The value to shareholders of cash paid out by companies depends on the tax treatment of the payment. This will vary between shareholders and is heavily influenced by the way the cash is distributed so that the method of distribution can have a major impact on the perceived value to investors. Unfortunately, the complexity of the UK tax system makes it impossible to point to one route that offers the best outcome for all types of shareholder. There is a general perception that income is “bad” and capital is “good” but this is a gross over simplification. To allow shareholders to make their own decision, B share schemes have been used to give shareholders the choice between income and capital tax treatment. A number of structures have developed over the years but, typically, the company makes a bonus issue of new B shares which then either pay a one off cash dividend or can be disposed of for a capital payment.
Advisers have generally sounded a note of caution that HMRC may not play ball and could try to tax the cash as income under existing anti-avoidance rules, regardless of how it is paid out. However, these structures have been quite widely used without apparent objection from HMRC. In December, the Government finally called time on B share schemes and announced in the Autumn Statement that it would change the law to tax all returns to shareholders through B share schemes as income. Draft legisation was published before Christmas and we can expect it to be included in the Finance Bill that will be issued after the Budget on 18 March. Assuming there is no objection from the Labour opposition, there is every chance that the changes will become law by the end of March (when Parliament is dissolved for the May general election).
The new rules are intended to be effective from 6 April 2015 so there remains a short window during which B share schemes can be used to offer shareholders a choice of tax treatment. From April, there may still be occasions when these structures make sense from a company law perspective but it is likely that this route for returning cash to shareholders will largely cease to be relevant.