ICAEW Says Proposed Share-Capital Tax Rules Could Curb Growth

ICAEW warned that proposed UK tax changes for share-capital reductions and returns could make it harder for companies to grow. The body raised the concern in its response to a government consultation on company distributions.

The consultation, opened by HM Revenue & Customs on June 23, covered seven areas of the tax rules. It closed on September 14. The rules have remained largely unchanged since corporation tax began in 1965, according to the government.

The disputed proposal concerns how tax is calculated when a company returns capital, including through a share buyback. The government wants future holding companies to carry forward a “frozen” capital amount based on what investors originally paid, rather than treating later share exchanges as new capital.

ICAEW says that approach could restrict companies’ options for buying out shareholders who oppose a restructuring. It also warns some businesses might be unable to pay dividends, potentially making them less attractive to investors.

Another possible outcome, it says, is more companies using liquidation demergers to reorganise. ICAEW argues that route can bring substantial professional costs, adding to the burden on businesses.

Instead of changing the capital-reduction and distribution rules, ICAEW recommends strengthening the existing transactions-in-securities rules. It says a targeted anti-avoidance test could address share exchanges or restructurings followed by a return of capital.

The institute supports parts of the wider package, including proposed changes to demerger rules and company share purchases. It also backs aligning the tax treatment of distributions from UK and overseas companies.

The government said it would review consultation responses and publish a summary after the process closes. The final design of any reforms, and whether ministers adopt ICAEW’s alternative, remain open.