26 October, 2017
An unsurprising revision has recently passed through the Upper Tribunal, in the case of McQuillan v HMRC. The First-Tier had decided in favour of the McQuillans, in relation to their attempts to claim for entrepreneur's relief when selling ordinary voting shares in their company. In the definition given in clause 989 of the Income Tax Act 2007, ordinary share capital is the entirety of the company's issued share capital, with the exception of capital where the holders have a right to a dividend at a fixed rate, but no other rights to share in profit.
The question to be determined therefore was whether the words "a dividend at a fixed rate" in that definition includes shares the holders of which have no right to any dividend. Initially, the First-Tier held that a right to no dividend at all could still be interpreted as a right to a dividend at a fixed rate (i.e. 0%) for the purposes of section 989.
The redeemable shares therefore were not classed as ordinary share capital, and excluded from consideration when determining the company's issued share capital. The result was that the McQuillans held more than 5% of the ordinary share capital of the company and were entitled to claim entrepreneur's relief. This decision of the First-Tier however, was in clear opposition with the standard practice of HMRC, and also contradicted prior judgment in Castledine v HMRC.
The Upper Tribunal dismissed the interpretation of a right to no dividend being equivalent to a right to a dividend at a fixed rate of 0%. They argued that the redeemable shares held no right to a dividend by definition in the first instance, so could not be also understood as having any fixed rate to a dividend at all. Further to this point, the Upper Tier confirmed that the redeemable shares were therefore not excluded from the total of ordinary share capital, and the McQuillans' claim for entrepreneurial relief no longer qualified.
The significance of this case is that what constitutes as ordinary share capital remains clear and unambiguous, and section 989 cannot be re-constructed simply for the purposes of enabling entrepreneurs' relief. Where a company's aim is to issue shares that do not fall within the boundaries of ordinary share capital, legal and tax advice is best recommended to ensure no anti-avoidance rules are breached in taking the best, most tax-efficient routes.
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