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HMRC internal manual

Corporate Finance Manual

Debt cap: the available amount: dividends treated as borrowing costs for accounting purposes

The available amount does not include preference share dividends

Preference shares may be classed as financial liabilities under IAS 32: Financial Instruments, where such equity results in the issuing party creating a contractual obligation.

This can occur where there is an issue of, for example, redeemable preference shares and these are mandatorily redeemable on a certain date. The issuer has a contractual obligation to repurchase the shares on that date, and so the preference shares will be classed as a financial liability by the issuer.

In such instances any preference dividends paid will be shown as interest in the income statement of the issuer.

To prevent such preference dividends being included in the calculation of the available amount TIOPA10/S332(2) states that any amounts that fall within the categories specified in section 332(1) (a) to (g) are to be disregarded to the extent that:

  • the amount represents a dividend payable in respect of preference shares; and
  • those shares are recognised as a financial liability in the financial statements of the group for the period.