Wednesday 1 May 2019

UK: Tax Tribunal decides that preference shares were part of company's ordinary share capital

The First-tier Tribunal (Tax) gave its decision a few days ago in Warshaw v Revenue & Customs [2019] UKFTT 268 (TC). The central question before Tribunal Judge John Brooks was whether the preference shares held by a taxpayer, Mr Warshaw, were regarded as "ordinary share capital" within the definition provided by section 989 of the Income Tax Act 2007: "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". If Mr Warshaw's shares fell within this definition, the company in which he held the shares would have been his "personal company" under section 169S(3) of the Taxation of Chargeable Gains Act 1992 (as amended) and he would have been entitled to entrepreneurs relief.

The shares in question gave a right to a dividend and no other rights to share in the profits. This right was set out in the articles of association as follows:
“In priority to any other class of shares, each Preference Share shall have the right to a fixed cumulative preferential dividend (“the Preference Dividend”) which shall accrue on a daily basis from the dividend commencement date at the rate of 10 per cent per annum on the aggregate of (i) the subscription price of such Preference Share and (ii) the aggregate amount of Preference Dividend that has previously compounded and not yet paid. The Preference Dividend accruing on each Preference Share shall be compounded on each anniversary of its dividend commencement date to the extent not previously paid.”

Did these shares give a right to a dividend at a fixed rate? Mr Warshaw's counsel argued that because the rate of dividend was calculated by reference to any previously unpaid dividends, the preference shares did not have a right to a dividend at a fixed rate. Counsel for HMRC argued that there was a right to a dividend at a fixed rate because the rate at which the dividends were paid remained fixed at 10% even if the base in respect of which they were paid varied.

Judge Brooks agreed with Mr Warshaw's counsel and allowed the taxpayer's appeal: Mr Warshaw was, therefore, entitled to entrepreneur's relief because his preference shares fell within the definition of "ordinary share capital" under section 989. Judge Brooks stated: "if, as in the present case, at the time the preference shares are issued the Articles of Association provide that only one of these, the percentage element, is fixed and the amount to which that percentage is to be applied may vary, those shares cannot be regarded as having a right to a dividend at a fixed rate and are therefore ordinary share capital as defined by s 989 ITA" (para. [19]).

An appeal by HMRC seems inevitable.

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