions of the kind mentioned in subsection (6) above, by a further amount equal to that required to make the distribution to which he is entitled in accordance with that subsection;
and where the aggregate of the sums payable by the company on the purchase and on any contemporaneous redemption, repayment or purchase of other shares of the company exceeds the amount of the profits available for distribution immediately before the purchase, that amount shall be treated as further increased by an amount equal to the excess.
(8)
M8References in this section to entitlement are, except in the case of trustees and personal representatives, references to beneficial entitlement.
222 Conditions applicable where purchasing company is member of group.
(1)
M9Subject to section 224, where the company making the purchase is immediately before the purchase a member of a group and—
(a)
immediately after the purchase the vendor owns shares in one or more other members of the group (whether or not he then owns shares in the company making the purchase), or
(b)
immediately after the purchase the vendor owns shares in the company making the purchase and immediately before the purchase he owned shares in one or more other members of the group,
the vendor’s interest as a shareholder in the group must be substantially reduced.
(2)
In subsections (5) to (7) below “relevant company” means the company making the purchase and any other member of the group in which the vendor owns shares immediately before or immediately after the purchase, but subject to subsection (4) below.
(3)
M10Subject to section 224, where the company making the purchase is immediately before the purchase a member of a group and at that time an associate of the vendor owns shares in any member of the group, the combined interests as shareholders in the group of the vendor and his associates must be substantially reduced.
(4)
M11The question whether the combined interests as shareholders in the group of the vendor and his associates are substantially reduced shall be determined in the same way as is (under the following subsections) the question whether a vendor’s interest as a shareholder in a group is substantially reduced, except that the vendor shall be assumed to have the interests of his associates as well as his own (and references in subsections (5) to (7) below to a relevant company shall be construed accordingly).
(5)
M12The vendor’s interest as a shareholder in the group shall be ascertained by—
(a)
expressing the total nominal value of the shares owned by him in each relevant company as a fraction of the issued share capital of the company,
(b)
adding together the fractions so obtained, and
(c)
dividing the result by the number of relevant companies (including any in which he owns no shares).
(6)
Subject to subsection (7) below, the vendor’s interest as a shareholder in the group shall be taken to be substantially reduced if and only if it does not exceed 75 per cent. of the corresponding interest immediately before the purchase.
(7)
The vendor’s interest as a shareholder in the group shall not be taken to be substantially reduced if—
(a)
he would, if every member of the group distributed all its profits available for distribution immediately after the purchase (including any profits received by it on a distribution by another member), be entitled to a share of the profits of one or more of them, and
(b)
that share, or the aggregate of those shares, expressed as a fraction of the aggregate of the profits available for distribution of every member of the group which is—
(i)
a relevant company, or
(ii)
a 51 per cent. subsidiary of a relevant company,
exceeds 75 per cent. of the corresponding fraction immediately before the purchase.
(8)
Subsections (6) and (7) of section 221 shall apply for the purposes of subsection (7) above as they apply for the purposes of subsection (5) of that section.
(9)
M13Subject to the following subsections, in this section “group” means a company which has one or more 51 per cent. subsidiaries, but is not itself a 51 per cent. subsidiary of any other company, together with those subsidiaries.
(10)
M14Where the whole or a significant part of the business carried on by an unquoted company (“the successor company”) was previously carried on by—
(a)
the company making the purchase, or
(b)
a company which is (apart from this subsection) a member of a group to which the company making the purchase belongs, the successor company and any company of which it is a 51 per cent. subsidiary shall be treated as being a member of the same group as the company making the purchase (whether or not, apart from this subsection, the company making the purchase is a member of a group).
(11)
Subsection (10) above shall not apply if the successor company first carried on the business there referred to more than three years before the time of the purchase.
(12)
For the purposes of this section a company which has ceased to be a 51 per cent. subsidiary of another company before the time of the purchase shall be treated as continuing to be such a subsidiary if at that time there exist arrangements under which it could again become such a subsidiary.
223 Other conditions.
(1)
M15Subject to section 224, the vendor must not immediately after the purchase be connected with the company making the purchase or with any company which is a member of the same group as that company.
In this subsection “group” has the same meaning as it has for the purposes of section 222.
(2)
M16Subject to section 224, the purchase must not be part of a scheme or arrangement which is designed or likely to result in the vendor or any associate of his having interests in any company such that, if he had those interests immediately after the purchase, any of the conditions in sections 221 and 222 and subsection (1) above could not be satisfied.
(3)
A transaction occurring within one year after the purchase shall be deemed for the purposes of subsection (2) above to be part of a scheme or arrangement of which the purchase is also part.
224 Relaxation of conditions in certain cases.
M17Where—
(a)
any of the conditions in sections 221 to 223 which are applicable are not satisfied in relation to the vendor, but
(b)
he proposed or agreed to the purchase in order that the condition in section 221(2) or 222(3) could be satisfied in respect of the redemption, repayment or purchase of shares owned by a person of whom he is an associate,
then, to the extent that that result is produced by virtue of the purchase, section 219(1)(a) shall have effect as if the conditions in sections 221 to 223 were satisfied in relation to the vendor.
225 Advance clearance of payments by Board.
(1)
M18A payment made by a company on the redemption, repayment or purchase of its own shares shall be deemed—
(a)
to be one to which section 219 applies if, before it is made, the Board have on the application of the company notified the company that they are satisfied that the section will apply; and
(b)
to be one to which section 219 does not apply if, before it is made, the Board have on the application of the company notified the company that they are satisfied that the section will not apply.
(2)
An application under this section shall be in writing and shall contain particulars of the relevant transactions; and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision.
(3)
If a notice under subsection (2) above is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.
(4)
The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (2) above, within 30 days of the notice being complied with.
(5)
If particulars furnished under this section do not fully and accurately disclose all facts and circumstances material for the decision of the Board, any resulting notification by the Board shall be void.
226 Returns and information.
(1)
M19A company which treats a payment made by it as one to which section 219 applies shall within 60 days after making the payment make a return to the inspector giving particulars of the payment and of the circumstances by reason of which that section is regarded as applying to it.
(2)
Where a company treats a payment made by it as one to which section 219(1)(a) applies, any person connected with the company who knows of any such scheme or arrangement affecting the payment as is mentioned in section 223(2) shall, within 60 days after he first knows of both the payment and the scheme or arrangement, give a notice to the inspector containing particulars of the scheme or arrangement.
(3)
M20Where the inspector has reason to believe that a payment treated by the company making it as one to which section 219(1)(a) applies may form part of a scheme or arrangement of the kind referred to therein or in section 223(2), he may by notice require the company or any person who is connected with the company to furnish him within such time, not being less than 60 days, as may be specified in the notice with—
(a)
a declaration in writing stating whether or not, according to information which the company or that person has or can reasonably obtain, any such scheme or arrangement exists or has existed, and
(b)
such other information as the inspector may reasonably require for the purposes of the provision in question and the company or that person has or can reasonably obtain.
(4)
The recipient of a payment treated by the company making it as one to which section 219 applies, and any person on whose behalf such a payment is received, shall if so required by the inspector state whether the payment received by him or on his behalf is received on behalf of any person other than himself and, if so, the name and address of that person.
227 Associated persons.
M21(1)
Any question whether a person is an associate of another in relation to a company shall be determined for the purposes of sections 219 to 226 and 228 in accordance with the following provisions of this section.
(2)
A husband and wife living together are associates of one another, a person under the age of 18 is an associate of his parents, and his parents are his associates.
(3)
A person connected with a company is an associate of the company and of any company controlled by it, and the company and any company controlled by it are his associates.
(4)
Where a person connected with one company has control of another company, the second company is an associate of the first.
(5)
Where shares in a company are held by trustees (other than bare trustees) then in relation to that company, but subject to subsection (8) below, the trustees are associates of—
(a)
any person who directly or indirectly provided property to the trustees or has made a reciprocal arrangement for another to do so,
(b)
any person who is, by virtue of subsection (2) above, an associate of a person within paragraph (a) above, and
(c)
any person who is or may become beneficially entitled to a significant interest in the shares;
and any such person is an associate of the trustees.
(6)
Where shares in a company are comprised in the estate of a deceased person, then in relation to that company the deceased’s personal representatives are associates of any person who is or may become beneficially entitled to a significant interest in the shares, and any such person is an associate of the personal representatives.
(7)
Where one person is accustomed to act on the directions of another in relation to the affairs of a company, then in relation to that company the two persons are associates of one another.
(8)
Subsection (5) above shall not apply to shares held on trusts which—
(a)
relate exclusively to an exempt approved scheme as defined in Chapter I of Part XIV, or
(b)
are exclusively for the benefit of the employees, or the employees and directors, of the company referred to in that subsection or of companies in a group to which that company belongs, or their dependants (and are not wholly or mainly for the benefit of directors or their relatives);
and for the purposes of this subsection “group” means a company which has one or more 51 per cent. subsidiaries, together with those subsidiaries.
(9)
For the purposes of subsections (5) and (6) above a person’s interest is significant if its value exceeds 5 per cent. of the value of all the property held on the trusts or, as the case may be, comprised in the estate concerned, excluding any property in which he is not and cannot become beneficially entitled to an interest.
228 Connected persons.
M22(1)
Any question whether a person is connected with a company shall be determined for the purposes of sections 219 to 227 in accordance with the following provisions of this section.
(2)
A person is connected with a company if he directly or indirectly possesses or is entitled to acquire more than 30 per cent. of—
(a)
the issued ordinary share capital of the company, or
(b)
the loan capital and issued share capital of the company, or
(c)
the voting power in the company.
(3)
Where a person—
(a)
acquired or became entitled to acquire loan capital of a company in the ordinary course of a business carried on by him, being a business which includes the lending of money, and
(b)
takes no part in the management or conduct of the company,
his interest in that loan capital shall be disregarded for the purposes of subsection (2) above.
(4)
A person is connected with a company if he directly or indirectly possesses or is entitled to acquire such rights as would, in the event of the winding up of the company or in any other circumstances, entitle him to receive more than 30 per cent. of the assets of the company which would then be available for distribution to equity holders of the company; and for the purposes of this subsection—
(a)
the persons who are equity holders of the company, and
(b)
the percentage of the assets of the company to which a person would be entitled,
shall be determined in accordance with paragraphs 1 and 3 of Schedule 18, taking references in paragraph 3 to the first company as references to an equity holder and references to a winding up as including references to any other circumstances in which assets of the company are available for distribution to its equity holders.
(5)
A person is connected with a company if he has control of it.
(6)
References in this section to the loan capital of a company are references to any debt incurred by the company—
(a)
for any money borrowed or capital assets acquired by the company, or
(b)
for any right to receive income created in favour of the company, or
(c)
for consideration the value of which to the company was (at the time when the debt was incurred) substantially less than the amount of the debt (including any premium thereon).
(7)
For the purposes of this section a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date or will at a future date be entitled to acquire.
(8)
For the purposes of this section a person shall be assumed to have the rights or powers of his associates as well as his own.
229 Other interpretative provisions.
M23(1)
In sections 219 to 228—
“control” has the meaning given by section 840;
“holding company” means a company whose business (disregarding any trade carried on by it) consists wholly or mainly of the holding of shares or securities of one or more companies which are its 75 per cent. subsidiaries;
“personal representatives” means persons responsible for administering the estate of a deceased person;
“quoted company” means a company whose shares (or any class of whose shares) are listed in the official list of a stock exchange;
“shares” includes stock;
“trade” does not include dealing in shares, securities, land or futures and “trading activities” shall be construed accordingly;
“trading company” means a company whose business consists wholly or mainly of the carrying on of a trade or trades;
“trading group” means a group the business of whose members, taken together, consists wholly or mainly of the carrying on of a trade or trades, and for this purpose “group” means a company which has one or more 75 per cent. subsidiaries together with those subsidiaries; and
“unquoted company” means a company which is neither a quoted company nor a 51 per cent. subsidiary of a quoted company.
(2)
References in sections 219 to 228 to the owner of shares are references to the beneficial owner except where the shares are held on trusts (other than bare trusts) or are comprised in the estate of a deceased person, and in such a case are references to the trustees or, as the case may be, to the deceased’s personal representatives.
(3)
References in sections 219 to 228 to a payment made by a company include references to anything else that is, or would but for section 219 be, a distribution.