Proposed adjustments to the tax framework governing corporate share capital reductions and repayments risk creating adverse outcomes for commercial activity, the Institute of Chartered Accountants in England and Wales (ICAEW) has warned.
The measures form part of a broader government initiative designed to update the tax rules around capital repayments and distribution from companies. This section, according to the ICAEW, has remained largely untouched since the introduction of corporation tax in 1965.
Submitting its response to the official consultation, the ICAEW indicated general backing for the overall package of proposals.
However, the organisation highlighted concerns regarding the commercial repercussions of altering the tax rules on share capital reductions including share repurchases.
It noted that such changes could constrain the ability of enterprises to buy out dissenting investors, prevent certain companies from issuing dividends and encourage greater reliance on more expensive liquidation demergers.
To mitigate these risks, the ICAEW advised policymakers to re-examine the existing transactions in securities framework.
The institute suggested that these rules could be amended to incorporate a dedicated anti-avoidance test targeted at share exchanges or reconstructions that are subsequently followed by a return or reduction of capital.
The body also expressed support for plans to remove the trading requirement from demerger legislation, alongside several proposed revisions to the framework governing companies acquiring their own shares.
The institute further added that enterprises will continue to favour other routes unless these specific routes are made more practical and appealing.
In addition, the ICAEW endorsed proposals to align the tax treatment of domestic and foreign distributions.
ICAEW Tax technical manager Katherine Ford said: “While we are broadly supportive of government proposals to modernise the distributions framework, we are concerned about the impact that changes to the rules applying on a reduction of share capital could have on company behaviour.
“Businesses need stability and certainty of position and, in order to encourage economic growth, any implemented proposals should avoid unnecessary administrative changes and complexity.”
“Proposed distribution tax reforms risk harming growth, ICAEW warns” was originally created and published by The Accountant, a GlobalData owned brand.
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