Taxation and Wording of documents
in the Purchase of Shares

Time and again, taxpayers get caught out because of simple errors in the wording of documents. In a recent case, the wording of a board resolution that two retiring directors should be awarded £30,000 each as a termination payment ‘in appreciation of their services to the company’ was sufficient to persuade the Special Commissioners of Taxes that the payments were taxable, rather than ex-gratia payments which would have been considered tax free.

This same case had a second unfortunate outcome for the taxpayers, who had retired using the Purchase of Own Shares legislation to sell their shareholding back to the company. They treated the receipt as a capital receipt which was not liable to Capital Gains Tax by virtue of retirement relief…or so they thought.

The problem was that a Purchase of Own Shares payment qualifies for treatment as a capital receipt when the arrangement is made wholly or mainly for the benefit of the business. In this case, the company was left in a significantly weaker position than it had been before, including having lost the services of two directors.

Although the Inland Revenue’s own statement of practice on Purchase of Own Shares (SP2/82) takes a rather liberal view of circumstances in which the receipt will be treated as a capital receipt, the Special Commissioners of Taxes did not and disallowed the claim.

These problems might well have been avoided had the procedures been planned carefully in advance and appropriate documentation been put in place.