Capital contribution?

Parent (sml group) wants to inject funds into sub. Not a loan, nor purchase of shares, so what is it

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Parent company has cash and subsidiary is starting a new venture. How to get funds from parent to sub...

Previous accountant suggested an inter company loan, and whilst I can see that this would be the simple answer, there is no intention for said funds to be repaid, therefore it is not a loan (in my eyes).  
 

No additional shares are to be subscribed for, so what will the treatment of these funds be?  Would it be a capital contribution?

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By Ruddles
10th Jul 2024 21:58

There is no such thing as a capital contribution in UK company law.

If it will never be repaid, and it is a 100% holding, what is the resistance to issuing additional shares?

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Replying to Ruddles:
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By Manchester_man
10th Jul 2024 22:43

Fair point! I was thinking along the lines of something akin to share premium but I agree it’s better to just issue additional shares. I will confirm with client that the funds are not repayable, and will suggest additional shares are subscribed for.

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By Ruddles
10th Jul 2024 22:57

Share premium is fine - no need to issue £ for £ shares. 1 would be enough, with the balance taken to premium.

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By John Toon
12th Jul 2024 10:29

Ruddles wrote:

There is no such thing as a capital contribution in UK company law.

If it will never be repaid, and it is a 100% holding, what is the resistance to issuing additional shares?

Whilst there is no such thing in law it doesn't stop a capital contribution being presented in the financial statements as such. There's plenty of detail on this in the FRC staff education notes.

Depending on the accounting standard in play the loan, if presented as one, would need to be discounted. Personally I'd go loan/capital contribution over a new share issue.

What appears to have been forgotten is the impact on the holding company accounting for this transaction and this may influence the choice made.

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Replying to John Toon:
By Ruddles
12th Jul 2024 10:41

John Toon wrote:
Personally I'd go loan ... over a new share issue.

So would I. If it is not in fact a loan, and it is not a capital contribution (because such a thing does not exist in the UK), it doesn't leave much, other than credit to distributable reserves.

I'm aware that it is not HMRC's position to comment on how certain items should be presented in the accounts. Nevertheless, for completeness, their view (with which I happen to agree) is:

As capital contributions are not a concept formally recognised within UK company law, a contribution received by a UK company should be reported within distributable reserves either as a gift or possibly a donation. If however it can be repaid in any circumstances it should be considered as a loan falling within the loan relationships regime.

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By John Toon
12th Jul 2024 12:56

There are lots of things not recognised in law that appear in financial statements, plus the substance over form accounting principle that always applies, and I must admit the tax treatment is of little relevance to me. The question was about accounting treatment/preference and capital contributions can be recognised in the financial statements of a UK company, as per my previous comment. You're welcome to google the FRC SENs referred.

I do appreciate the considerations should include the potential tax consequences of any accounting treatment of something that could be subjective or has multiple recognition options but I was always taught to not let the tax tail wag the dog...

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Replying to John Toon:
By Ruddles
12th Jul 2024 14:44

Largely agreed. But although the text of the question does refer to 'treatment' there is no specific reference to accounting (or, for that matter, tax) treatment. I'm guilty of focussing on the headline question - "Not a loan, nor purchase of shares, so what is it?" Regardless of how it is described in the accounts it is not, as a matter of company law, a capital contribution. Even if the accounts incorrectly describe it as such.

I'm not sure that I can be bothered trawling through the FRC guidance but if you can direct me to the relevant notes I'd be interested to see what they say.

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By paul.benny
11th Jul 2024 06:26

Just because there is no present expectation of repayment, it doesn't make it not-a-loan. Presumably this new venture is expected to succeed and eventually make profits.

Equity has built in permanence, whereas debt has flexibility, including the ability to convert into equity if that's needed in the moment.

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By zebaa
11th Jul 2024 08:55

Don’t forget, loans can always be written off by the parent if the sub makes losses.

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By Paul Crowley
11th Jul 2024 09:58

Really do not see the desire not to have a loan. Intercompany debt is quite normal in a group.

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RLI
By lionofludesch
11th Jul 2024 12:15

What if you change your mind about the loan repayment?

New company makes another capital contribution to the old one?

Why cut down your options?

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By AJACK
11th Jul 2024 21:38

Other than a loan, there would be no other way if you did not want topco to subscribe for more shares.

Loan from topco to sub 1, connected parties, write the loan off with a formal deed, no credit or debit allowed in either company tax comp, topco needs sufficient reserves effectively from top co. You may have ERS issues in sub 1 if not a 100% sub.

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