McQuillan and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 May 2016 |
| Neutral Citation | [2016] UKFTT 305 (TC) |
| Date | 05 May 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Christopher Staker
Mr Joseph Murray, accountant, appeared for the Appellants
Mr John Corbitt, presenting officer, appeared for the Respondents
Capital gains tax – Entrepreneurs' relief – Definition of personal company Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. 169S(3) – Definition of ordinary share capital Income Tax Act 2007 (ITA 2007), s. 989 – Whether shares with no right to a dividend have a right to a dividend at a fixed rate.
The First-tier Tribunal found that shares with no dividend rights had a right to a dividend at a fixed rate of 0% and were therefore excluded from the definition of ordinary share capital in ITA 2007, s. 989.
Mr and Mrs McQuillan (the appellants) established a business in 1999 which they franchised in 2004, incorporating a company for the purpose. Mrs McQuillan's sister and brother-in-law (who also lent £30,000 to the company) became directors and shareholders, holding 17 shares each. The appellants each held 33 shares. In 2006, as part of a condition for raising further finance, the £30,000 loan was converted into redeemable shares with no voting rights and no rights to a dividend. In late 2010, an offer for sale of the company was received and, prior to completion of the sale, the redeemable shares were repaid and a dividend was then paid on the remaining shares. The appellants claimed entrepreneurs' relief but their claim was refused by HMRC on the ground that the company was not their personal company throughout the one year prior to the disposal because the redeemable shares were ordinary shares that caused their holdings to be diluted below 5%.
The question to be determined by the FTT was whether the redeemable shares were ordinary share capital, defined in ITA 2007, s. 989 as all the company's issued share capital [ ] 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. HMRC argued that a right to no dividend was not a right to a dividend and therefore could not be a right to a dividend at a fixed rate, whereas the appellants argued that a zero rate is a fixed rate, as in the case of a zero rate of VAT. The FTT found the wording of s. 989 to be ambiguous but were influenced both by HMRC's own guidance at ESSUM 43230, which states that shares with no dividend rights may be accepted as ordinary share capital, and continues we do not contend that they carry the right to a fixed dividend of 0%, both of which imply recognition of a counter-argument, and by the commercial reality. The appellants could (and possibly would, if the share structure had been established after rather than before the introduction of entrepreneurs' relief) have structured their affairs such that the relief was available whilst still achieving the same commercial consequences. Consequently the FTT accepted that a right to no dividend is a right to a fixed dividend for the purposes of the s. 989 definition and concluded that the redeemable shares were not ordinary shares.
This decision contrasts with the earlier decision of the FTT in Castledine TAX[2016] TC 04930, in which shares that carried no economic rights to participation in a company were regarded as falling within the definition of ordinary share capital in s. 989 because they did not carry a right to a dividend at a fixed rate.
[1] The Appellants appeal against closure notices dated 17 April 2014 issued by HMRC in respect of tax year 2009–10. The effect of the closure notices was to disallow the claims for entrepreneur's relief that had been made by the Appellants in their self-assessment tax returns in respect of the sale of certain shares in January 2010.
[2] This appeal turns on a point of law, and the facts are largely undisputed. On the basis of the evidence before it, including oral evidence given by the Appellants at the hearing that was not contested by HMRC, the Tribunal makes the following findings of fact.
[3] The Appellants are husband and wife. In 2004, they decided to franchise a business that they had established in 1999. For this purpose, they established a company which was incorporated on 24 August 2004 (the Company). When the Company was incorporated the issued share capital consisted of 100 £1 ordinary shares. The Appellants each held 33 of these shares, and another couple, Mr and Mrs Pennick, held 17 each. Mrs Pennick is the first Appellant's sister. Mr and Mrs Pennick were brought in because they had skills that were valuable to the growing of the business. Mr and Mrs Pennick at some point lent £30,000 to the Company, which was shown in the company accounts as a directors' loan.
[4] The Company's business was successful, and it continued to grow. In early 2006, the Company approached Invest Northern Ireland (Invest NI) for certain grants. Invest NI offered grants to the Company, but on the precondition that Mr and Mrs Pennick's directors' loan be converted to shares. This was to give Invest NI the confidence that new funding from Invest NI would not be used as replacement funding simply to repay the loan from Mr and Mrs Pennick. It was a condition imposed by Invest NI that the loan from Mr and Mrs Pennick not be repaid before March 2009.
[5] Accordingly, at a directors' meeting on 12 June 2006, it was resolved that the £30,000 advanced to the Company by Mr and Mrs Pennick be converted to redeemable ordinary shares of £1 each. An amendment was made to the shareholder agreement, which as amended now provided as follows. The Company had an authorised share capital of £100,000, divided into 100,000 shares of £1 each, of which 100 voting shares and 30,000 non-voting shares had been issued at par. The Appellants each held 33 voting shares. Mr and Mrs...
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Revenue and Customs Commissioners v McQuillan and Another
...capital – No – HMRC's appeal allowed. The Upper Tribunal (UT) held, overturning the decision of the First-tier Tribunal (FTT) (McQuillan [2016] TC 05074), that shares that do not have a right to a dividend cannot be said to have a right to a dividend at a fixed rate and are therefore ordina......