TPP Your Questions Answered February 26

Find out what our members are asking this month…

My client has a company that received a qualifying EIS investment of £350,000 on 29 August 2023. The nominal value of the shares acquired was small, so most of the money has been allocated to a share premium account.

The company has grown as a result of these investments, and the company has paid dividends. However, no more reserves can be distributed.

Therefore, the directors wish to make a capital reduction under the Companies Act 2006 to reallocate the share premium account into distributable reserves (without canceling any shares), to allow further dividends using the cash surplus.

Please assume that directors can and will sign solvency statements etc to comply with the Companies Act.

Regarding taxes;

1. Can you see any other tax risks here?
2. I assume the transfer of share premium to distributable reserves is not a taxable event – ​​please confirm?
3. Does this process affect the initial EIS investment, in which case, would it be helpful to wait until after August 29, 2026? If it could be done earlier, would it be better for shareholders?

1. The transfer of share premium to distributable reserves has no tax implications (balance sheet movement);
2. I think the capital reduction may be in breach of the “received value” rule – Article 216( 2)(a) ITA 2007. You are effectively distributing the capital that was originally the EIS tax relief claimed by the investor.
3. There are no other tax risks, but considering the comments above, you may have to wait until after August 29, 2026 to make a capital reduction.

I have a client who is a self-employed trekking guide. Since 6/4/25, he has spent all his time working in various countries in Europe and Asia on this expedition.

His clients would come and see him in any country, and he had no business base in England. Nb Income/Expenses are paid via Bank of England account.

He had no property or dependents in England or any other ties.

He spent less than a week in England 25/26

Expectations are similar for 26/27, namely not to be in the UK for more than a week.

The question is whether he should report his income on his UK tax return dated 25/26? (Even so, don’t know where he stated moving from one country to another!)

If not, does he have to notify HMRC of his circumstances in some way?

Based on the information provided, your client appears to have spent very limited time in the UK, with no home in the UK or other ties, and is working full time overseas. Based on this, they are most likely not UK residents based on the UK Statutory Residence Test.

If they are not resident in the UK, they will generally only be subject to UK tax on UK source income. As their trekking activity takes place overseas, this is usually treated as a non-UK source of income and therefore outside the scope of UK tax. In these circumstances, a UK tax return may not be required, unless they have other income in the UK or are still under Self-Assessment.

However, it is reasonable to notify HMRC of their position (for example, via a P85 and/or final return if required).

The important thing to remember is that, even if they are not resident in the UK, there is a risk of becoming tax resident in another country (or possibly more than one country), depending on time spent and local regulations. This can sometimes result in overlapping tax residency positions, which may require consideration of double tax treaties and local filing obligations.

If you have questions similar to the above or would like to know more about our Tax Partner Pro membership, please email us enquiries@etctax.co.uk