Share buy-back attack

The Inland Revenue has moved to increase the tax burden on share buy-backs, a decision experts say is a deliberate attempt to protect corporation tax receipts.

The inspectors ruled that if venture capital fund Electra Investment Trust bought back 40% of its shares, shareholders would be liable to income tax.

Tax consultants PricewaterhouseCoopers had expected the cash to be seen as a capital receipt and thus subject to less tax because of the personal allowances for capital gains. Ernst & Young tax partner Rosalind Upton said the Revenue’s decision was wrong, but added: ‘I assume it will achieve its purpose of deterring people from very large buy-backs.’

The Revenue is understood to be increasingly concerned that the vogue for share buy-backs will reduce its corporation tax receipts, especially in cases where companies reduce their equity and replace it with tax-deductible debt.

The abolition of advance corporation tax last week has fuelled the trend for handing cash-back to shareholders, now tax free for the company. It has also made debt financing more attractive to companies.

Electra’s proposed share buy-back is part of an effort to fight off a takeover attempt by rival fund 3i, which shareholders are due to vote on today.