Find out what our members have been asking us this month...

Q

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

The company has grown as a result of this investment, and the company has been paying dividends.  However, there are no more distributable reserves left.

The directors would therefore like to do a capital reduction under  Companies act 2006 to reallocate the share premium account to distributable reserves (without cancelling any shares), to allow for further dividends using the cash surplus.

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

Concerning tax;

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

A

1. The transfer from share premium to distributable reserves does not have any tax implications (balance sheet movement);
2. I think the capital reduction may fall foul of the “value received” rules – Section 216( 2)(a) ITA 2007. You are effectively distributing what was originally capital on which EIS tax relief has been claimed by the investors.
3. No other tax risks, but in view of the above comments, you should probably wait until after 29 August 2026 to do the capital reduction.

Q

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

His clients will come and meet him in whatever country, and he has no business base in the UK.  Nb  Earnings / Expenses are paid via a UK Bank account.

He has no property or dependents in the UK or other ties.

He spent less than a week in the UK 25/26

His expectation is similar for  26/27  , i.e. will not be in the UK more than a week.

The question is does he have to declare his earnings on a UK tax return for  25/26?   (That said, no idea where he does declare as moving from country to country!)

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

A

Based on the information provided, your client appears to be spending very limited time in the UK, with no UK home or other ties, and working full-time overseas. On that basis, they are likely to be non-UK resident under the UK Statutory Residence Test.

If they are non-UK resident, they would generally only be subject to UK tax on UK-source income. As their trekking activities are carried out overseas, this would typically be treated as non-UK source income and therefore outside the scope of UK tax. In these circumstances, a UK tax return may not be required, unless they have other UK income or remain within Self-Assessment.

It would, however, be sensible to notify HMRC of their position (for example, via a P85 and/or final return where appropriate).

A key point to be mindful of is that, while they may not be UK resident, there is a risk of becoming tax resident in another country (or potentially more than one), depending on time spent and local rules. This can sometimes lead to overlapping tax residency positions, which may require consideration of double tax treaties and local filing obligations.

If you have a question similar to the above or want to know more about our Tax Partner Pro membership please drop us an email mailto:enquiries@etctax.co.uk