HMRC v McQuillan – UKUT upholds appeal
In 2016 the FTT (2016 UKFTT 305) decided that redeemable preference shares with ‘zero’ dividend rights were shares that offered a dividend at a fixed rate of 0% and were therefore not ordinary shares for the purpose of the entrepreneurs’ relief legislation.
The general feeling at the time was that there was a likelihood of this ruling being overturned on appeal. The decision appeared to be in complete contradiction to earlier case law such as Castledine v HMRC. In this case, the FTT found that ‘shares that carried no economic rights to participation in a company were regarded as falling within the definition of ordinary share capital because they did not carry a right to a dividend at a fixed rate’.
It could not be properly concluded that shares which have no right to a dividend should be regarded as having a right to a dividend at a fixed rate of 0% and consequently have a right to a dividend. However, the analysis was circular and flawed. Even if the shares had been described in the shareholders’ agreement as shares with a right to a dividend at a fixed rate of 0%, they could not properly be described as shares having a right to a dividend for this purpose.
As predicted, the decision of the FTT has been overturned by the Upper Tribunal, which placed emphasis on a share class with no dividend rights, having no right to a fixed 0% dividend. The tribunal were sympathetic with the circumstances of Mr and Mrs McQuillan, and have acknowledged that they were the kind of entrepreneurs’ for which the relief was devised, but the reasoning behind the UT decision was the fact that there must be a right to a dividend rather than whether or not this was at a fixed 0%.
To avoid situations such as this, redeemable shares should carry a positive fixed rate dividend. The initial tribunal suggested that the shares would have automatically not been ordinary shares if they had held a right to dividend of only thousandths of a penny.
A link to the case is below: