Issuing shares in a company may appear straightforward; however, the reality is often more complex. Consequently, errors in process, timing or documentation can lead to serious legal and tax consequences.
As a result, HMRC will deny tax reliefs where shares don't legally exist. This article explains how to issue shares in a UK company, the legal distinction between allotment and issue, and the key tax risks to be aware of.
Allotment vs Issue of Shares: Why Timing Matters
Understanding when shares legally come into existence is critical, as timing determines the tax treatment.
Although these steps are often treated as one in private companies, UK courts distinguish between them. Furthermore, this distinction is crucial because most HMRC tax reliefs are contingent on the date of issue, not intention.
How to issue new shares
To issue shares correctly under the Companies Act 2006, the following steps must be followed:
Failure to follow this process can result in penalties and invalidate the share issue for tax purposes.
Key considerations when issuing shares in your company
Some critical points to consider when you issue shares in your company are covered below.
Director's authority
Directors must be authorised to allot shares under the Companies Act 2006. Without proper authority, the allotment may be invalid and the shares may not exist for tax purposes.
Pre-emption Rights and Restrictions
Before issuing shares, review:
As a result, ignoring pre-emption rights can lead to legal challenges plus failed tax planning.
Share Subscription and Payment
Shares must be issued through a clear subscription process.
Additionally, payment for your company shares can be made in cash, property, goods, services or goodwill.
However, shares must not be issued below nominal value, even if unpaid.
Board Minutes and Documentation
A board meeting must formally approve:
Therefore, accurate board minutes are essential evidence for HMRC to avoid potential loss of reliefs.
Companies House Filing Requirements
After allotting shares, you must:
Although you have two months to provide share certificates and amend the company’s register, it is advisable to do these as soon as possible, as they form the primary evidence of a shareholding.
HMRC and Share Issues: Tax Relief Risks
HMRC frequently challenges tax relief claims where share documentation is incomplete or incorrect.
To claim reliefs (e.g. share loss relief or Entrepreneurs’ Relief), you must prove:
Case Law: When Shares Do Not Exist for Tax
In National Westminster Bank plc v Inland Revenue Commissioners [1994] STC 580. the House of Lords confirmed that shares are only issued when:
There are a number cases which have expanded on this definition. Furthermore these cases highlight the importance of completing all the formalities and paperwork when issuing shares.
These cases are often decided on the documentary evidence provided and a couple of examples are discussed below.
Halnan and Squire v HMRC
The individuals concerned were unable to produce share certificates or notes of meetings where the share issue was discussed. Additionally they could not provide Companies House records or the register of members to support their claim. Consequently a claim for share loss relief was denied by HMRC.
Richard Alberg v HMRC
No register of members, share certificates or annual returns of the company were produced to evidence a shareholding. Furthermore a draft shareholders’ agreement and the taxpayer’s own testimony were considered insufficient to support a share loss relief claim.
Dieno George v HMRC
A claim to Entrepreneur's relief was denied by HMRC as a result of prevarication in changing its chief executive's non-voting shares into voting shares. Unfortunately, equity could not prevail to alter the capital gains tax rules.
Summary
Issuing shares in a UK company requires strict compliance with both company law and HMRC requirements.
The key principle is simple:
If you cannot prove the shares exist legally, HMRC will deny the tax treatment.
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