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HMRC internal manual

Company Taxation Manual

Introductory: meaning of ordinary share capital: share capital

The UK Companies Acts do not define share capital directly but state that references in the Companies Acts to a company having a share capital are to a power under its constitution to issue shares.  Share capital is the amount appearing in the balance sheet from the issue of shares and if shares are issued at a premium over their nominal value the premium is reflected in a share premium account separate from the nominal share capital, although for both company law purposes (CA06/S610 (4)) and tax law purposes (CTA10/S1025 (2)) the premium is treated as forming part of the share capital for the purposes of its “reduction” under company law and its “repayment” under tax law.

This means that share capital reflects the equity (ownership) interests of the company members in their company and, in liquidation, the value of the interests (if any) after creditors have been repaid.  Historically, share capital reflects shares in the “joint-stock” lying in the hold of a merchant adventurer trading vessel.  Originally investors owned their own trading stock but as time went on it was held jointly and divided into shares. The important point in modern terms is that share capital, together with share premium, other reserves and undistributed profit, reflects company assets net of liabilities, and thus ownership (not creditor claims).

It follows that certificates that simply give rise to an interest in distributions of profit, an income stream, sometimes called “jouissance” shares, are not shares in share capital.  The French term is used because there is no (common law) English equivalent.  And the translation of “actions de jouissance” or in German “Genussscheine” is closer to “enjoyment certificates” than to “shares”.

A joint-stock company is defined at CA06/S1041 as one that

  • has a permanent paid-up or nominal share capital of fixed amount, divided into shares of fixed amount, or held as transferrable as stock (this means expressed as a monetary sum), or divided partly in one way and partly in another, and
  • is formed on the principle of having for its members the holders of those shares, or that stock, and no other persons
  • if registered with (members’) limited liability is a “company limited by shares”.

Members’ liability in the case of a limited company is limited to the nominal amount of the share capital they hold.  Limited companies are much the most common, for commercial reasons, but companies may be formed without a share capital and members’ liability may be limited by guarantee.  Companies limited by guarantee are generally formed by non-profit seeking members who nevertheless wish to operate via a corporate entity, and are commonly used for charities.  Some companies limited by guarantee with a share capital still exist, but since 22 December 1980 (in Great Britain, but 1 July 1983 for Norther Ireland) may no longer be formed.

Unlimited companies are fairly rare but continue to be formed due to their limited reporting requirements.  Their members may choose whether or not to have a share capital.

In 1999 the Special Commissioners considered the status of “founders’ deposits” with a company limited by guarantee in the case South Shore Mutual Insurance Co Ltd v Blair 1999 STC (SCD) 296. The Special Commissioners came to the conclusion that the deposits were not issued share capital; the company did not, in fact, have any authorised share capital and, as a consequence, could not have issued share capital.  Companies Act 2006 abolished the requirement for a company to have an authorised share capital with effect from 1 October 2009, but the case contains a useful review of authorities on share capital.

See CTM00511 for an introduction to the topic of ordinary share capital.