Case Studies Company Secretarial Services Chartered Accountants London UK

Winters Chartered Accountants and Registered Auditors
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England, UK

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Case Study:

In 1996 we took over the audit of a small, well-established engineering company, C Limited. The company had been formed and was initially run by four directors, D, H, L and S, each of whom owned, together with their wives, 25% of the 100 shares in issue.

However, several years earlier D, L and S had had a disagreement with H who had subsequently left the company. It was agreed between the shareholders that the shares of H and his wife should be bought in equal proportions by the other six shareholders for approximately £70,000 in total. This was being achieved by the sale of 4 shares per annum. When we came in a total of 12 shares had been transferred by Mr and Mrs H.

We advised that this was not the most tax efficient way to buy out Mr and Mrs H as effectively the other shareholders were making the payments out of their taxed income (they were 40% taxpayers). We suggested that, since the company had sufficient reserves that it would be preferable for the shares to be purchased by the company. Provided that H M Customs and Revenue clearance is obtained beforehand, the vendor shareholders may elect to have the payment for the shares subject to Capital Gains Tax rather than income tax, enabling them to take advantage of the annual CGT exemption. Transfers to other family members prior to the buy-back would also further reduce the amount of proceeds taxable on a higher rate taxpayer.

This solution also had the advantage that Mr and Mrs H could be paid off completely and would no longer be minority shareholders in the company.

Since the Articles of Association incorporated the 1948 version of Table A, the company did not have the power to purchase its own shares. The Company Secretarial Department drafted the appropriate amendment to the Articles, drew up the Agreement to purchase the shares and provided all the documentation in relation to the EGM to pass required Special Resolution of the members. We also arranged for the appropriate Stamp Duty to be paid and registered the transaction on the statutory books.