In Colin Bielckus, Mark Arnell and Kevin Taylor v HMRC [2016] TC05044 the addition of voting rights attaching to shares were not enough to make them ordinary shares for the purposes of share loss relief.
- A travel company became insolvent.
- Shareholders claimed s131 ITA 2007 Income Tax Share Loss relief on the basis that their shares had become of negligible value for CGT purposes.
- HMRC challenged their claim on the basis that their shares were not ordinary shares.
ITA s 989 states that share 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” is not Ordinary Share Capital.
The company’s share capital consisted of ordinary and preference shares and each shareholder held shares in both classes.
- The ordinary shares contained full rights,
- The preference shares attracted a fixed right to a 7% dividend p.a. and acquired voting rights in the event of arrears of dividends.
The appellants submitted that the preference shares were created on the insistence of ABTA (Association of British Travel Agents) and that the directors’ intention was that the preference shares would become the same as ordinary shares if dividends were in arrears.
Despite there being an arrears of the preference dividends, the First Tier Tribunal (FTT) found no documentary evidence to show that the holders of the preference shares had any entitlement to the company’s profits in addition to their fixed rate dividends.
The preference shares did not meet the statutory definition of ordinary shares and so the appeal failed and no share loss relief was allowed.
Comment
Another case where bespoke drafting of share rights apprently backfires. The phrase in the legislation “but have no other right to share in the company’s profit” might deserve more thought particularly “no other right”. If a share acquires a voting right of an ordinary share then a shareholder presumably can also acquire rights to profits. Would that amount to “no other right”? A point not yet tested.
Links
Share Capital: what's an Ordinary share
Case reference: Colin Bielckus, Mark Arnell and Kevin Taylor v HMRC [2016] UKFTT TC05044
