Pref share confusion

Dividends or interest?

Didn't find your answer?

I think I need to go back to accounting school because this has confused me.

A client has issued a preference share to his pension fund.  The pref share has cumulative rights to dividends at a set rate of 15%, and the company is required to redeem the shares on a specific date.

For accounting purposes I have no issue at all in classifying this as a liability.

So the question becomes, if it is classified as a liability then the 'coupon' payment should be classified as interest expense, right?  And if so is the 'interest' deductible as ordinary interest in the calculation of corporations tax?  This would be even though the legal payment mechanism from the company to the pref shareholder is technically a dividend?

At the end of the day I'm trying to figure out of the payment to the pref shareholder is a pre-tax expense, or an out of profits disbursement, as either option may limit what the director can do about discretionary spend if he needs to preserve sufficient profits to pay the dividend/interest.

Replies (9)

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paddle steamer
By DJKL
25th Sep 2020 15:13

Treat as interest but add back for tax purposes- we have £1m of 8% [***] prefs and that is certainly how I treat our dividends- the other thing is you likely need to accrue the divs (interest) whether it is paid or not, I use a generic provision and have an extra note explaining within our accounts.

Do not accrue into say DLA accounts unless you want the individuals at that juncture to be taxed as having received, I had a discussion with HMRC for nearly a year on this very point. (which I won)

***cumulative, the censorship on here is OTT.

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Replying to DJKL:
Psycho
By Wilson Philips
25th Sep 2020 15:50

DJKL wrote:
Do not accrue into say DLA accounts unless you want the individuals at that juncture to be taxed as having received,

Shudder - here we go again ...

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Replying to Wilson Philips:
paddle steamer
By DJKL
25th Sep 2020 16:00

Is Justin about??

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Replying to DJKL:
By Michael Beaver
25th Sep 2020 16:23

Perfect, just the response I needed.

It doesn't need to go anywhere near the DLA as the pref share is issued to technically a third party.

The censorship bot on here reminds me of my 8th grade English teacher. Didn't like legit words that sounded like other naughtier words!

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Replying to michaelbeaver:
avatar
By Tax Dragon
26th Sep 2020 08:00

My favourite is when it censors CLT (little test there to see if it still does). I'm not sure whether that's because it's similar to [***] or [***].

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Replying to Tax Dragon:
avatar
By Tax Dragon
26th Sep 2020 08:03

Tax Dragon wrote:

(little test there to see if it still does)

Looks like it's been updated! Don't they have more important things to be changing? :-)

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Accountants & Business Advisers
By Gladstone
26th Sep 2020 11:54

Why liability and not equity in the balance sheet? And 15% coupon is dividend payable (liability) and not interest payable (liability). Preference dividend is only different from ordinary dividend when it comes to the distribution of dividends and with a fixed percentage. Preference dividend is payable only if there is earnings. Usually, there will be addl. clauses in the Companies Articles that describes how and when to pay. Please do not mix preference shares with the loan notes where interest is also fixed and payment will also be fixed (accrued if not paid).
Gladstone&Co.

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Replying to Gladstone:
Psycho
By Wilson Philips
26th Sep 2020 12:00

I think that you need to brush up on accounting for preference shares. Even HMRC understand the rules.

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Replying to Gladstone:
paddle steamer
By DJKL
26th Sep 2020 14:08

When are prefs treated as debtI think originally started with FRS25 which has since been absorbed into things like FRS102.

I personally still think it is a nonsense, legal form imho ought to trump nature in this instance, but they somehow never asked me to be a setter of standards. (Rot started when SSAP2 was killed, Dear Prudence ought to have been allowed to come out to play.)

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