Richard Ferguson, Legal Director in the corporate tax team at Higgs LLP, looks at the future of the multiple completion share buyback – and suggests there is life left in them yet.
Much has been reported and commented lately on the ‘death of the multiple completion share buyback’ (the multi-buyback). But, to poorly (and shamelessly) paraphrase popular culture, “reports of my death have been greatly exaggerated!”.
So, what’s all the fuss about? To get to that, we have to briefly consider the history of the multi-buyback – there has always been some tension between company law and tax law.
On the one hand, company law requires shares to be paid for on purchase in order for there to be a valid buyback. On the other hand, tax law focuses on beneficial interest, and finds deferred consideration to be perfectly acceptable (albeit the tax must be paid upfront).
It is probably fair to say that HMRC has never been fully comfortable with multi-buybacks – over the years, we have seen:
- Arguments around the use of a power of attorney to remove voting rights attaching to the retained shares – even where the power was described as irrevocable (and notwithstanding a contrary view for, as was, entrepreneurs’ relief), HMRC’s position was that the individual still possessed the voting rights on the retained shares.
- Similarly, HMRC was later reported to have advanced (and now appears to have abandoned) arguments that, in essence, Section 28 of the Taxation of Chargeable Gains Act 1992 should apply differently to multi-buybacks, affecting qualification for entrepreneurs’ relief.
Which brings us to the latest new issue:
It is common ground that the various all important tax tests for capital treatment on a buyback relate to beneficial interest – the legislation says as much, with a refreshing amount of clarity.
Over the past year, we have corresponded with HMRC on very similar terms to those now published in their recently published guidance. This has gone along the lines of ‘actually, the connected test for multi-buybacks does not relate to beneficial interest, it relates to the legal title’ (held by the seller, in respect of subsequent tranches).
This means HMRC is now refusing clearance on multi-buybacks where the seller’s retained shares amount to more than 30% of the share capital, even though the seller has disposed of all beneficial interest in these shares on the first completion. This often leads to a long correspondence with HMRC, after which the transaction is restructured to use a new holding company, at an additional stamp duty cost and an unwanted holding company.
This feels like another slightly clumsy attempt to again curtail the use of multi-buybacks. That said, the Higgs Tax team has, subsequently to the latest changes, successfully obtained clearance for multi-buybacks in these circumstances by restructuring the share capital.
So, in short, where the facts work, HMRC’s current interpretation can be successfully navigated and clearance obtained.
Long live the multi-buyback!
