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Not necessarily
In a private company the ordinary shares give the owners rights to the asset of the company. But whether they take those assets in the form of income dividends or capital distributions is entirely a matter of their choice.
So the most that can said is that ordinary shares in a private company are substantially a right to income and/or capital.
That is surely a very different thing, even economically and financially speaking, to a right to income simpliciter without the right to the underlying assets that produce the income - eg a preference share or a rental stream.
hear what you say E.C......
...but you would be hard pressed to find many economists or financiers to agree with the underlying proposition.
On the specifics of the case, this is in the context of their Lordship's taking the broad view (which I agree is the view to take) of the "arrangements" made in the case. Luckily they did not choose to take a similarly broad view on the ordinary share rights in the case.
paradise lost???????
Ok so their lordships decided that there was "bounty" here in the form of a gift from Mr Jones to Mrs Jones of something which was presumably her subsequent ability to enjoy his income in the form of company dividends - but they then go on to decide that an ordinary share is not "substantially a right to income" and therefore an exempt gift for a spouse. Whilst it is good to see the case won by the Joneses, (didn't they do well!), this is less than a satisfactory outcome. In the context of a consultancy business such as this was I find it less than convincing to say that this share was anything other than substantially a right to income. What we presumably take from this is that preference shares or restricted rights "A" shares etc etc are now at risk of a more confident HMRC challenge. For the future it cannot be long before we see some new special rate of CT introduced by the Chancellor to seek to resitct the advantages of ordinary share structures such as the joneses used, or perhaps a return to Investment income surcharge or even close comapny apportionment? plus ca change!!!
Surely the law lords are right
While you may not be able to find economists or financiers that take the law lords line, I'll bet that small or start up businesses funded by VCs will recognise the position the law lords have taken with respect to the benefits conferred by ordinary shares.
While each share might be a right to income (definitely in the future) the legal agreements such as the articles don't usually dwell on this point but instead focus on the share as an instrument of company control or influence through its right to a vote. In my experience this leads VCs to require at least 25.1% of the shares in exchange for their investment. Not so they can expect at least this share of the profit but so that they are able to exercise sufficient control control of their investment under the companies act.
Artics Systems may not be VC funded but it doesn't mean that the meaning of an ordinary share should be any different for a close company than it is for any other company.
Martin - surely you miss the point...
An Ordinary Share is not a right to income at all. It only provides / allows for an income to be paid in the form of a dividend if whoever is in control of that income decides to pay an income in that form. You seem to be focussing on income rather than rights.
It is, of course, possible that a shareholder controls the distribution of the income of the company may have the necessary degree of control - but Mrs Jones didn't.
Huge numbers of companies never pay dividends. If you take the Lords viewpoint that you have to establish whether there is an arrangement at the outset, how are you ever meant to decide which shares have to be defined as "..substantially a right to income"?
Interesting that our government says they will legislate to effectively reverse the decision. If it's that easy, why didn't they do it years ago.
As another correspondent says, Mr Murphy seems to know what is "fair and right". But that depends upon your starting point - which he conveniently forgets to define!
the article highlights...
...what a narrow squeak the judgement was.
Their Lordships took a "legal" (and wrong !!) view that ordinary shares do not represent "...substantially a right to income".
They would be hard pressed to drum up many financiers or economists who would agree their view on that matter.
Of course they are "substantially" (as defined in OED) a right to income (in economic terms and any financial sense whatever) .
If they were not, capitalism would be dead !!!
The fact that they also have several other legal (and even commercial/social rights, if you will) does not come close to upsetting that fundamental.
Are they different (legally and economically and financially) to preference shares? You bet.
That fact does not come close to upsetting the fundamental either.
Thank goodness a narrow legal view over-rode any realistic financial/economic view - and it's not often you can say that !!
Now onto the debate about how we decide what is a "fair" tax.
Although Richard (Murphy) apparently knows the answer to that one !!
Remember we are talking about tax here
Which inhabits a world akin to 'Second Life' except that it is much more mysterious and unfathomable. (What would be the tax equivalent of Heizenberg's Uncertainty Principle I wonder).
What Martin forgets is that we are talking about 'income' in its strictly tax sense, not in its economic sense.
And as we all know (I hope) it is perfectly possible to build up funds in a small company and then liquidate the company. You would then have capital, not income!
So an ordinary share in an OMB can by 'wholly or substantial a right to capital' if you desire it to be so.
And that is why the exemption applies.
well. my fault .....
...for starting a red herring since the case is over, but just some quick follow ups:
(i) Jon ; it is totally true that the ordinary share gives various legal entitlements. But the fundamental financial/economic raison d'etre of owning an ordinary share is the future income. There is no other rational financial motive, even if there be possible other motives (eg buying a share in a company where you wish to turn up at AGM and protest against their green policies)
(ii) Steven ; you are discussing/arguing a different set of points and issues altogether. You are correctly pointing out that HMRC's various rules and laws and views are totally fragmented and utterly inconsistent ; 100% agreed.
(ii) Neil ; I agree the Lawlords were debating the point in the context of tax (and agree your views thereon!!). But the Lawlords, in assessing the first ("arrangement ") point, took the wider view. As I said originally, it's as well thay did not take the wider view on the second point. Of course, instances exist of folk taking a tax capital gain and not tax income by liquidating (or indeed selling), and the tax system works that in different ways (although as you point out, the economics is essentially the same). But given the Jones clear cut instance, the Lawlords could have trampled a very different path.
Whatever, my fault for starting a side debate which probably has not much future purpose but only thanks past lucky stars. I can't readily see how it can help or hinder the Treasury in creating new legislation (famous last words).
Move on
We think we understand where this decision takes us and things will get clearer still.
But what will this proposed legislation anti-avoidance look like? It's fairly easy, as the Revenue assert, to draft legislation to catch the Arctics of this world - but Arctic is at one very extreme end of the family ownership spectrum.
Supposing it's more difficult to identify the principal earner. Supposing the secondary earner is nevertheless an active contributor. Who will make these judgements?
As we all know, this fiasco has arisen from separate taxation and the new premier's fiction that national insurance is not principally taxation, which has led to the complete reversal of the income of choice for owner/managers. Those of my advanced years will remember when it was different and dividends were the expensive method of taking personal reward.
Last point - every computation illustrating the "tax" cost comparison of salary/dividend fails to acknowledge that S2P has real benefit. So NI cost, considerable though it be, can provide a material uplift in state index linked pension. So it's not all one way.
If the big onstacle is NI
then I could live with a merger so long as the issue is properly tackled.
But, candidly I see my suggestion as pragmatic, easy and more managable and so a winner.
But I'm open to persuasion...if that's all that stands between us
Richard
had a quick look....
...at the paper, Richard, and
(i) there is a lot in there that I agree with
(ii) there is quite a bit I don't agree with.
Not very helpful, so I hope I get time over next few weeks to comment, but personal circumstances may preclude that.
On one key "nettle" if we are going for genuine root and branch reform.
I remain unconvinced by arguments for continuing to separate NI from mainstream Taxes, despite agreeing there are significant obstacles. I think we do have to address whether this is tax by any other name or if we wish to separate it. The latter is surely a dead duck in economic reality, so let's accept it. It's (un?)arguably too huge a distortion at the heart of the system to leave it there.
(a) Your argument about the psychology of it (headline rates etc) is valid, but are we not able to get past this?
(b) do not agree that pensioners as a body are, by definition, unfairly treated if the distinction is dropped. More to the point, that matter could readily be addressed if folk wanted to treat them differently. So I honestly regard that as a red herring (wittingly emotive or otherwise - you can just see the politicians on that one) in any NI debate.
Arctic Systems: Moving on
Martin Foley (amongst others) challenged me on this issue. I have written a paper on how to resolve the issues raised by the Arctic Systems case. It is available at http://www.taxresearch.org.uk/Blog/2007/08/09/arctic-systems-moving-small-business-taxation-on-in-the-uk/