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HMRC internal manual

Corporate Finance Manual

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Deemed loan relationships: shares with guaranteed returns: non-qualifying shares: the redemption return condition: mirroring a public issue of shares

Shares which mirror a public issue

This guidance applies to companies that hold shares up to 21 April 2009

This let out from S529 is aimed at cases where a company makes an issue of qualifying publicly issued shares (QPIS) (which would normally be made by the parent company), but the group then needs to move the money so raised into a trading or investment company where it is required. One common way to do that is for a subsidiary to issue shares on the same terms to the parent (the ‘mirroring shares’), and so-on down the group.

CTA09/S530(4) and (5) provide for two cases -

Case 1 deals with first level mirror shares and applies where -

  • a company (A) issues shares (‘the public issue’) to independent persons,
  • within 7 days of that issue, one or more other companies (BB) issue shares (the mirroring shares) to company A on the same, or substantially the same, terms as the public issue,
  • company A and companies BB are associated companies, and
  • the total nominal value of the mirroring shares does not exceed the nominal value of the public issue.

Case 2 deals with second level mirror shares and applies where -

  • within 7 days of the public issue, one or more other companies (companies CC) issue shares (the second-level mirroring shares) to one or more companies BB on the same, or substantially the same, terms as the public issue,
  • company A, companies BB and companies CC are associated companies, and
  • the total nominal value of the second level mirroring shares does not exceed the nominal value of the public issue.

Before 22 March 2006, the limit was 24 hours not 7 days.

For these purposes, companies are associated if they are within the same group by virtue of ICTA88/S413 (3)(a).

If it takes more than two share issues to get the money into the relevant operating company, and the shares do give an interest-like return, then the group will need to rely on the unallowable purposes test (see CFM45240) for the third and any subsequent level mirror shares. In normal commercial funding cases, that test will be satisfied. Where mirroring shares are issued after the 24 hour time limit, because for instance there has been a group reorganisation, then assuming the purpose remains to route money to where it is required within the group, it is expected the unallowable purpose test will be satisfied. Other intra-group issues will need to be considered on their merits.

In the normal commercial funding case, the money subscribed for the mirroring shares would be the same as the money subscribed for the public issue. If HMRC staff come across a case where either -

  • the public issue does not consist of QPIS (because for instance, the holders have substantially more than 10% of the issue), or
  • the money subscribed for the mirroring shares exceeds that subscribed for the public issue (because there is a premium payable on the mirroring shares),

they should seek the advice of CTIAA (Financial Products Team).