Alphabet shares are a share structure where each shareholder holds a different class of share - A shares, B shares, C shares, and so on. The practical effect is that dividends can be paid at different rates to different shareholders, giving the business flexibility over how profits are distributed. 

It is a structure that has been widely used by owner-managed businesses for years, often as a way of managing the tax position across a family or between business partners. HMRC have never liked it, but historically they have done little about it. 

That is beginning to change. 

HMRC are now asking specific questions about share classes on tax returns, which tells you something about the direction of travel. There is also existing case law that allows HMRC to reclassify dividend income as salary where the arrangement is effectively being used to reward someone for their work in the business rather than their investment in it. If that happens, the full payroll taxes apply and HMRC can look back several years. 

The risk is higher in two situations in particular: where dividends are being used to top up a salary in a way that does not reflect genuine investment returns, and where shares are being issued to employees as part of a remuneration arrangement rather than a genuine equity stake. 

If you have alphabet shares in place, this is not a reason to panic. But it’s worth reaching out for good advice to review the position and make sure the structure is defensible if HMRC come asking.