Tax consequences of failed buybacks

When it comes to transactions involving share capital few areas are more frequently mishandled than a company repurchasing shares from existing shareholders – second only perhaps to employment-related securities and share option schemes. Despite their routine nature buybacks are often carried out incorrectly sometimes with serious consequences.

These mistakes usually come to light during a company sale when legal and tax advisers scrutinise the company’s corporate history with a fine-tooth comb. In many cases share transactions from years or even decades ago are placed under the microscope.

Why is this such a persistent issue and how significant are the risks? Before answering that it is important to revisit the fundamental legal and tax requirements governing a company’s ability to buy back its own shares.

Conditions of a company purchase of own shares

CTA 2010 s 1000(1)(B) tells us...