In M & E McQuillan v HMRC [2016] TC05074 redeemable non-voting shares carrying no right to a dividend were not counted as ordinary shares for CGT relief on the basis that no right to a dividend amounted to a fixed rate dividend of 0%. This finding is contrary to HMRC's manuals.
- The taxpayers’ company was formed with 100 £1 ordinary shares and they owned 33 shares each.
- Another couple made a loan of £30,000 which, on the requirement of another lender, was converted into 30,000 of redeemable non-voting share capital that carried no right to a dividend.
- The company thus had 33,100 issued shares.
- The company redeemed its redeemable share capital and was later sold: the taxpayers claimed Entrepreneurs' Relief on the disposal of their ordinary shares.
HMRC challenged their claim on the basis that they did not meet a qualifying condition of ER: they each had held less than 5% of the ordinary share capital of the Company (33/33100).
Section 989 ITA 2007 defines ordinary share capital to mean “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”.
- The taxpayers appealed on the basis that a share that has no right to a dividend has a right to a dividend of 0%, i.e. it has by default a right to a fixed rate dividend, as in 0% VAT is a rate of VAT.
- HMRC’s argument was that the 30,000 redeemable shares were ordinary shares, as they did not have a right to a fixed rate of dividend. A right to no dividend is not a right to “a dividend”, and therefore cannot be a right to “a dividend at a fixed rate”.
The Tribunal found some ambiguity in the wording of the definition of “ordinary share capital”, something possibly reflected also in HMRC’s manuals. It was persuaded that in the particular circumstances of the case, a right to no dividend is a right to a dividend at a fixed rate for purposes of that definition and the appeal was allowed.
Comment
The Tribunal decision is at odds with HMRC's manuals, which only express HMRC's interpretation of the tax legislation, conversely, a FTT decision is not binding on HMRC (other than in the outcome of this particular case).
As the FTT found, the wording in HMRC's manual is curious. It implicitly acknowledges that there is at least an argument that shares with no dividend rights carry a right to a fixed dividend of 0%, since it considers it necessary to address the question.
Update 16 August 2016
HMRC have been given permission to appeal the decision in the Upper Tribunal.
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Share capital: what's an ordinary share?
Case reference: M & E McQuillan v HMRC [2016] UKFTT TC05074
