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Autumn Statement

05 December 2014

Changes in the Autumn Statement about ways in which companies can return capital to their shareholders

Not mentioned in the House of Commons, nor picked up by many commentators, was one paragraph (1.254) on page 62 of the Autumn Statement which, subject to the precise wording of the draft legislation, will have a profound effect on the way in which companies  return capital to shareholders, forcing a rethink about such future schemes.

The paragraph states:

The government is taking action to block the tax advantage offered to additional and higher rate taxpayers by special purpose share schemes. These schemes allow shareholders to choose how to receive their ‘dividend’ so that it is taxed at preferential rates. This typically involves the issue of a share that is bought back by the company shortly after, with no commercial purpose other than to secure a tax advantage for the shareholder. Autumn Statement announces that the government will remove this tax advantage by treating the amount received the same way as dividend income, where an individual shareholder is offered this choice.

Companies have offered this choice by issuing each shareholder with new B shares – which  are then immediately bought back from them.  The effect has been to give shareholders the choice of receiving the funds as income or capital.  If the shareholders have not used their annual CGT allowance they can decide on the capital route, and have not paid tax on the money or reduced their tax liability.  The announcement makes it clear that this will not be an option in the future and, although there will be ways in which tax could be avoided by shareholders in such circumstances, it will be considerably more expensive and may fall foul of further tax avoidance initiatives.  Some of the preceding paragraphs in the Autumn Statement reemphasise the government’s determination to clamp down on such behaviour.

It will also mean that companies will need to consider their plans and, if the change has immediate effect, to go back to the drawing board with schemes currently in the planning phase.  As soon as the legislation is published, expected to be next week, Equiniti will look in detail at the arrangements  and the implications.

Ezine edition: December 2014