Preferential rights attached to shares, no matter how small, disqualified those shares from benefiting for enterprise investment scheme relief purposes.

The appellant company’s share capital was divided into two classes (A and B shares). It was decided to reorganise the appellant’s share capital in order to raise further funds, by converting some of the A shares into a new class of almost worthless non-voting deferred shares. All remaining A and B shares would then become a single class of ordinary share. The appellant’s new Articles of Association gave the ordinary shares a preferential right to a return of assets of the company on a winding up or otherwise. 

The appellant submitted a compliance statement for enterprise investment scheme (EIS) purposes (form EIS1) to HM Revenue and Customs (HMRC). However, HMRC’s view was that the ordinary shares issued carried a present or future preferential right