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HMRC internal manual

Company Taxation Manual

Introductory: meaning of ordinary share capital: what is meant by “shares”

An incorporated company is a body corporate, a type of legal entity established under legal or royal authority distinct from its member or members and governed by its articles or other constitutional documents, see CTM00510 for background on bodies corporate and the development of Companies Act companies.  As the legal entity is distinct from its member or members, their ownership interests must be reflected in some way.

An incorporated company (in most cases, see CTM00511) has a share capital and its members hold shares in that share capital; shares and share capital should be understood accordingly.  On formation, a company with a share capital is required to submit a Statement of Capital and initial shareholdings to the Registrar of Companies, and a Statement of Capital is needed whenever an annual (company) return is filed and at certain other times, such as on a reduction of capital.

The company’s assets are owned by the company itself, not by the shareholders individually, although in turn the shareholders as members together have ownership of the company through their “equity”. The shares express the shareholders’ proprietary interest in the company, which as an entity carries on the activities, not the members or shareholders.

In principle, shares are transferable, but in practice there are often restrictions on transfer, set out in the company’s articles or other constitutional documents.

The principal rights that usually attach to a share are –

  • the right to dividends (of profits) declared,
  • the right to vote, and
  • the right to share in the company’s assets in a winding-up.

The principal liability that attaches to a share is to pay what is due on it.

The rights and liabilities are all subject to the company’s articles or other constitutional documents, and there is no debtor/creditor relationship between a company and its members until distribution out of assets takes place. Lord Millett gives a useful summary of the “juridical nature of a share” in IRC v Laird Group plc [2003] UKHL 54 at [37].  Shares are often described as a bundle (or “fasciculus”) of rights and liabilities.  See Lord Wright in Lowry v Consolidated African Selection Trust Ltd (1938-41) 23 TC 259 at 298.

For the purposes of CTA10/PART23 (definition of distribution in the Corporation Tax Acts) “share” includes stock and any other interest of a member in a company.

Issue and allotment of shares

Possession of a share certificate is prima facie evidence of ownership of a share, CA06/S127.  This does not, of itself, confirm ownership and certificates are not essential to demonstrate that share capital has been issued.  However, in order to be a member of a company under the UK Companies Acts, a person must be entered in the company’s register of members, CA06/S112.  From 30 June 2016 certain private companies can report changes of membership to Companies House to be reflected in a public register rather than keeping their own.  The issue of share capital is only complete when the processes of application, allotment and issue are complete:  National Westminster Bank plc v IRC [1994] STC 580.  Shares are allotted when a person acquires the unconditional right to be included in the company’s register of members: CA06/S554.

TCGA92/S288 (5) provides that, for chargeable gains purposes, shares are treated as issued if they are to be issued under the terms of an unconditional letter of allotment or similar instrument. 

See CTM00511 for an introduction to the topic of ordinary share capital.  CTM00514 considers when shares meet the definition of “ordinary share capital”.