Alphabet shares and cumulative reserves

Insufficient cumulative reserves and alphabet shares

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Husband & wife company owned jointly with A & B shares both classes with capital, dividend and voting rights. Only one spouse in essence generates the income, albeit the other supports with administration functions and there is a formal payroll scheme. Previously the majority dividend was voted to the lower earning spouse on their class of share. However, the cumulative reserves are now insufficent to provide a dividend sufficient to each class of share re HMRC TSEM4225.

If the company wishes to carry on voting a larger dividend on the B share only for example, do readers see any issues in rearranging the shares so there is a 90:10 split thus allowing a larger dividend to the lower earning spouse bearing in mind the available reserves? Alternatively, would amending the rights to the A shares to 'capital only' allow dividends to be voted on the B shares only without the need to consider the reserves for each share class?

Thanks in advance.

Replies (17)

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By Paul Crowley
20th Mar 2024 14:12

Just declare dividends on the type of share that suits the purpose.
Do not really understand the problem.

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Ivor Windybottom
By Ivor Windybottom
20th Mar 2024 14:44

Does this help:
https://www.accountingweb.co.uk/business/finance-strategy/alphabet-share...

HMRC at TSEM4225 may be relying on the statement that the "shares rank equally" and it is not clear how this interacts with A and B shares where, for example, one class may have prior dividend rights.

Reallocation of shares does not appear controversial, but if you are going to do that then what is the point of the A and B designations.

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By Springers
20th Mar 2024 17:45

Thanks Both

The issue is that each class of share currently has the same voting, dividend and distribution rights, so as far as I am aware the company would need 40k of reserves to vote 20k on the B share only.

Is the suggestion that the B shares would need to have prior dividend rights and in this situation the total reserves would not need to be considered i.e. the 20k in the above example could be considered in isolation?

The point of the 90:10 suggestion was the company having existing A & B shares and therefore would help the situation if the total available reserves needed to be taken into account re tax efficient dividend split.

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Replying to Springers:
Stepurhan
By stepurhan
21st Mar 2024 08:40

Springers wrote:

The issue is that each class of share currently has the same voting, dividend and distribution rights.


Are you sure that means that they both have to have proportional dividends whenever dividends are declared? I would suggest re-reading the rights carefully.

Because if that is the case, it completely defeats the purpose of having alphabet shares. The whole point is that they can be dealt with differently in at least one aspect, usually the ability to declare dividends independently.

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Replying to stepurhan:
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By Tax Dragon
21st Mar 2024 09:06

You too are missing the point of the question, which is to do with taxation (specifically the settlements legislation), not dividend rights.

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By Tax Dragon
20th Mar 2024 19:45

Has the company stopped generating reserves? If so changing to 90:10 may not solve the problem.

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By Paul Crowley
20th Mar 2024 20:31

Both A & B voters can vote for just A to get a dividend.
That is the entire point of Alphabet shares.
I think you are befuddling yourself.

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Replying to Paul Crowley:
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By Tax Dragon
20th Mar 2024 21:35

You don't think HMRC's argument has any basis in law?

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Replying to Tax Dragon:
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By Paul Crowley
20th Mar 2024 22:47

Any legal precedent for their opinion? Or even a FTT?
If not then it is just an opinion.
I advise clients to take regular monthly dividends, lowers the risk of error quite a bit.
Never had HMRC argue about dividends in forty years of practice.Touchwood.
tsem etc is about dividend waivers.
Even that can be frustrated by have lots of dividends and waivers

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Replying to Paul Crowley:
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By Tax Dragon
20th Mar 2024 23:24

Donovan/McLaren/Buck provide support for some of what HMRC say, I believe.

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Replying to Tax Dragon:
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By Tomazaan
25th Mar 2024 17:42

These cases relate to dividend waivers which different from having A and B shares.
PS Thank you Tax Dragon for your many helpful and insightful comments on Accounting Web.

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Replying to Paul Crowley:
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By Tax Dragon
21st Mar 2024 09:50

Paul Crowley wrote:

...it is just an opinion.

It matters that it's HMRC's.

See MJShone's comment at the end of this thread: https://www.accountingweb.co.uk/any-answers/white-space-disclosure

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By Springers
21st Mar 2024 09:06

Morning All

The articles allow for different levels of dividends to be paid on a particular share class. The company has not stopped generating reserves, but post-tax profits have reduced so payment of a significant B dividend only for example, is what needs consideration going forward.

Reading the HMRC manual in conjunction with a recent article in taxation, points towards the tax requirement for the company to have sufficient overall reserves when looking at dividends paid on a particular share class i.e. you are unable to vote a £20k B dividend if the reserves do not allow the same £20k A dividend.

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Replying to Springers:
Stepurhan
By stepurhan
21st Mar 2024 10:21

What manual are you reading that says A and B shares are not separate classes?

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Replying to stepurhan:
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By Springers
21st Mar 2024 10:56

stepurhan wrote:

What manual are you reading that says A and B shares are not separate classes?

Not sure what you mean. They are separate classes of shares. My query was all to do with ITTOIA/S624 because the decision only to vote dividends on certain shares was a bounteous arrangement, HMRC will argue if insufficient total reserves the dividend of say £20k paid on the B shares only, should actually be 1ok on A and 1ok on B on the assumption of jointly owned H&W company.

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By More unearned luck
21st Mar 2024 14:34

If H gifted his A shares to W (and W gifted her B shares to H), would the reserves 'earmarked' for the A shareholder be available to 'fund' dividends paid to the new A shareholder (viz: W)? Would it work?

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Replying to More unearned luck:
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By Tax Dragon
21st Mar 2024 15:42

Isn't that OP's question? You've thrown in an extra 'gift' from W to H, but I don't see how that helps.

The issue is whether s626(3) applies.

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