Readers' forum: Alphabet conundrum

I act for some private company clients for which the director/shareholders have implemented ‘alphabet share’ arrangements. The shares are organised into A B C D shares and so forth so that dividends of different amounts can be paid to each shareholder/director as a tax-efficient way of paying bonuses. Typically the shares don’t carry any rights to a fixed dividend and no order of priority is set out in the company’s articles. Each year the directors determine the dividend (if any) to be paid on each share.

I know there are concerns that these sorts of arrangements are vulnerable to challenge under ITEPA 2003 Pt 7 but my experience is that HMRC rarely challenges them and that they are very common in practice.

I am now concerned that these arrangements could deny the shareholders entrepreneurs’ relief even though all the usual qualifying conditions are...