Share this content

Excess share premium

Excess share premium

Didn't find your answer?

We are dealing with a company that has issued some share capital for £800,000, the price was to be settled by some future cash receipts being reassigned from the purchasor of the shares to the share issuing company,  these receipts have now been received by the share issuer and they are in excess of the agreed share price, there is no arrangement for them to go back to the purchaser of the shares, what is this additional amount, is there such a thing as excess share premium, is it just more of a premium. 

Replies (23)

Please login or register to join the discussion.

avatar
By Paul Crowley
06th May 2021 17:47

The parties need to make a decision
What if there was a shortfall?
Did neither party consider that there could be a difference?

Thanks (0)
Psycho
By Wilson Philips
06th May 2021 18:37

The agreed subscription price is the agreed subscription price. Any excess paid by the purchaser is surely nothing more than a debt due to the purchaser. It’s certainly not a share premium. The purchaser may choose to waive the debt - I wouldn’t.

The above is of course all said with no knowledge whatsoever of what was actually agreed. The analysis could well be different.

Thanks (1)
Replying to Wilson Philips:
avatar
By Tax Dragon
06th May 2021 20:44

The way I read it, the issuing company accepted an asset in settlement of the subscription and has made a taxable profit on that asset.

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
07th May 2021 08:03

That’s a perfectly plausible alternative, and one that I was going to suggest myself. (And the fact that there is a difference supports it.). I would say that we need to know how that difference came to be and what the receivables are exactly.

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
07th May 2021 09:20

Thanks. I thought I must be going mad because you and the two Pauls seemed to be suggesting it couldn't be as the OP had described* and I wondered whether there was a company law or other point that meant it couldn't be so.

*Using this word fairly loosely.

Thanks (0)
Replying to Tax Dragon:
avatar
By paul.benny
07th May 2021 09:54

Not 'couldn't be'. Just 'more to it'. And I would have thought that, given the sums involved, the parties would have properly documented the agreement and in doing so, considered the possibility of surplus or deficit.

But then I'd also have wondered why such a large sum was being locked in as equity.

Thanks (0)
Replying to paul.benny:
avatar
By Tax Dragon
07th May 2021 10:24

Got it. Thanks. Perhaps one day I will understand why so many respondents in here seem so keen to address questions that weren't asked and ignore the one that was. Today is not that day.

If the OP (any OP) has not, prior to posting, analysed the (relevant) situation accurately in terms of what happened, then it's a given that s/he needs to go away and do that. Perhaps one day I will also understand why so many OPs post without knowing the details. Again, today is not that day. You're right that it's not unlikely that a failure to fact-find/analyse has happened here too. In which case I agree with you, Paul and Wilson.

However, if the OP here has analysed correctly, what appears (to me) to have happened is that the issuing company has made a taxable profit. As ever, that's a thought/pointer not a conclusive answer, but I thought one of us should at least try to address the actual question.

Thanks (1)
Replying to Tax Dragon:
avatar
By CW2012
07th May 2021 11:25

Thanks Tax Dragon, I suspect that it will become a profit on the transaction, there isn't a route backwards, so the difference will have to be settled in the issuers P&L.

Thanks (0)
Replying to CW2012:
avatar
By paul.benny
07th May 2021 11:57

What you've described is A agreeing to issue shares to B in return for a stream of receipts owing to B. Although that stream of receipts was uncertain at the time of the original agreement, there is no mention of any additional aspects to the agreement.

So maybe there's a share premium over and above that originally anticipated. Maybe A issues more shares to B. I'm not remotely convinced that it's P&L income.

None of us, except maybe you, know the substance of the agreement between the parties. And if you do know that, you haven't chosen to provide any additional information.

Thanks (0)
Replying to paul.benny:
avatar
By Tax Dragon
07th May 2021 12:26

I'm not convinced either. But if the "stream of receipts" is an asset (à la Marren v Ingles, or as Ch1 Pt16 CTA2010 is presumably predicated on), if its value when acquired was £800,000, if it has raised more than that on realisation, and if the agreement between the two parties is silent on what happens with that excess, then it is at the least plausible.

Quite a few ifs. They may not all be relevant. (I'm not convinced about that either.)

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
07th May 2021 12:54

On what has been said, I'd favour this view.

"Here's a golden frog, if you sell it you ought to get £800K."

When you actually sell it a year or so later it might only be worth £700K or it might be worth £900K. You'd have an allowable loss or a chargeable gain if it weren't tangible moveable property with an expected useful life of less than 50 years.

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
07th May 2021 14:12

Golden frog with an expected useful life of less than 50 years? That's fool's gold.

Could the OP's assumed asset (which sounds a bit debty, and not at all froggy) perhaps come within LR rules?

I'm done guessing now.

Thanks (1)
Replying to Tax Dragon:
avatar
By The Dullard
07th May 2021 16:38

As described, it sounds unlikely to be a debt arising from a transaction for the lending of money. It sounds like a royalty stream or similar.

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
07th May 2021 17:13

Your guesses are typically better than mine (or so it seems to me). But if you're right...

the asset has, presumably, not in fact been disposed of/realised
the issuing company will continue to receive sums and
it's possible the £800k received is taxable, as well as the excess over that amount... (though is tax deducted before payment? Royalties is another subject on my Inquisitionny list....)

Or have I missed the guess completely?

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
07th May 2021 21:25

One of us has given this more thought than the other. I am the one that's thought about it least.

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
07th May 2021 21:53

Yet both of us have contributed more to the discussion than the OP.

Some men you just can't reach. So you get what we have here in this thread, which is the way he wants it; well, he gets it. I don't like it any more.

Thanks (0)
Replying to Tax Dragon:
avatar
By paul.benny
07th May 2021 13:57

There we are. You know properly about tax and I don't
But then we don't even know whether the OP was asking about the accounting treatment or the tax treatment and we've each come at this from our own area of knowledge.

Thanks (0)
Replying to paul.benny:
avatar
By Tax Dragon
07th May 2021 14:22

Agreed.

As you may know, I steer away from talking about accounting issues having had an enlightening discussion on same with another Aweb Paul. If UK GAAP says a profit on disposing of an asset should be classed as share premium, I find that illogical in the extreme, but so be it. (There are equally illogical things about tax that you could no doubt point out.)

Thanks (0)
Replying to Tax Dragon:
avatar
By paul.benny
07th May 2021 14:36

Quote:
If UK GAAP says a profit on disposing of an asset should be classed as share premium..

Don't worry, it doesn't. But then I don't think that's what the OP described. I read it as the subscription price being paid in a number of instalments from a cashflow.

Who knows?

Thanks (0)
Replying to paul.benny:
avatar
By Tax Dragon
07th May 2021 15:11

A bit like when a tax refund of £100 is due and HMRC add a zero? But what happens then is that you find you can't keep hold of the £900 overpay. There's an easy (indeed, enforced) reverse gear. I should have thought that, if similar has happened here, there'd likewise be an easy 'remedy'. But OP has told us there's no way back.

Weird. Unless there is a frog. (But who knows indeed.)

Thanks (0)
avatar
By paul.benny
07th May 2021 07:53

I think you need to go back to the written agreement and understand what it says about consideration and issue of shares.

Thanks (0)
Replying to paul.benny:
Routemaster image
By tom123
07th May 2021 11:55

I always fear that no such 'agreement' exists, and the poor finance guy/gal is having to do a bit of post rationalisation..

Thanks (0)
Replying to tom123:
avatar
By Paul Crowley
07th May 2021 18:17

Agreed
If the parties thought it out and understand company shares, differences would have been considered

Thanks (0)
Share this content