Sometimes it can be better to extract funds from your company or to acquire another company through an aquistion method known as ‘purchase of own shares’.
In essence, you use the Company’s own cash to reduce the number of shares in issue and pay those shareholders to exit the business.
To do so can be extremely tax advantageous, that’s if you structure it right to begin with.
The most important aspect is to understand that a company’s purchase of its own shares is unlawful unless a prescribed procedure is complied with.
The consequences of getting it wrong are severe and a contravention could mean that the company is liable to a fine and, ultimately, the purported acquisition of the shares will be deemed to be void.
Additionally, an offence will be considered to have been committed not only by the company, but by each and every officer. In such circumstances an officer in default is liable to a potential prison term of up to two years, an unlimited fine, or both.
The Company can purchase its own shares in the following three ways;
- Out of Distributable Reserves – the most common method.
- Out of Cash – this new procedures allows for private companies to purchase shares using small amounts of cash, being the lower of £15,000 or 5% of its share capital in a financial year, without having to state that the cash is from distributable reserves. In order to take advantage of this, the company must be specifically authorised to do so in its Articles of Association.
- Out of Capital – very complex and time consuming – requires a Statement of Solvency.
A company can only purchase its own shares if it is done pursuant to a contract or (in the absence of a contract) a written memorandum of the contract terms. There is one exception to this, when the purchase is pursuant to an employees’ share scheme then authority from the shareholders is sufficient. Otherwise, the contract must be approved in advance of the Ordinary Resolution, and must be available for inspection by the members at least 15 days prior to the meeting. You will need to check your Articles of Association to ensure that you disapply the statutory pre-emption rights otherwise a special resolution will be required also.
Once the above is in order then it is a simple ‘paper shuffling’ process to go through.
You will need to complete forms SH03 and SH06 to deal with the stamp duty and cancellation of the shares.
Stamp Duty is applicable on transactions over £1000 and is calculated at ½ per cent of the transaction fee rounded up to the nearest £5
There is an interesting option now for shares to be purchased into Treasury shares (with the exception of shares purchased out of cash) – these Treasury Shares are not cancelled and are held by the Company and can be transferred at any time in the future.
Any payment must be made on completion of the documents and the documents must be filed at Companies House within 28 days.
Under no circumstances should a company buy back its own shares without tax advice. The purchase price on a share buy-back is generally divided into a capital element and a distribution element for tax purposes. The parties may wish to seek HMRC clearance to treat the purchase as a capital transaction, or they may proceed on the basis of a tax credit certificate.
You may be able to boost distributable reserves to fund a ‘Purchase of own Shares’ by reduction of share premium reserves, capital redemption reserves and large share capital reserves
You no longer need authority in the Articles to do a purchase of own shares but it is advisable to check them to ensure they do not contain clauses that state that the company is not allowed to purchase shares.