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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Groups & consortia: groups - entitlement to profits or assets available for distribution: equity holders - subsidiary profits available to


The amount of the subsidiary’s profits which is treated as available for distribution to equity holders for a relevant accounting period (CTM81005) is:

  • an amount of profits equal to the total profits which arose in that accounting period, whether or not any of those profits are distributed (under ICTA88/SCH18/PARA2 (1)(a)), or ‘Profits’ for this purpose are commercial profits, not tax profits. To arrive at the commercial profits you take the profit figure shown in the profit and loss account, and

    • add back any payments made to equity holders as such (CTM81010 equity holders as such) which have been deducted, and
    • deduct fixed rate preference dividends and commercial loan interest not charged in the profit and loss account. ### Example:

    Company M’s accounts for the accounting period ended 31 December 1995 show commercial profits of £1,000. The profit and loss account looks like this:

    Sales   £10,000
    Purchases £5,000  
    Loan interest to Mrs OM £2,000  
    Other expenses £2,000  


      Profits   £1,000

      On 5% preference shares £500  
      On ordinary shares Nil  

    The loan interest is in respect of a loan of £40,000 made by the principal shareholder, Mrs OM. The loan carries interest at 5% and is made on terms that she can convert the loan into ordinary shares at par. This is not, therefore, a ‘normal commercial loan’ for the purpose of ICTA88/SCH18/PARA1 (5) (CTM81010 ‘normal commercial loan’).

    The 10,000 5% preference shares are owned by Mr PM, who is Mrs OM’s husband. He paid £10,000 cash for them in 1989. The shares carry rights to a fixed dividend of 5% of each year, and to repayment at £1 each in 2001. They have no other rights. These are, therefore fixed rate preference shares for the purpose of ICTA88/SCH18/PARA1 (3) (CTM81010 ‘fixed rate preference shares’).

    For the purpose of arriving at the ‘profits available for distribution to equity holders’ in ICTA88/S413 (7)(a):

    • the interest on the loan to Mrs OM, which is not a ‘normal commercial loan’ is added back, and
    • the dividends on the fixed rate preference shares owned by Mr PM are deducted.

    The ‘profits available for distribution to equity holders’ are, therefore, £2,500. This is calculated as follows:

    Profits £1,000
    Add loan interest to Mrs OM £2,000
    Deduct dividend on 5% shares £500
    Total * * *