Companies that have shares with no dividend rights in issue may need to review their impact on the shareholdings of employees and directors and, if necessary, consider either their cancellation or conversion in the light of two recent decisions.
In the first, the First-tier Tribunal (Tax Chamber) held that deferred shares with no voting rights, no dividend entitlement and no realistic expectation of a distribution on winding up formed part of the ordinary share capital of a company. Accordingly, a director who held 5% of the voting rights and non-deferred ordinary shares held, for the purposes of entrepreneurs’ relief, only 4.99% of the ordinary share capital and thus did not qualify for relief.
In the second, the tribunal held that a class of redeemable shares with no dividend entitlement were fixed rate shares and therefore did not form part of the ordinary share capital of the company.
Both decisions have potential implications for entrepreneurs’ relief and for other provisions where it is necessary to determine the percentage of ordinary share capital held by a taxpayer, such as whether the taxpayer has a material interest for the purposes of a tax-advantaged share scheme, or is connected with the issuing company in relation to an enterprise or seed enterprise investment scheme.
