Was a Company Share Buyback Tax Avoidance? HMRC Says Yes – Here’s What You Need to Know

Tax planning can often sit in a grey area between efficiency and avoidance, and a recent case involving Enterprise Investment Scheme (EIS) shares has drawn fresh attention to just how closely HMRC is scrutinising such arrangements.

Two taxpayers attempted to use the “purchase of own shares” procedure to extract gains tax-free. HMRC viewed this as tax avoidance and took the matter through two levels of court. So, what happened, and what can directors learn from the outcome?

Let’s walk through the case and the final decision by the Upper Tribunal (UT).

The Background: EIS Shares and a £20m Gain

The case involved Hugh Osmond and Matthew Allen, two individuals who in early 2015 held shares in a company called Xercise2 Ltd. The shares had originally been issued under the Enterprise Investment Scheme (EIS), which offers significant capital gains tax relief to investors, provided the company continues to meet the qualifying conditions.

However, Osmond and Allen became concerned that Xercise2 Ltd was about to lose its EIS status. If that happened, their CGT relief could be at risk.

To secure the tax benefits before the relief was potentially lost, they arranged for Xercise2 to buy back its own shares — a process known as a “company share buyback.” As a result of the buyback, the two individuals realised £20 million in gains. Which they claimed were free of tax due to the EIS exemption.

But HMRC had other ideas.

HMRC Steps In: The Transactions in Securities (TiS) Rules

In 2021, HMRC issued tax assessments to both Osmond and Allen. Their argument? That the share buybacks were subject to the anti-avoidance rules under the Transactions in Securities (TiS) legislation.

These rules exist to prevent individuals from converting what is essentially income into capital — which is often taxed at a lower rate — in ways that lack genuine commercial substance.

HMRC claimed that one of the “main reasons” for arranging the share buybacks was to secure an income tax advantage. Therefore, they argued, the TiS rules should apply — and the £20 million gain should be taxed not as capital, but as income.

First-tier Tribunal Agrees with HMRC

The matter first went to the First-tier Tribunal (FTT), where Osmond and Allen argued that they were simply securing a legitimate tax relief to which they were entitled. They claimed there was no intention to avoid tax and that the buyback was necessary to preserve the EIS benefit.

However, the FTT sided with HMRC.

The Tribunal accepted that the tax advantage — avoiding income tax through the buyback — was not just a result, but a primary reason for the transaction. The judges concluded that once the share buyback was arranged, the tax benefit became inevitable. Which satisfied the conditions for the TiS rules to apply.

In short, the tribunal found that the structure of the transaction had the hallmarks of avoidance. Even if the intention was to safeguard a legitimate relief.

Osmond and Allen appealed the decision to the Upper Tribunal.

Upper Tribunal Upholds the Decision

At the UT, Osmond and Allen raised a new defence. They argued that the buyback was designed to secure EIS relief — which is government-approved — and therefore could not reasonably be seen as tax avoidance.

They maintained that the relief would have been lost if they hadn’t acted when they did. Their decision to proceed with a share buyback was framed as a commercially reasonable response to protect an approved tax relief, rather than a scheme to avoid tax.

HMRC, however, held firm. It maintained that the key test was whether one of the main reasons for the transaction was to obtain an income tax advantage. They argued that the TiS rules don’t exclude government-approved reliefs from scrutiny. Especially where the structure of the transaction creates a tax benefit not originally intended by the relief itself.

The Upper Tribunal ultimately agreed with HMRC. The judges concluded that the TiS rules apply even where a government-approved relief is involved. If the mechanics of the transaction produce an artificial or unintended tax benefit.

What Does This Mean for Business Owners and Investors?

This case highlights how tax planning using even government-backed incentives such as EIS can still fall foul of HMRC’s anti-avoidance legislation if the transaction is structured in a way that goes beyond the intended spirit of the relief.

Key lessons:

• Substance matters more than structure: Even if a transaction is technically within the law, HMRC will look closely at whether the primary purpose was to achieve a tax saving. If so, TiS or similar anti-avoidance rules may apply.
• Motives are scrutinised: The courts were clear that it wasn’t enough for the taxpayers to say they were preserving relief. What mattered was that securing a tax advantage became a central, and inevitable, result of the transaction.
• TiS rules are wide-ranging: These rules don’t just catch classic “income to capital” schemes. They can also apply where company shares are sold back to the company under circumstances that result in a favourable tax position.
• EIS relief isn’t a blanket shield: Just because a tax relief is government-approved doesn’t mean HMRC won’t challenge how it’s used. Directors must ensure the overall transaction has genuine commercial substance.

Could This Happen to You?

If you’re considering a share buyback — whether involving EIS shares or not — this case serves as a cautionary tale. What may seem like sensible tax planning can trigger anti-avoidance rules if HMRC believes the intention was to avoid income tax through technical means.

Before proceeding with any such arrangement, it’s essential to seek advice. At Merranti Accounting, we help business owners and investors navigate the complexities of tax law — including anti-avoidance rules — with clarity and confidence.

Our approach is grounded in aligning tax strategy with real-world commercial substance. If you’re unsure about the tax treatment of a planned transaction or recent arrangement. Don’t wait for HMRC to raise the issue.

Final Word

Tax reliefs like EIS can be extremely valuable. But, as this case shows, how they’re used matters just as much as whether they’re available. Even legitimate planning can cross the line if the primary outcome is tax reduction and the transaction lacks broader commercial justification.

If you’ve benefited from EIS or similar reliefs and are considering share restructuring, disposal, or buybacks, speak to us first. We can help ensure your plans remain compliant — and effective.

Need tailored advice? Contact the Merranti Accounting team today.