Distributions: general: new consideration
When someone pays cash to a company for the issue of shares, that cash from the point of view of the company is new consideration for that share issue.
The full meaning of new consideration is wider than the simple example above. CTA10/S1115 (1)(a) gives a basic definition of new consideration as ‘consideration not provided directly or indirectly out of the assets of the company’.
The consideration need not necessarily be cash. It can include other assets, including shares in another company, and this raises quite complex issues.
Capitalising a distribution
CTA10/S1115 (1)(b) specifically excludes from the definition of new consideration amounts retained by the company on capitalising a distribution, for instance paying up newly issued shares out of a distributable reserve - the shares are not issued for new consideration and are ‘bonus’. The issue of such bonus shares may trigger a charge under CTA10/S1022 following a repayment of share capital or ‘cock the trigger’ under CTA10/S1026 when followed by a repayment of share capital - see CTM15400.
Application of share premium
CTA10/S1115 (2) and (3) cover the situation where share capital has been issued at a premium, and the premium represents new consideration. In these circumstances if any part of the premium is later applied in paying up further share capital, then it is treated as new consideration for that share capital also. However, this treatment does not apply to any part of the premium that has been taken into account under CTA10/S1025 (2) to enable a distribution to be treated as a repayment of share capital (see CTM15400).
Instead of issuing shares directly from share premium, a company may cancel the premium under Companies Act 2006, take this to a distributable reserve and then issue shares from the reserve - see CTM15440. Where this is done as part of an arrangement for the reorganisation of the company’s share capital, HMRC’s view is that CTA10/S1115 (2) and (3) will apply, so there is in effect transfer of new consideration. For this treatment to apply the amounts used to pay-up new shares must be identifiable as the cancelled share premium and distinguished from other distributable reserves.
Where, however, cancellation of share premium does not form part of a recognisable scheme for re-organising share capital, but is assimilated to distributable reserves such that the share premium loses its identity as premium, HMRC’s view is that amounts subsequently applied in paying up share capital no longer fall within CTA10/S1115 (2)(b). Instead, CTA10/S1115 (1)(b) will apply and so the share capital issued as paid up will not be treated as issued for new consideration.
Value derived from share capital
CTA10/S1115 (4) to (6) cover circumstances in which amounts derived from the value of share capital or securities may be treated as new consideration. The underlying principle of the legislation is that where capital derived from shares or securities is used for the issue of new shares or securities, the new consideration for the ’new’ is limited to the new consideration for the ’old’.
The main rule, at CTA10/S1115 (4), is that consideration derived from the value of share capital (or securities) of a company, or from voting or other rights in the company, is not treated for distribution purposes as new consideration. However, this is subject to exceptions at CTA10/S1115 (5) and where the exceptions apply, to a limitation at CTA10/S1115 (6). New consideration is derived from the value of share capital in the following circumstances:
- the returning to the company of money or value which was treated as a qualifying distribution when it emerged from the company, or
- the returning to the company of a repayment by the company of share capital or principal secured, or
- the lifting of the company’s obligations relating to its shares or securities on their cancellation or extinguishment, or on the acquisition of those shares or securities by the company.
The amount of the new consideration is then limited by reference to that originally given for the shares or securities in question. In the case of shares that as a result of CTA10/S1022 were a qualifying distribution when they were issued, the nominal value of the shares constitutes new consideration even though the shares were not issued for full consideration.
The effect of these provisions is thus the logical one of recognising as new consideration:
- anything derived from shares or securities in the company so far as it originated as new consideration received by the company,
- anything that comes out of the company which is taxed as a distribution and returned to it.
However, any value reflecting accumulated profits, which have not been subjected to a distribution charge, cannot be treated as new consideration.
Note that CTA10/S1115 (4) to (6) only restricts new consideration derived from share capital in or securities of the same company. It is possible for a company to recognise as new consideration the full value of shares in another company which are received in exchange for the issue of fresh capital or securities.
Where share capital is reduced and taken to a reserve as part of an arrangement for the reorganisation of the company’s share capital, this will amount to the cancellation, by the company under section 1115 (5) (c) providing this involves the shareholder giving up the right to the share capital as part of the reorganisation. Application of the reserve in these circumstances will be treated as new consideration.