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October 13, 2017

HMRC v McQuillans: All this talk about nothing

Entrepreneurs’ Relief (ER) is a valuable capital gains tax (CGT) relief that allows qualifying gains to be taxed at a fixed rate of 10% rather than at the normal rates of up to 20% on the disposal of business assets.

One key condition for the availability of ER on the disposal of shares is that the seller must have owned at least 5% of the company’s “ordinary share capital” in the 12 months prior to disposal.

In the case of HMRC v McQuillan [2017], the Upper Tribunal examined the definition of “ordinary share capital” as defined in the legislation and held that a right to no dividend is not a right to a dividend at a fixed rate of 0%, thereby denying ER.


  • Mr and Mrs McQuillan each owned 33% of the shares in a company, while Mr and Mrs Pennick each owned 17%.
  • The Pennicks provided an interest free loan of £30,000 to the company.
  • In order to secure a government grant, the investor required the Pennicks’ loan to be converted into 30,000 £1 redeemable shares which had no voting rights, no rights of ownership over the business, nor any right to a dividend.
  • Following the issue, the company’s share capital was held as follows:
Class of shares Amount issued Mr McQuillan Mrs McQuillan Mr Pennick Mrs Pennick
Ordinary shares 100 33 33 17 17
Redeemable shares 30,000 - - 15,000 15,000
  • The Pennicks’ redeemable shares were redeemed 19 days before the entirety of the ordinary shares were sold to a third party.
  • The McQuillans claimed ER on the sale on the basis that they held at least 5% of the ordinary share capital for the 12 months prior to sale, however HMRC refused their claim.

The Case

“Ordinary share capital” is defined in the Income Tax Act 2007 s. 989 as “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 McQuillans argued that the right to a dividend on the redeemable shares was at the fixed rate of 0%, therefore they should not be considered part of the ordinary share capital of the company.

HMRC contended that there was no right to a dividend fixed or otherwise.  Therefore, the redeemable shares did not fall within the exclusion set out above and were included as part of the ordinary share capital of the company.

The Decision

The Tribunal held that, on a literal reading of the legislation, shares must have a right to a fixed dividend to be within the excluded category of shares found in the definition of “ordinary share capital” (see above).

They rejected the First-Tier Tribunal’s finding that shares with no rights to dividends equated with shares having a right to a fixed dividend of 0%.

In arriving at this decision, the Tribunal referenced a judgement in Apollo Fuels Limited v HMRC [2016] that “nil is not a number or an amount, but the absence of a number or an amount” and also drew attention to the zero-rate and exempt classes for VAT.

Therefore, as the Pennicks’ redeemable shares carried no actual right to a dividend, the shares did not fall outside the definition of “ordinary share capital” and should therefore be included when determining whether ER is available under the 5% shareholding test.

While the Tribunal sympathised with the McQuillans’ circumstances, it found that they were not eligible for ER on their gains as they each only held 0.1% of the ordinary share capital for most of the 12 months prior to sale.


Despite the intentions of the relevant parties, shares which confer no rights to a dividend will be classed as ordinary share capital.

Taxpayers looking to sell shares or change the share capital in their companies should take appropriate advice before acting to ensure the benefits of ER are preserved.

Contact us today to discuss your tax requirements.
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