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HMRC internal manual

Company Taxation Manual

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Groups & consortia: groups - entitlement to profits or assets available for distribution: definitions of terminology

ICTA88/SCH18/PARA1, 6 and 7

Connected persons

Any question whether one person is connected with another is determined in accordance with ICTA88/S839 (see CG14620 onwards).

Equity holders

The definition of an equity holder is at ICTA88/SCH18/PARA1.

An equity holder is any person who:

  • holds ordinary shares in the company,

or

  • is a loan creditor of the company in respect of a loan that is not a normal commercial loan.

(For this purpose, ordinary shares are all shares other than fixed rate preference shares. ‘Fixed rate preference shares’ are defined below.)

There is further guidance at CTM81025on the treatment of certain persons as equity holders and on the treatment of a bank as an equity holder at CTM81030.

Equity holder as such

‘Equity holder as such’ is not specifically defined in ICTA88/SCH18. Something is received by an ‘equity holder as such’ when an equity holder receives it in his or her capacity as an equity holder. That is to say dividends, interest and assets in a winding-up in respect of shares or securities in respect of which he or she is treated as an equity holder.

In contrast, someone who is, for example, an equity holder in respect of a holding of ordinary shares may receive interest in respect of a loan that is a ‘normal commercial loan’. Although the equity holder will receive this interest, it will not be received by the equity holder ‘as such’.

Fixed rate preference shares

The definition of fixed rate preference shares is at ICTA88/SCH18/PARA1 (3). For the purpose of the definition of ‘equity holder’ above, the definition of fixed rate preference shares is shares which:

  • are issued for consideration which is, or includes, new consideration (see below),

and

  • 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. This is subject to certain exceptions described at CTM81015),

and

  • do not carry any rights 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
    • represent no more than a reasonable commercial return on the new consideration received by the company in respect of the shares,

and

  • on repayment do not carry any rights to an amount exceeding that new consideration, except in so far as those rights are reasonably comparable with those general for fixed dividend shares listed in the Official List of the Stock Exchange. From 1 April 2000 onwards the comparison is with such shares listed on any recognised stock exchange.

Shares that carry no rights to a dividend may be fixed rate preference shares for the purposes of the definition in ICTA88/SCH18/PARA1. They are, however, ordinary share capital for the purposes of ICTA88/S832. The Revenue’s view on shares with no dividend rights and the Schedule 18 definition has changed. If this change of view causes any difficulties in a case you deal with, advice is available from CTIAA (Technical).

Because of the condition, in the first bullet above, that fixed rate preference shares are issued for consideration which is, or includes, new consideration, a bonus share (for which no new consideration is received by the company) cannot be a ‘fixed rate preference share’ even if the conditions in the other three bullets above are satisfied.

Indirect shareholdings etc

ICTA88/SCH18/PARA6 provides that the percentage to which one company:

  • is beneficially entitled of any profits available for distribution to the equity holders of another company, and
  • would be beneficially entitled of any assets of another company on a winding-up,

means the percentage to which the first company is, or would be, so entitled, either:

  • directly,

or

  • through another body corporate or other bodies corporate,

or

  • partly directly and partly through another body corporate or bodies corporate.

Loan creditor

‘Loan creditor’ is defined in ICTA88/S417 (7) (CTM60130), for the purpose of the definition (above) of an equity holder, as any person who is a loan creditor of the company in respect of a loan that is not a normal commercial loan. Note that the exclusion of banks by ICTA88/S417 (9) does not apply to the definition of equity holder in ICTA88/S417 (7). This is because ICTA88/SCH18PARA1 (4) brings in the Section 417 (7) definition of ‘loan creditor’ but specifically disapplies the Section 417 (9) exclusion of banks.

New consideration

New consideration is defined in ICTA88/S254 (CTM15140).

Normal commercial loan

A ‘normal commercial loan’ means a loan that satisfies all the following conditions.

  • It is a loan of, or including, new consideration (see above). (It follows that a bonus security for which the company receives no new consideration cannot be a ‘normal commercial loan’.)
  • It does not carry any right either to conversion into shares or securities of any other description (this is subject to certain exceptions described at CTM81015), or to the acquisition of any additional shares or securities.
  • It does not entitle the loan creditor to any amount by way of interest which depends to any extent on:
    • the results of the company’s business or any part of it, or
    • on the value of any of the company’s assets, or
    • which exceeds a reasonable commercial return on the new consideration lent.

(This sub-paragraph operates subject to the two modifications at CTM81020, which refers to the comments of the then Financial Secretary to the Treasury on these provisions when they were introduced.)

  • The loan creditor is entitled on repayment to an amount which either:
    • does not exceed the new consideration lent, or
    • is reasonably comparable to the amount generally repayable, in respect of an equal amount of new consideration, under the terms of issue of securities quoted on the Stock Exchange.

As far as possible, similar securities should be selected for comparison, for example, indexed securities should be compared with quoted indexed securities.

Ordinary shares

Ordinary shares means all shares other than fixed rate preference shares (see above) (ICTA88/SCH18/PARA1 (2)).

Securities

A loan to a company is to be treated as a security whether or not it is a secured loan. If it is a secured loan to a company, it is treated as a security regardless of the nature of the security.