If we only look at the BADR rules that may indeed be the case, but the Transactions in Securities (TIS) of Chapter 1 Part 13 ITA 2007 allow HMRC to charge receipts under such transactions to income tax instead.
The TIS rules apply where the conditions in ITA2007 s.684(1) are met, these are:
• the person is a party to a transaction in securities or two or more transactions in securities (which include shares),
• the circumstances are covered by section 685 and not excluded by section 686,
• the main purpose, or one of the main purposes, of the transaction in securities, or any of the transactions in securities, is to obtain an income tax advantage, and
• the party or any other person obtains an income tax advantage in consequence of the transaction or the combined effect of the transactions.
The exception in ITA2007 s.686 is for a “fundamental change in ownership” which is not applicable here as your client controls both companies.
From the situation you have described your client has a transaction in securities; he will receive consideration for the disposal of the shares; the fundamental ownership does not change; the main purpose appears to simply draw funds from the company without paying income tax – an income tax advantage. Your client would therefore face the strong possibility of receiving a counteraction notice under ITA2007 s.698.
However, the amount of counteraction is limited to the amount of a distribution that could have been paid. This relevant consideration is defined in ITA2007 s.685(4) and includes the distributable reserves of the acquiring company and the target company.
If the purchasing company and the target company do not have sufficient distributable reserves, then your client could say that they have no income tax advantage and so this would be taxed under the capital gain rules. This is on the assumption the amount being paid for the shares does not exceed their market value.
If the transaction is caught by the TIS rules, the value distributed would be taxed at the dividend rates of tax, but a credit would be available for any capital gains tax already paid by your client.
HMRC have six years from the end of the tax year in which the transaction takes place to issue a notice of enquiry – ITA2007 s.695. After an enquiry is under way, HMRC can then issue a counteraction notice without time limit – ITA2007 s.698(5).
A clearance is available under ITA 2007 s.701.
For commentary on Transactions in Securities, see the Croner-i Direct Tax Reporter at 763-000.
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