When ordinary shares are not ordinary
Recently (in the context of tax legislation) we published a blog on a couple who were able to benefit from entrepreneurs’ relief because their preference shares (with a fixed rate dividend of zero) were deemed to be part of the company’s ordinary share capital.
“Ordinary share capital” is defined as all a company’s issued share capital, other than capital where the holders have a right to a dividend at a fixed rate but no other right to share in the company’s profits.
The Chartered Institute of Taxation (“CIOT”) has published a table setting out their views on what constitutes ordinary share capital, and what doesn’t. Ordinary share capital includes a share with no dividend rights, or a fixed rate preference share with a zero coupon. Shares that aren’t ordinary share capital include preference shares with a coupon set at 0.00001% – because even though this is negligible, it’s still a fixed rate.
What’s most interesting here is CIOT’s own warning that, in avoidance cases, the courts will look hard at any arrangements and may make a different decision.
In addition, HMRC have agreed to publish the table, and intend to update their manuals. But they have their own big red caveat on the document: “Some of the examples in this document … are finely balanced and subject to review. And whether or not the view expressed is the right outcome may depend on the specific facts and circumstances.”
In other words – if you’re being too clever by half with the design of your share capital, or your share plans, don’t be surprised if the tax authorities question your intentions.
RM2’s view – as ever – keep it simple. There are great tax breaks – for employees and companies – which are legitimately available for companies under a range of government recognised employee share plans such as the Enterprise Management Incentive (EMI), and there’s not usually any need to create a complex range of share classes.
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