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HMRC internal manual

Company Taxation Manual

Corporation Tax: small profits relief: association by holding fixed rate preference shares

Certain financial institutions, notably the venture capital funds that seek to support smaller developing companies, may provide finance by taking up preference shares rather than by making loans. In some cases the degree of share ownership is sufficient to give the investor company control under CTA10/S450 (3)(a) or (b).

CTA10/S28 (formerly ESCC9) applies in such circumstances to determine whether:

  • the investor and target companies are associated, or
  • companies under the common control of the investor company are associated with each other.

Fixed rate preference shares are disregarded for the purpose of determining control in this context if the company holding them meets all the following conditions:

  • it is not a close company
  • it takes no part in the management or conduct of the issuing company or in the management or conduct of its business, and
  • it subscribed for the shares in the ordinary course of a business which includes the provision of finance.

Fixed-rate preference shares for this purpose are defined as shares which:

  • were issued wholly for new consideration
  • do not carry any right either to conversion into shares or securities of any other description or to the acquisition of any additional shares or securities, and
  • do not carry any right to dividends other than dividends which:

    • are of a fixed amount or at a fixed rate per cent of the nominal value of the shares, and
    • together with any sum paid on redemption, represent no more than a reasonable commercial return on the consideration for which the shares were issued.

    For the meaning of ‘control’ see CTM60220