It doesn’t often happen that two tribunal cases are heard within three days on substantially the same point but come to opposite conclusions. But that is what has happened in McQuillan [2016] UKFTT 305 (TC) and Castledine [2016] UKFTT 145 (TC).
In each case the availability of Entrepreneurs’ Relief depended upon whether the taxpayer held 5% of the ordinary shares in the company whose shares had been sold. That in turn depended on whether a share of a class carrying no right to a dividend and no right to receive anything beyond par value on a redemption or winding-up counted as an “ordinary share”.
In McQuillan the Tribunal held that it didn’t: in Castledine that it did.
“Ordinary share capital” is defined by exclusion: it means “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 profit”. It was argued in McQuillan that zero is a “fixed rate”, such that shares with no right to a dividend were potentially within the exclusion. The Tribunal were attracted by the argument. First, zero was indeed a number for some purposes (as in “zero rate” VAT). Further, it was clear that if the shares in question had carried a dividend at a fixed rate of a vanishingly small amount they would not have been “ordinary shares”: it was anomalous that if the rate were zero the answer would be different. So the Tribunal held that the shares were not “ordinary shares”.
In Castledine the question whether zero was a fixed rate was not raised. Instead, the argument was, essentially, that “Parliament would never have intended to categorise as ordinary shares holdings which had none of the characteristics of an ordinary share, or even of a preference share, and were shares only in name”. That argument was rejected: the wording of the statute was clear and the Tribunal did not “feel able to depart from the plain meaning of the legislation at issue”. That “plain meaning” (!) was that the shares were ordinary shares.
The definition of “ordinary share” is widely used throughout the tax code. Sometimes, as in these two cases, a taxpayer wishes to argue that a particular class of share is not “ordinary”. But in other circumstances (for example, EIS or share schemes) the status of “ordinary share” confers valuable tax advantages. Indeed HMRC guidance has been, in the context of share schemes, that shares with no dividend rights “may be accepted as ordinary share capital – we do not contend that they carry the right to a fixed dividend of 0%”. So the decisions in Casteldine and McQuillan create unwelcome confusion that extends well beyond the immediate area of Entrepreneurs’ Relief. Until there is further clarity, the prudent thing to do must be to assume the worst: that zero-dividend shares are “ordinary” if you would prefer them not to be but not “ordinary” if you would rather they were. Or, better still, avoid zero-dividend shares altogether if you can, until the position is clarified.
