For UK tax purposes, it is often necessary to determine whether shares constitute ordinary share capital (OSC). For instance, this might be necessary when considering, amongst others:
- a number of the group relief rules, such as corporation tax, capital gains tax and stamp duty
- the substantial shareholdings exemption
- the corporate dividend exemption
- entrepreneurs relief
- tax-advantaged share schemes
- enterprise and seed enterprise investment schemes
The question of what constitutes OSC has recently been the subject of consideration by the UK courts in the context of entrepreneur’s relief (see our prior updates Ordinary share capital: clarity in relation to dividend rights and Ordinary share capital: can a negative prove a positive?)
In practice, this is often far from straightforward, and difficult questions can arise when considering whether:
- preference or redeemable shares constitute OSC;
- the shares in question provide the holders with a fixed rate of return; and
- the fact shares contain an entitlement to cumulative, non-cumulative or compounded returns impacts on any OSC determination.
On 19 September 2018, the Chartered Institute of Taxation (CIOT) published, with the agreement of the UK tax authority (HMRC), example scenarios in which HMRC has provided its initial view as to whether the shares in question constitute OSC or not (https://www.tax.org.uk/sites/default/files/180918_OSC%20Aide%20Memoire%20with%20caveats.pdf). It is understood that HMRC will update its guidance in the Company Taxation Manual to reflect this in due course.
Of course, whether shares constitute OSC for UK tax purposes is highly fact dependent and regard must be had to all of the circumstances. However, the publication of this guidance is helpful for tax advisers and their clients in considering questions concerning OSC and may provide a little more certainty in an otherwise complex area of the UK tax code.