Accounting for Shares issued at a Premium but partly unpaid

Accounting for Shares issued at a Premium but...

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A client company made a rights issue of shares at a premium.  The payment for the new shares was 50% on application/allotment and the balance when called for by the company.

The auditors consider that the amount outstanding but uncalled, is debt due to the company, however I thought this was not a debt until a call is made.  I would have thought that this was a note item not a balance sheet item.

The company is small and reporting under FRSSE.

Any thoughts?  It is a family company so showing the shareholders as debtors may have taxation implications for loans to participators.

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By johngroganjga
27th Jun 2014 20:50

I would agree with the auditors, and if your reason for being reluctant to do so is fear of the tax consequences, it may help if I say that I'm sure I've heard it said that amounts unpaid on share issues are not loans for tax purposes.

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By User deleted
27th Jun 2014 22:17

I'm perhaps showing my age ...

... or lack of accounting knowledge (or both) but is/was there not a separate line (at the top of the balance sheet) for unpaid amounts of share capital?

But taxwise, John is correct - there is no debtor for tax purposes until the call is made.

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By johngroganjga
28th Jun 2014 07:35

Yes you are right about the Companies Act balance sheet format BKD.

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By Steve Kesby
28th Jun 2014 10:47

I disagree

If I have a £1 share and issue it unpaid (assuming the articles so permit) the company has issued share capital of £1, but the amount of share capital to be shown in the company's accounts is £0.

The reason being that the balance sheet formats to which you refer, say at the bottom of the balance sheet "called up share capital". They then require a note identifying the amount of issued share capital and the called up share capital that has been paid up. See SI 2008/409.

It seems to me that share capital that has not yet been called up can't properly be described as called up share capital and considered to be "called up share capital unpaid", as per the balance sheet formats. It's just uncalled share capital.

It's not a debt for any purpose. It represents the limit of the members' liability in the event of a liquidation; that's what limited liability means.

However, I do believe that, as a matter of company law, the whole of any premium must be paid at the time the shares are issued, because you can neither have uncalled share premium nor can you call it up. If the share premium hasn't been paid, it must, therefore, be a debt to which s. 455 could apply.

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By User deleted
28th Jun 2014 10:41

To the OP

The first point to note is that share capital consists of shares called up. You are right that uncalled shares are merely disclosed in the notes and do not create a debt. The relevant rules for small businesses are here. Shares called up but remain unpaid could either be shown as a separate item on the face of the balance sheet (format 1) or as other debtors (C.II.3 - format 2). 

The objective behind a s.455 charge is to prevent artificial distributions. A contractual commitment to invest does not result in a loan so as to attract a s.455 charge. Broadly this was outcome of RKW Ltd v HMRC decided by the FTT.

Edit: just crossed with Steve's post

 

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By mervyn beach
30th Jun 2014 19:40

Whittaker v Kers seems to answer the question

Thanks taxguru, 

 

The reference to RKW was very helpful as it confirms that there are no tax issues arising.  That case also refers to Whittaker v Kers which established that there is no debt until the call is made.  I also found a useful article from Felicity Cullen Taxbar.com whose analysis of the Revenue's arguments for the old Section 419 to apply would, in her opinion, fail because of Whittaker v Kers.

Thanks also to Steve Kesby.  The only point here is that I understood that private companies do not have to receive the whole of the premium on allotment,  I thought that this requirement only applied to public companies. (Section 586 Companies Act 2006).

 

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By User deleted
30th Jun 2014 20:54

Yep, thanks Steve

For confirming why I should stick to tax - the balance sheet entry that I referred to is for called up share capital not paid.

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