In HMRC v S Warshaw [2020] UKUT 366 the UK Upper Tribunal endorsed the decision of the First-tier Tribunal and found that cumulative fixed-rate preference shares were “ordinary share capital” for the purposes of entrepreneur relief and capital gains tax. The First-tier Tribunal decision was reviewed in “Direct Tax Cases”, Irish Tax Review, 32/3 (2019).
The taxpayer had applied entrepreneurs’ relief on a share disposal. HMRC rejected the claim. The sole issue in the appeal, as it was before the First-tier Tribunal, was whether the preference shares carried a “right to a dividend at a fixed rate”. If the answer was in the affirmative, then the preference shares were excluded from the definition of “ordinary share capital”, and the taxpayer was not entitled to entrepreneurs’ relief. If, as the First-tier Tribunal determined, the answer was negative, the contrary consequences would ensue, and HMRC’s appeal would fail. In this regard, the definition of “ordinary share capital” that was examined by the Tribunal is largely similar to the definition of “ordinary share capital” found in s2 TCA 1997.
The shares in question were 10% cumulative preference shares. Under the company’s constitution, the dividends were cumulative and were computed on a compound basis. This characteristic meant that if the company had inadequate profits in a certain year, payment was pushed out to a future year. This meant that the 10% dividends would ultimately be paid on an increased amount (the aggregate of the subscription price and the unpaid dividends).
The Upper Tribunal rejected HMRC’s appeal, agreeing with the First-tier Tribunal that the preference shares did not carry a right to a dividend at a fixed rate. The Upper Tribunal determined that the rate must be fixed not just as a percentage but also as to the amount to which it is applied to. The compounding nature of the shares in question in the case meant that the 10% rate was applied to a differing amount. These rights, which were accorded to the shares in the Articles of Association, meant that the shares were considered to be “ordinary share capital”.