Finance Act, 1989

Schemes to avoid liability to tax under Schedule F.

88.—(1) This section is for the purposes of counteracting any scheme or arrangement undertaken or arranged by a close company, or to which the close company is a party, being a scheme or arrangement the purpose of which, or one of the purposes of which, is to secure that any shareholder in the close company avoids or reduces a charge or assessment to income tax under Schedule F by converting into a capital receipt of the shareholder any amount which would otherwise be available for distribution by the close company to the shareholder by way of a dividend.

(2) Subject to subsection (6), this section shall apply to a disposal of shares in a close company by a shareholder if, following the disposal or the carrying out of a scheme or arrangement of which the disposal is a part, the interest of the shareholder in any trade or business (hereafter in this section referred to as the “specified business”) which was carried on by the close company at the time of the disposal, whether or not the specified business continues to be carried on by the close company after the disposal, is not significantly reduced.

(3) Subject to subsection (4) and notwithstanding subsection (1) of section 84 of the Act of 1976 or any provision of the Capital Gains Tax Acts, the amount of—

(a) the proceeds in either or both money and money's worth received by a shareholder in respect of a disposal of shares in a close company to which this section applies, or

(b) if it is less than those proceeds, the excess of those proceeds over any consideration, being consideration which—

(i) is new consideration received by the close company for the issue of those shares, and

(ii) has not previously been taken into account for the purposes of this subsection,

shall, for all the purposes of the Tax Acts, be treated as a distribution (within the meaning of the Act of 1976) made, at the time of the disposal, by the close company to the shareholder.

(4) (a) The amount which at any time may be treated, under subsection (3), as a distribution made by a close company to a shareholder in respect of any disposal of shares in the close company shall not exceed the amount of the capital receipt, or the aggregate of the amounts of the capital receipts, which at such time has, or have, been received by the shareholder—

(i) in respect of the disposal, or

(ii) by reason of any act done pursuant to a scheme or arrangement of which the disposal is a part:

Provided that—

(I) a capital receipt received by a shareholder at any time on or after the disposal shall in respect of such time result in so much of the amount mentioned in subsection (3) being treated as a distribution (which is made by the close company to the shareholder at the time of the disposal) as does not exceed the amount of the capital receipt, or the aggregate of the amounts of such capital receipts, which at such time on or after the disposal has or have been received by the shareholder, and

(II) if, as a result of a shareholder having received a capital receipt, a close company is treated as having made a distribution to him under subsection (3), any provision of the Income Tax Acts in respect of interest on unpaid tax shall apply, for the purposes of tax due in respect of that distribution, as if the tax were due and payable only from the day on which the shareholder received the capital receipt.

(b) For the purposes of this subsection, “capital receipt” means, as appropriate in the circumstances, any amount of either or both money and money's worth (other than shares issued by a close company carrying on the specified business) which—

(i) is received by a shareholder in respect of a disposal of shares or by reason of any act done pursuant to a scheme or arrangement of which the disposal is a part, and

(ii) is not, apart from this section, chargeable to income tax in the hands of the shareholder.

(5) Notwithstanding the provisions of section 88 (1) of the Act of 1976, where a shareholder in a close company is treated under this section as having received a distribution from the close company, the shareholder shall only be entitled to a tax credit in respect of the distribution to the extent that the close company has paid advance corporation tax in respect of the distribution in accordance with Chapter VII of Part I of the Finance Act, 1983 :

Provided that where a close company would but for the application of the provisions of section 41 of the said Finance Act, 1983 , have paid an amount or an additional amount of advance corporation tax in respect of a distribution, then the close company shall be treated as having paid such an amount or additional amount of advance corporation tax in respect of that distribution for the purposes of this subsection.

(6) This section shall not apply as respects a disposal of shares in a close company by a shareholder where it is shown to the satisfaction of the inspector or, on the hearing, or the rehearing, of an appeal, to the satisfaction of the Appeal Commissioners, or the judge of the Circuit Court, as the case may be, that the disposal was made for bona fide commercial reasons and not as part of a scheme or arrangement the purpose, or one of the purposes, of which was the avoidance of tax.

(7) (a) In this section—

“the Act of 1976” means the Corporation Tax Act, 1976 ;

“appeal” means an appeal made pursuant to the provisions of section 416 of the Income Tax Act, 1967 ;

“close company” has the same meaning as it has, by reason of sections 94 and 95 of the Act of 1976, for the purposes of that Act;

“market value” shall be construed in accordance with section 49 of the Capital Gains Tax Act, 1975 ;

“new consideration” has the meaning assigned to it by section 87 of the Act of 1976;

“shares” includes loan stock, debentures and any interest or rights in or over, or any option in relation to, shares, loan stock or debentures, and references to “shareholder” shall be construed accordingly.

(b) (i) For the purposes of this section, there shall be a disposal of shares by a shareholder where the shareholder disposes of shares, or is treated under the provisions of the Capital Gains Tax Acts as disposing of shares, and references to a disposal of shares shall include references to a part disposal of shares within the meaning of those Acts.

(ii) Where under any arrangement between a close company (hereafter in this subparagraph referred to as “the first-mentioned company”) and its, or some of its, shareholders (being any arrangement similar to an arrangement entered into for the purposes of or in connection with a scheme of reconstruction or amalgamation) another close company issues shares to those shareholders in respect of or in proportion to (or as nearly as may be in proportion to) their holdings of shares in the first-mentioned company, but the shares in the first-mentioned company are either retained by the shareholders or are cancelled, then those shareholders shall, for the purposes of this section, be treated as making a disposal, or a part disposal, as the case may be, of the shares in the first-mentioned company in exchange for those shares held by them in consequence of such arrangement.

(c) For the purposes of this section, the interest of a shareholder in a trade or business is not significantly reduced following a disposal of shares or the carrying out of a scheme or arrangement of which the disposal is a part, if, but only if, at any time after the disposal, the percentage—

(i) of the ordinary share capital of the close company carrying on the trade or business at such time which is beneficially owned by the shareholder at such time, or

(ii) of any profits, which are available for distribution to equity holders, of the close company carrying on the trade or business at such time to which the shareholder is beneficially entitled at such time, or

(iii) of any assets, available for distribution to equity holders on a winding up, of the close company carrying on the trade or business at such time to which the shareholder would be beneficially entitled at such time on a winding up of the close company,

is not significantly less than the percentage of the said ordinary share capital, profits or assets, as the case may be, of the close company carrying on the trade or business at any time prior to the disposal—

(I) which the shareholder beneficially owned, or

(II) to which the shareholder was beneficially entitled,

at such time prior to the disposal, and sections 109 to 111 and section 114 of the Act of 1976 shall apply, but without regard to section 107 (7) of the Act of 1976 in so far as it relates to those sections, with any necessary modifications, to the determination, for the purposes of this paragraph, of the percentage of share capital, or other amount, which a shareholder beneficially owns or is beneficially entitled to, as they apply to the determination for the purposes of Part XI of the Act of 1976 of the percentage of any such amount which a company so owns or is so entitled to.

(d) The value of any amount received in money's worth shall, for the purposes of this section, be the market value of the money's worth at the time of its receipt.

(8) This section shall apply to any disposal of shares made on or after the 25th day of January, 1989.