Tax

On 29 October 2024, HMRC updated its guidance on the meaning of “ordinary share capital” (OSC) in order to exclude non-cumulative fixed rate shares from the definition. The update follows a request for clarification from the Chartered Institute of Taxation (CIOT). In their response, HMRC confirmed their view that “whether a dividend is cumulative or not has no bearing on whether a share carries a right to a dividend at a fixed rate”.

The statutory definition of OSC is “all the [relevant] 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”. However, the application of the statutory definition is not always straightforward and has been the subject of recent consideration by both HMRC and the English courts (see, for example, Ordinary share capital: HMRC shares its views, Ordinary share capital: clarity in relation to dividend rights and Ordinary share capital: can a negative prove a positive?).

HMRC’s previous position on non-cumulative fixed rate shares was that they would constitute OSC, on the basis that the dividends could pay out in some years and not in others. However, in HMRC v Stephen Warshaw [2020] UKUT 0366, the Upper Tribunal indicated that “it is clear that a fixed rate dividend right does not cease to be fixed rate merely because it is cumulative”. In other words, the classification of a share does not depend upon whether its dividends are cumulative.

HMRC’s updated guidance provides important clarity, particularly given the large number of UK tax provisions that hinge on the meaning of OSC. The key takeaway is that the question of whether or not shares constitute OSC is highly fact dependent and requires a careful application of the statutory meaning. Taxpayers seeking to rely on the definition of OSC (for instance, in relation to Business Asset Disposal Relief or the substantial shareholdings exemption), should undertake a careful analysis, as the result will not always be straightforward or intuitive.