CTM00514 - Introductory: meaning of ordinary share capital: how “ordinary” shares are distinguished
The general meaning of ordinary share capital (see CTM00511) depends on identifying and excluding capital to which the holders have a right to a dividend at a fixed rate but have no other right to share in the profits of the company. (There are, though, some slightly different definitions of ordinary shares or shares for specific purposes, see for example CTA10/S160 (group relief, CTM81010) and CTA09/S931U (distribution exemption, INTM653050)).
The definition appears fairly straightforward but has given rise to a number of issues, addressed in the following table.
Some of the issues are finely balanced, and the table is, except where authority is quoted, only a guide. If arrangements appear to reflect uncommercial elements designed to circumvent the purpose of the legislation in identifying ordinary share capital the principles will be applied accordingly.
| Description | Ordinary Share Capital | Comment |
|---|---|---|
| Share with no dividend rights | Yes | CTA10/S1119 is silent on rights other than fixed rate of return |
| Fixed rate preference share with zero coupon | Yes | Right to nothing is not a right to something. See McQuillan v HMRC [2017] UKUT 344 |
| Fixed rate preference share with small coupon | No-but see comment | Could be fact dependent, particularly where there are avoidance concerns |
| Fixed rate of 10% cumulative/un-cumulative | No-but see comment | The rate of dividend is a fixed percentage on a fixed amount. See HMRC v Stephen Warshaw [2020]. This is not affected by whether the dividend is cumulative or un-cumulative |
| Preference share with right to “tiered” dividends, meaning they increase on a pattern over time | Yes | Rate is not fixed as can change depending on tier. There is more than one fixed rate, and in context this is not a case where the singular should include the plural |
| Right to greater of specified sum or dividend paid in respect of another class of shares | Yes | Rate is not fixed and similar analysis applies as for tiered dividends - there is right to a return at one of two fixed rates |
| Fixed rate preference share but with rights in liquidation | No - but this is finely balanced and may depend on facts of case | A distribution in liquidation is of surplus assets rather than of profits. But, depending on the circumstances, a purposive approach might point to a different conclusion |
| Preference share with 2 alternative fixed rates | Yes | No fixed rate but a rate that varies between two fixed levels. Similar analysis as for tiered dividends |
| Fixed rate preference share but with right to further dividend payment were certain events to occur (e.g. breach of banking covenants) | Yes | Right to further payment is another right to share in the profits. But conclusion might be different if circumstances very unlikely to materialise |
| Preference shares where coupon compounds over time or a preference share where a rate of interest is added if dividend is unpaid | Yes | In HMRC v Stephen Warshaw [2020] UKUT 0366 (TCC) the Upper Tribunal held that preference shares giving the right to a cumulative dividend which is compounded for amounts unpaid from the date they fell due are not shares carrying a right to a dividend at a fixed rate and are therefore ordinary share capital for the purposes of ITA07/S989 and CTA10/S1119. A fixed rate in this context requires both the rate of dividend to be expressed as a fixed percentage and also for the amount to which that rate is to be applied to be fixed. In the case of a cumulative compounding preference share, although the stated rate remains fixed as a given percentage, the amount to which it applies may vary over time depending on the aggregate amount of any accrued but unpaid dividends |
| Fixed rate of 10% but dividend only paid on regulator authorisation |
No | The rate and amount are both fixed in this situation and HMRC do not view the fact that the regulator can prevent payment as changing the analysis |
| LIBOR plus a fixed percentage | Yes | Rate is not fixed because LIBOR varies – does not matter that it is a fixed point of reference |
See CTM00511 for an introduction to the topic of ordinary share capital.