Utilising the share premium account

5th July 2019

For some privately owned companies, negative profit and loss reserves means that they are unable to pay out dividends as they do not have enough distributable reserves. However, they might have a significant share premium reserve, which is a non-distributable reserve.

The Companies Act 2006 allows a private company to utilise the share premium account and transfer this reserve to the profit and loss reserve, meaning it becomes distributable. In order to do this, the company needs to go through a capital reduction process.

There are a few steps to go through, in summary these are:

  • Ensure the company’s articles allow a capital reduction
  • All directors must sign a solvency statement
  • Shareholders must approve the capital reduction via a special resolution (needing 75% of the votes) within 15 days of the solvency statement date
  • The special resolution must be filed with Companies House within 15 days

The techy bit: example & accounting treatment

A company has £1,000 cash which is surplus to requirements, which it wants to return to the shareholders.

This cannot be done via a dividend as the company has negative profit and loss reserves.

Balance sheet (before reduction)  
Share capital £1, fully paid 2,000
Share premium 500
Profit and loss reserve (150)
Total reserves 2,350

 

The company can cancel 1,000 shares, so the nominal value £1,000 is repaid to the shareholders and cancelled. As a part of this journal entry, the company can cancel and reduce down the share premium account in any proportion it wishes. It can either reduce the whole share premium account, or just a part of it.

DR Share capital                              1,000

CR Cash                                            (1,000)

DR Share premium                         500

CR Profit and loss reserve             (500)

Balance sheet (after reduction)  
Share capital £1, fully paid 1,000
Share premium 0
Profit and loss reserve 350
Total reserves 1,350

 

As can be seen, the company now has positive distributable reserves and has eliminated the share premium account in its entirety.



 
Other items in Blogs
 
Chris Kelly
25th September 2020 COVID-19 Business Support – Winter Economy Plan

  With the Autumn Budget cancelled the Chancellor has announced a Winter Economy Plan introducing a package of measures to support businesses.   The highlights are:   The Coronavirus Jobs Retention Scheme (CJRS) – Will end as planned on 31 October 2020.   A new Job Support Scheme – To support viable UK employers who…

Read More »

Steven Denton
25th September 2020 HMRC Job Support Scheme (JSS)

On 24th September the government announced the launching in November of the Job Support Scheme to replace the existing Furlough Scheme that is feted to end on 31st October. The JSS is to run from 1st November through to 30th April, but initial rules may be amended after three months.   To qualify for the…

Read More »

Matilda Mawson
25th September 2020 2019/20 Pension Savings Statement – Request yours today!

  If you have made contributions to a registered pension scheme of more than £40,000 in the tax year, your scheme administrator should automatically send you a pension savings statement by 6 October 2020. This will detail your total pension input for the 2019/20 tax year as well as your pension input for the 3…

Read More »

Ian Piper
24th September 2020 Corporation Tax due soon: Not necessarily.

Companies with 31 December 2019 year ends will be due to pay their corporation tax on 1 October 2020. If that company is expecting to suffer a loss during the 2020 financial year, perhaps due to COVID-19 related reasons, it should be possible to carry that loss back one year and claim a refund of…

Read More »

Ruth Pearson
17th September 2020 Fuel Rates From September 2020

HMRC have updated the latest company car advisory fuel rates. These rates apply from 1 September 2020.   The guidance states that you can use either the previous or current rates, for up to one month from the date the new rules apply.   The new rates per mile are below: Engine size Petrol LPG…

Read More »

Robert Baxter
16th September 2020 Redundancy Pay & Payment in Lieu of Notice (PILON)

HMRC have introduced legislation which ensures employee’s statutory rights, including redundancy pay and payment in lieu on notice (PILON), are based on an employee’s normal pay and not their furlough pay.   Redundancy pay   An employee is entitled to redundancy pay if they have been working for their current employer for 2 years or…

Read More »