Shares which do not carry a dividend are not ordinary shares for the purposes of Entrepreneurs’ Relief says the First Tier Tribunal
M McQuillan and E McQuillan v HMRC  UKFTT 305
On the sale of a trading business, in order to qualify for entrepreneurs’ relief (ER) the seller must hold both:
- 5% of the company’s ordinary share capital allowing exercise of 5% of the company’s voting rights; and
- a position as an officer or an employee of the company,
throughout the period of one year ending with the disposal of the shares in the company.
Whilst it is straightforward to calculate the possession of 5% of the voting rights, the calculation of a 5% holding of ordinary share capital is more complex.
Ordinary share capital is defined in section 989 of the Income Tax Act 2007 as all the company’s issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits.
In McQuillan the First Tier Tribunal (FTT) held that shares with no dividend rights were zero percent fixed rate preference shares and therefore did not form part of the ordinary share capital of the company. The FTT’s logic was analogous to the established principle that 0% is a specific rate of VAT. Consequently, shares with no rights to dividends will not be taken into account when calculating the percentage of ordinary share capital held.
This is a rather surprising decision and seems to go against longstanding practice and previous guidance from HMRC.
On the 16 August 2016, HMRC was given permission to appeal the decision in the Upper Tribunal.
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