In Russell Baker v HMRC TC02790 a purchase of own shares was voided on a technicality and the Tribunal had to decide whether the payment received by the taxpayer was taxable as a distribution instead of capital.

The taxpayer fell out with other shareholders and it was agreed that the company would repurchase his shares. The repurchase was later found to be void in company law because the company had a deficiency of reserves and the directors failed to make a declaration to allow a payment out of capital.

HMRC sought to tax the repayment which was out of assets and cash as a distribution under s415 ITTIOA 2005 on the basis that the payment was actually the release of loan to a participator in a close company.

The tribunal found that the payment was unlawful and this meant that the contract to purchase the outgoing shareholder’s shares was void. The company was therefore entitled to its money back and the sum was not taxable as income.