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 [2016] 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.

For more information on Greg and his work, please click here.

Testimonials

Read what our clients have to say...

View All

Excellent experience start to finish – always very responsive to any queries and the turnaround on the property I was buying was very quick, even in the busy time leading up to stamp duty deadline. Jenny was always very helpful and went above and beyond to close on a short timescale.

Ben Armitage

“Very approachable, practical solutions to problems, but most of all very responsive which I personally think is very important because if you need help, you need it quickly, or at least to know someone is looking at it for you”.

Joanne Rowe, Finance Director, Greater Manchester Chamber

“Always able to contact, very approachable, friendly and professional”

Nives Feely, JAM Recruitment

“I believe I have been able to establish a professional working relationship with everyone I have come into contact. Importantly, I sense the relationships which have been established give me the confidence that I can make contact with Davis Blank Furniss at any time and on any matter. I would also like to express my thanks to the very impressive “gatekeepers” who work in reception, not only for making me very welcome, but also for their professionalism”

Bill Pryke, CEO, Chartered Institution of Civil Engineering Surveyors

“Thank you for your efficient and friendly help throughout this process. We have had it easy but your approach has been part of that”.

Robert Amsbury (Conveyancing Client)

“I would like to take this opportunity to thank you personally for the ongoing support and assistance the firm has offered to our parents over the years. I hope also that we may be able to call on you if necessary in the future.”

Valerie Fisher (Probate Client)

“Jo always provides great service, understands our needs and delivers on her promises. Our needs are relatively simple but the complexity arises out of the volume of work and short time frames, Jo always delivers.”

Peter Fernandez, Corporate Director at Royal Bank of Scotland

“A big thank you to all who dealt with my wife’s claim… We would not hesitate to recommend Davis Blank Furniss to anyone that may be in a situation like we have been…”

Anon (Personal Injury client)

“Before putting my case in Kirsty (Morbey)’s capable hands I’ve met a couple of other solicitors. None of them listen to me as intently as Kirsty and showed me as much empathy and understanding as she did. Simultaneously she was able to look at my case from legal perspective, explain all the options and follow each of our meetings with written summary of the discussed matters (in timely manner). Her advice was invaluable and led me to successfully ending the case matter (hopeful for good). I’m forever grateful for he work and would definitely recommend her to anyone looking for reliable, knowledgeable and committed solicitor”.

Anon (Family client)
5 star service

Our Manchester office is rated 5 stars on Google