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HMRC internal manual

Company Taxation Manual

Introductory: meaning of ordinary share capital: how “ordinary” shares are distinguished

The general meaning of ordinary share capital (see CTM00511) depends on identifying and excluding capital to which the holders have a right to a dividend at a fixed rate but have no other right to share in a dividend.  (There are, though, some slightly different definitions of ordinary shares or shares for specific purposes, see for example CTA10/S160 (group relief, CTM81010) and CTA09/S931U (distribution exemption, INTM653050)).

The concept of “ordinary capital” originated in the wartime Excess Profits Duty at F(2)A1915/SCH4/PART1/PARA6, for the purposes of applying the tax to a subsidiary as though it were a branch of the parent; the aim of that rule being to distinguish equity capital from loan capital for this purpose.

That distinction remains relevant today and is expressed in the current definition.  The aim of the current tax legislation is to exclude instruments that are in legal terms shares but in effect represent perpetual debt, namely fixed rate preference shares.  The definition appears fairly straightforward but has given rise to a number of issues, addressed in the following table.

Some of the issues are finely balanced, and the table is, except where authority is quoted, only a guide.  If arrangements appear to reflect uncommercial elements designed to circumvent the purpose of the legislation in identifying ordinary share capital the principles will be applied accordingly.

Description Ordainary Share Capital Comment
Share with no dividend rights Yes CTA10/S1119 is silent on rights other than fixed rate of return
Fixed rate preference share with zero coupon Yes Right to nothing is not a right to something.  See McQuillan v HMRC [2017] UKUT 344
Fixed rate preference share with small coupon No-but see comment Could be fact dependent, particularly where there are avoidance concerns
Fixed rate of 10% cumulative No Holder knows return is fixed even when profits not available
Fixed rate of 10% non-cumulative Yes Some years no dividend will be paid so is more like equity than debt
Preference share with right to “tiered” dividends, meaning they increase on a pattern over time Yes Rate is not fixed as can change depending on tier. There is more than one fixed rate, and in context this is not a case where the singular should include the plural
Right to greater of specified sum or dividend paid in respect of another class of shares Yes Rate is not fixed and similar analysis applies as for tiered dividends - there is right to a return at one of two fixed rates
Fixed rate preference share but with rights in liquidation No - but this is finely balanced and may depend on facts of case A distribution in liquidation is of surplus assets rather than of profits.  But, depending on the circumstances, a purposive approach might point to a different conclusion
Preference share with 2 alternative fixed rates Yes No fixed rate but a rate that varies between two fixed levels. Similar analysis as for tiered dividends
Fixed rate preference share but with right to further dividend payment were certain events to occur (e.g. breach of banking covenants) Yes Right to further payment is another right to share in the profits.  But conclusion might be different if circumstances very unlikely to materialise
Preference shares where coupon compounds over time or a preference share where a rate of interest is added if dividend is unpaid Borderline – this is finely balanced and may depend on facts of case.  See Stephen Warshaw v HMRC, an FTT case (TC/2017/08674) which is of persuasive rather than precedent authority If the rate is fixed and cumulative arguably the shares are not ordinary share capital as there is in the end nothing beyond a right to a return at a fixed rate, albeit that the coupon compounds.Where a further rate of interest is added if the dividend is unpaid, the issue is whether the additional interest is seen as a return on the original investment, which would support fixed rate. But if seen as a separate return on amounts outstanding there would be a right to two differing fixed rates, and the tiered dividends analysis would apply
Fixed rate of 10% cumulative but dividend only paid on regulator authorisation / fixed rate of 10% non-cumulative but dividend can only be paid if regulator authorises Depends on whether cumulative or non-cumulative Third party involvement does not affect underlying right to income.  There is an underlying fixed rate where it is cumulative and the regulator can only prevent payment.
LIBOR plus a fixed percentage Yes Rate is not fixed because LIBOR varies – doesn’t matter that it is a fixed point of reference

 

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