HMRC challenge rejected
A recent tax case (Russell Baker v HMRC  UKFTT 294 TC) was interesting (in an odd way!)
The taxpayer received £120,000 from his company, which was intended to be a purchase of own shares. Unfortunately, the statutory conditions were not satisfied as, among other things the company had insufficient reserves. It seemed clear that the transaction was void, but HMRC took the view that, even so, this £120,000 should be taxed as a distribution.
HMRC suggested that tax should be charged on the basis of ‘economic reality’; £120,000 had been received from the company and ‘the tax treatment must follow the economic reality’. The fact that the repayment could not lawfully be a dividend and that the statutory conditions for it to be treated as a purchase of own shares were not satisfied seemed to be ignored.
Fortunately the tribunal judges did not accept the economic reality argument, nor did they think that a void transaction could be recategorised into anything else. It was void and any money received needed to be returned to the company and it was not taxable.
It is, though, a worrying stance from HMRC.
Date: 16th September, 2013
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