Something out of the ordinary (share capital)

The Chartered Institute of Taxation recently published a table detailing HMRC's views on what constitutes "ordinary share capital", with some un-ordinary results.

A number of key UK tax provisions turn, in part, upon the meaning of "ordinary share capital".

For example, in order to access the 10% CGT rate available under the UK's 'entrepreneurs' relief' rules, it is necessary amongst other things for a seller of a trading company/group to have held, for a period of at least 1 year, at least 5% of the company's "ordinary share capital".

The statutory definition of "ordinary share capital" is "all the company's issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company's profits".

Last month the Chartered Institute of Taxation published a table setting out HMRC's views on a number of different types of share capital, each with differing dividend rights. All of the examples provided by HMRC are ones which they have come across in practice. Although described as HMRC's "initial" views, subject to further review, and potentially to be treated differently in "avoidance" cases, it would appear that:

HMRC consider the following as falling within "ordinary share capital"

• A share with no dividend rights. Such shares were the subject of discussion in the case of HMRC v McQuillan [2017], in which the Upper Tribunal held that a right to a dividend of zero was not a right to anything at all. Such shares therefore do not have a right to a dividend at a "fixed rate".
  
  
• A fixed rate preference share with a zero coupon.
  
  
• A fixed rate of 10% non-cumulative (as in some years no dividend will be paid, so there is no "fixed rate". The return is dependent on the results of the business, so more like equity than debt).
  
  
• A fixed rate of 10% non-cumulative, but dividend can only be paid if Regulator (e.g. FCA) authorises. It is irrelevant that a third party is involved. The right is not fixed as the dividend rights are non-cumulative.
  
  
• A preference share with a right to "tiered" dividends (as the rate of dividend is not fixed).
  
  
• A share which has a right to the greater of a specified sum or the dividend paid in respect of another class of shares (again, as the rate of the dividend is not fixed).
  
  
• A fixed rate preference share, but the holders receive a payment above the par issue price based on the figure for reserves when redeemed, or when the company is sold, or placed in liquidation (although the holder is entitled to a fixed rate of return, the entitlement to a payment above par is an "other right to share in the company's profits"). Note that HMRC flag this as being particularly "finely balanced", and therefore subject to further review.
  
  
• A fixed rate preference share, but the holders receive a further dividend payment were certain events to occur (usually unlikely except in exceptional circumstances e.g. breach of banking covenants). Again, although the holder is entitled to a fixed rate of return, there exists an "other right to share in the company's profits.
  
  
• A preference share with 2 alternate fixed rates, the rate used depending upon certain events during the year (e.g. level of profits).
  
  
• LIBOR plus a fixed percentage (LIBOR of course fluctuates daily).

HMRC consider the following as NOT falling within "ordinary share capital"

• A fixed rate preference share with a zero coupon of 0.000001% (i.e. negligible).
  
  
• A fixed rate of 10% cumulative.
  
  
• A preference share where the coupon compounds over time (if the rate is fixed and cumulative). Note that HMRC flag this as being particularly "finely balanced", and therefore subject to further review.
  
  
• A preference share where a rate of interest is added if the dividend is unpaid (if the rate is fixed and cumulative). Note that HMRC flag this as being particularly "finely balanced", and therefore subject to further review.
  
  
• A fixed rate of 10% cumulative, but dividend can only be paid if Regulator (e.g. FCA) authorises.

It remains to be seen whether HMRC's views find their way into published, official guidance, and whether they are further refined in light of further HMRC experience/reflection.

For now, however, this should provide some further certainty as to what HMRC, at least, would consider to be ordinary (or 'extraordinary'!) share capital.