Alphabet shares and profit distribution

[DigitalUser]

Folks,

I've just fired off the same question to my accountant, would be curious if anyone else has experience with this...

I'm in talks with a small company about joining as a director + minority equity holding. There would be 3 directors in total with a 55:25:20 split and I will be buying in. One of the questions is hold we distribute profits fairly. Two options we're looking at

1. Salary + bonus (no dividend)
2. Salary + alphabet shares (profit split of 40:30:30 via dividend) so the distribution is not in line with equity.

Is 2. permissible and, if so, are there any tax | NIC implications to deal with?

More than happy to seek specialist advice should my accountant not be able to assist and any referrals in this instance would be appreciated

[Lance]

It's common practise.
Not advised for a PSC, but fine for the model you describe.
Dividends taxed as dividends. Salary as PAYE.
Your accountant can easily answer this, but as it's a different company they may want some more £££ for the advice.

[DigitalUser]

It's common practise.
Not advised for a PSC, but fine for the model you describe.
Dividends taxed as dividends. Salary as PAYE.
Your accountant can easily answer this, but as it's a different company they may want some more £££ for the advice.

Thanks Lance - the majority shareholder has been advised (by their accountants) against Alphabet shares that HMRC don't look favourably on this type of setup, but the only scenario I can find where there has been case law which HMRC has won is against PA Holdings, who setup a contrived scheme to dodge NICs.

My accountant has responded and also said Alphabet shares are common practice so I think they'll need to speak to each other to get this squared off.

In the scenario of salary + bonus (both taxable as PAYE) & dividend (taxable as dividend) do you see any implications around that? My reading on the subject hasn't found any red flags but I'm not an expert in this area.

[northernladuk]

You need to make sure you fully understand how they work though. I don't so might be wide of the mark but there are no voting rights with Alphabet shares so you'll have no say in votes, particularly when it's around kicking you out or something unfavourable you might need a say on. Make sure you aren't just making the decision based on distribution and forgetting some key basic principles about those types of shares.

[Maslins]

I'd be wanting to know why the expected profit split is different to the share split. Eg why not have one class of share but make them 40:30:30? I'm guessing because one person wants control, hence the 55%. This would make me nervous...as even if the other two of you club together, you can be outvoted on anything/everything.

Especially as you say you're buying in, make sure what you're buying actually has some value, rather than being some Mickey Mouse share class. I think a solicitor savvy with shareholder agreements should be involved. These can be the kinds of situations where it ends up with someone getting squeezed out, they feel unfairly. But they didn't understand the (very limited) rights their shareholding had, hence their shares are worthless.

[DigitalUser]

You need to make sure you fully understand how they work though. I don't so might be wide of the mark but there are no voting rights with Alphabet shares so you'll have no say in votes, particularly when it's around kicking you out or something unfavourable you might need a say on. Make sure you aren't just making the decision based on distribution and forgetting some key basic principles about those types of shares.

You can have equal voting rights on Alphabet shares unless they are classified differently in the shareholder agreement.

[DigitalUser]

I'd be wanting to know why the expected profit split is different to the share split. Eg why not have one class of share but make them 40:30:30? I'm guessing because one person wants control, hence the 55%. This would make me nervous...as even if the other two of you club together, you can be outvoted on anything/everything.

Especially as you say you're buying in, make sure what you're buying actually has some value, rather than being some Mickey Mouse share class. I think a solicitor savvy with shareholder agreements should be involved. These can be the kinds of situations where it ends up with someone getting squeezed out, they feel unfairly. But they didn't understand the (very limited) rights their shareholding had, hence their shares are worthless.

The threshold for passing a decision is > 75% so in this instance there isn't cause for concern.

In any case, I've followed up with my accountant over a lengthy call and we did the sums on a divi Vs bonus - the sums work out almost identical at the higher & additional taxpayer rate thresholds, so there's little benefit from that perspective to going down the Alphabet route. The main benefit I foresaw was flexibility in exercising when the drawdown would take place but I'm not going to lose sleep over it.

[Lance]

The threshold for passing a decision is > 75% so in this instance there isn't cause for concern.

Not true. But 75% is important.... read this Shareholders' Rights in Private and Public Companies in the UK: Overview | Practical Law (thomsonreuters.com)

[Craig@Clarity]

I don't the ins and out of your personal income or what setups you currently have but have you considered a corporate entity holding the shares to better manage your personal income? Just throwing it into the mix.