Recent weeks have brought a wave of tax reform proposals under HMRC’s Tax Update 2026.
Much of the attention has gone to changes affecting how VAT, PAYE and ITSA are paid, but for companies, a separate consultation on distributions and repayments of capital could turn out to be one of the more significant developments.
The proposals would change how share buybacks, demergers and returns of capital to shareholders are taxed, tightening the rules around several existing reliefs.
HMRC has said the changes are not aimed at shareholders directly, but anyone structuring a future transaction will need to look at the detail carefully.
The current framework for taxing distributions has barely changed since Corporation Tax was introduced in 1965 and HMRC believes it no longer fits how businesses actually operate.
Under the existing rules, two distributions that look almost identical can end up taxed completely differently, depending on a small technical distinction.
That gap has, in places, let individuals and trusts access the lower rates that apply to capital rather than income.
HMRC is hoping that feedback from shareholders and advisers will help shape a simpler and more consistent system. The consultation closes on 14 September.
One proposal targets a structure where a holding company is inserted above the company making a distribution, purely to increase what HMRC calls “good capital” and reduce the tax due on a capital reduction.
Under the new approach, shares would instead carry a frozen capital value set at the amount originally subscribed, whenever a new holding company is involved.
This mirrors how Capital Gains Tax already defers tax based on the original base cost, producing the same result as if the shares had simply been sold back without a holding company in the structure. HMRC has confirmed this is not intended to catch restructuring done for genuine business reasons.
Distributions are currently taxed differently depending on whether the paying company is UK resident or based overseas.
UK resident companies operate under a clear framework that brings extractions of value into the Income Tax charge.
Non-UK resident companies are subject to a narrower charge, limited to dividends that are not capital in nature, a distinction that has caused confusion in practice. The government wants to bring more clarity to this area.
Some companies currently use capital reductions to carry out demergers outside the formal statutory route.
That option would be removed under the proposals, pushing businesses towards the statutory demerger process instead.
In exchange for relaxing some of the statutory conditions, HMRC intends to remove the automatic right to appeal to a Tribunal if statutory demerger clearance is refused.
Further proposals in the consultation touch on distributions from close companies and changes to the transactions in securities rules, both of which may be relevant depending on how a business is structured.
At this stage, these are early proposals rather than final rules and the detail could shift considerably before anything appears in a future Finance Bill.
No immediate action is required, but it is worth keeping an eye on how the consultation develops, particularly if a buyback, demerger or capital reduction is on the horizon.
If you have questions about how these proposals could affect your business, please get in touch with our team.
