When zero is not a number

zero on a roulette wheel

To qualify for Entrepreneurs’ Relief (ER) on a share disposal, you must hold at least 5% of the company’s ordinary share capital. But what exactly is the “ordinary share capital” of the company?

Basic rules

When you dispose of shares in a trading company, ER should apply to that gain if you have been an officer or employee of the company (or company in the same group) for a year prior to the disposal, and you’ve held at least 5% of the ordinary share capital and voting rights during that period. The ER will reduce your rate of CGT on the gain to 10% if the gain lies within your lifetime limit for ER of £10m.

The Upper Tribunal (UT) has recently examined the definition of ordinary share capital in HMRC v McQuillan (2017 UKUT 0344). Their decision overturns a prior decision of the FTT (TC05074), and will now be binding on all future tribunals.

The facts

A company was set up in 1999 by Mr and Mrs McQuillan, who each owned 33% of the shares, and their in-laws Mr and Mrs Pennick, who each owned 17%. The Pennicks made a £30,000 interest-free loan to the company which was still outstanding in 2006 when Invest NI (a regional development agency) was approached for grant funding. As a condition of offering the grants, Invest NI insisted that the loan be converted to redeemable shares, which should not be redeemed for three years.

As a result, the company’s share capital became:

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

In keeping with the obvious intention to preserve the flavour of the original loan, the redeemable shares had no voting rights. No dividends had been paid by the company up to the date the shares were redeemed. The FTT found as a fact that the intention of the shareholders was that the redeemable shares should not receive dividends.

In 2009, an offer was made to purchase the company’s shares: the redeemable shares were redeemed and the remaining 100 ordinary shares were then sold. Mr and Mrs McQuillan claimed ER, but HMRC refused their claim.

Grey area

As far as the McQuillans were concerned, the 30,000 redeemable shares were not ordinary shares – the only ordinary shares were the original 100. As a consequence, they each had owned at least 5% of the ordinary share capital for the last decade.

From the perspective of HMRC, however, those shares were ordinary shares, which meant that for most of the year running up to the sale each of the McQuillans had only owned 33/30,100 or around 0.1%.

For the purposes of ER, a company’s ordinary share capital is defined, by ITA 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”.

Everyone accepted that the redeemable shares had no right to share in the company’s profits. The only point of disagreement was their entitlement to a dividend, as follows:

  • McQuillan and the FTT: the right to a dividend was at the fixed rate of 0%, so ignore the redeemable shares.
  • HMRC: no right to a dividend, fixed or otherwise – include the redeemable shares.

UT decision

The redeemable shares had no right to a dividend, and so could not be ignored in the context of calculating the shareholding for ER. The McQuillans lost their right to claim ER, as they did not own 5% of the ordinary share capital.


The UT referenced a judgement in the Court of Appeal (Apollo Fuels Limited [2016] STC 1594): “nil is not a number or an amount, but the absence of a number or an amount.”

But what about VAT, where there is a zero rate of tax? Wasn’t this a useful analogy in support of the argument for a zero rate of dividends? No: it is clear EU law that the so-called “zero rate” of VAT is not in fact a rate of tax, but merely the UK’s manner of applying the “exemption with refund” system which is mandated by the Principal VAT Directive.

What about applying a purposive approach? Counsel for the McQuillans suggested that “to deny entrepreneurs’ relief in the circumstances… would be inconsistent with the spirit and intention of the legislation”. The difficulty is that their problem is not with the Entrepreneur’s Relief rules themselves, but rather with the general definition of ordinary share capital given in ITA 2007, and the spirit and intention of that Act has nothing to do with anyone’s entitlement to ER!

If Parliament had wished the definition to work in a subtly different way for ER purposes, they would have made it so by adding extra bells and whistles – which, for example, is what they did in CTA 2010 for group relief and consortium relief.

Certainly, it is harsh that the McQuillans failed to obtain ER. Both the UT and the FTT were very sympathetic to them. As the UT pointed out: “they are the kind of entrepreneurs for whom the relief was devised”. However, there will always be cases where deserving taxpayers lose out, just as there are cases where the undeserving benefit. The statutory definition of ordinary share capital is there to “establish a bright dividing line between those shares which will be reckoned with... and shares which are not”.

Rebecca Cave examined this point in her article: How to recognise an ordinary share when she discussed the Castledine case (TC04930), which was decided in 2016 by the FTT and mentioned with approval by the UT in this case.


The definition of ordinary share capital includes more than just the shares which we routinely think of as ordinary shares. Sometimes, for all sorts of commercial reasons, there are other shares lurking around within a company which might sabotage a claim to Entrepreneurs’ Relief. An early review and, if needed, some cleaning-up activity might make the year running up to the eventual sale a bit safer.

About Andy Keates


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25th Sep 2017 12:31

This is an amazing case where a discussion over what is zero or nil was retrospectively open to interpretation. First a government agency insists on the redeemable shares, because they don't want the loan being paid back early, out of the grant. Second, issuing the shares as preference shares, with a small fixed rate of dividend, would have solved the problem. This should never have got as far as FTT, never mind the UT. Maybe no advice was taken when the loan was converted into redeemable shares?

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25th Sep 2017 12:52

" Maybe no advice was taken when the loan was converted into redeemable shares?"

Aother example of not knowing enough to know that you didn't know enough!
There is no way that any non-specialist-geek could possibly have understood any rationale whereby they needed to seek advice.
This is exactly the sort of artifice-creation that undermines 'normal people' who try to abide by the [arcane] rules then find they are a quicksand shifting under their feet.

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25th Sep 2017 13:19

Quicksand etc.

Your are right about people not understanding the law, but that is why professional advice is needed. The law is complex and ignorance of it, as demonstrated in this case, is no defence. You wouldn't be able to take out a mortgage without solicitors being involved, so why would you convert a loan and issue shares, without taking professional advice? It has got to be beyond the expertise of most people in business.

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27th Sep 2017 13:31

"why would you convert a loan and issue shares, without taking professional advice?"

All very well, but where does it stop?
Would you 'get professional advice' before opening a bank account - soon you'll need to take daily 'professional advice' when you count off the sheets of bog-roll.

My point is that its getting ludicrous.
My client pays me and I have to get 'chargable advidement' from a lawyer - who may have to get similar from a specialist barrister - and the messag back may just as likeley be "Hey, no probs. thanks for your £1,000".

No wonder Joe Public holds 'the professions' in ever lower esteem.

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27th Sep 2017 00:25

No mention of the zero rate for NIC purposes I would have thought this would indicate that zero is a number

Concerned Accountant

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02nd Oct 2017 13:51

I am not a number !

I am a free zero !!

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