In Bostan Khan v HMRC  UKUT 0168, the Upper Tribunal (UT) rejected a taxpayer’s argument that a company purchase of his shares was not a distribution as it was part of his wider agreement to purchase a controlling interest in the company.
The key facts were as follows:
The taxpayer then appealed to the Upper Tribunal arguing that the company buy-back formed part of the share sale agreement and should not be taxed separately.
This tribunal found that the share sale and the share purchase were executed as separate agreements and advised on separately. Also to reach any other conclusion would be problematic because then the purchase of own shares would be taxable on the sellers. As the selling shareholders had sold their shares to Mr Khan and only the shareowner could receive a distribution, it was clear that Mr Khan received the distribution and was entitled to receive it. The appeal was therefore dismissed.
Forbes Dawson comment
I am not surprised that Mr Khan failed at tribunal because in many ways this is a disastrous piece of tax structuring. There does not seem any reasonable interpretation that can conclude anything other than the fact that Mr Khan is subject to income tax on the £1.95m. However if proper advice had been sought at the time there may have been a few ways to secure the intended result:
Also given that Mr Khan was effectively buying cash which he would return to the vendors I hope that he factored in his £10,000 stamp duty liability (at 0.5%) in negotiations. Clearly that will now be the least of his worries!
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