Alphabet Shares

Alphabet Shares

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I have a client who would like to issue shares to key employees.  He would however like to use A, B & C shares for each of the three employees.  In addition he proposes that each of these shares would carry none of the ordinary attributes of shares as they would only carry a discretionary right to dividends but would not be voting shares and would have no rights on a wind up.  The value of these shares would be minimal so I doubt it is worth using any of the approved schemes and instead just pay tax on a nominal market value.  My concern however is regarding dividends.  Given the lack of other rights attached to the shares is it likley that HMRC would view future dividends as remuneration?  Any thoughts or similar experience would be welcome.

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By Mouse007
26th Nov 2013 11:52

You know

I've always taken the view that if it looks like a duck, walks like a duck and sounds like a duck

then it bloody well is a duck.

 

I call these "ideas" red flag ideas - just asking for trouble.

 

 

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By frustratedwithhmrc
26th Nov 2013 11:49

P A Holdings and ITEPA 2003 s447

Need to be careful here as it is possible for HMRC to attack these as employment related securities under the PA Holdings decision and/or ITEPA 2003 s447 as defined in s421B (8)

http://www.hmrc.gov.uk/manuals/ersmmanual/ersm20210.htm

Whether you believe either of these apply is a judgement you and your client will have to make between you as it is a very grey area, but these would be my main concerns.

I have dealt with this previously by having them as directors only and not employees and have alphabet shares issued in different proportions on a pari passu basis, this means that they have the same rights as ordinary shares (just fewer in number, possibly a few percent of the voting stock), but dividends can be issued on them based upon the majority stockholders.

You can then pay these directors a low salary with the remainder as a dividend and this will be tax efficient.

They should purchase these shares in the first instance based upon a reasonable valuation, reflecting the minute value of the company they own. They may feel uncomfortable not having any employment rights, but when shown the difference between what they would receive as an employee and what they would receive as no non-employed office holding director, most people will jump at the chance.

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By Steve Kesby
26th Nov 2013 11:55

You might be interested...

... in the Tower Radios decision which is under appeal to the UTT. Tower Radios didn't use alphabet shares but did use securities in an SPV to essentially pay a bonus to the employees.

Like the cases preceding it referred to in the judgement, the scheme failed in the FTT's judgement and the bonuses were liable to tax and NIC.

Mouse's view accords with that put forward at the Court of Appeal level by Lord Justice Moses, when deciding PA Holdings.

There's also s. 447 ITEPA 2003 to contend with.

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