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S Warshaw v HMRC

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In S Warshaw v HMRC [2019] UKFTT 268 (24 April 2019), the FTT found that preference shares could make up part of the shareholder’s holding in ‘ordinary share capital’ for the purpose of entrepreneurs’ relief (TCGA 1992 s 169).

Mr Warshaw was chairman of CEG, a holding company. He held both ordinary shares and preference shares in the company. If the preference shares were ‘ordinary share capital’ (as defined in ITA 2007 s 989), Mr Warshaw held 5.777%. However, if the preference shares were not ‘ordinary share capital’, he held only 3.5%.

In December 2013, Mr Warshaw disposed of his entire shareholding for cash. The issue was whether the disposal qualified for entrepreneurs’ relief. This, in turn, depended on whether the company was Mr Warshaw’s ‘personal company’ (as defined in s 169S(3)).

The preference shares were cumulative; if there were insufficient reserves to pay the dividends in respect of those shares in a particular year, payment was deferred to a subsequent year. Therefore, the rate at which the dividend would be paid, 10%, would be calculated on an increased amount (the aggregate of the subscription price and the aggregate unpaid dividends). HMRC contended that as the rate at which the dividend was paid remained fixed at 10%, there was ‘a right to a dividend at a fixed rate’, even if the base in respect of which it was paid, the compounded element, varied.

The FTT considered that Tilcon v Holland [1981] STC 365 ‘offered some support’ for the need to take into account both the percentage element and the amount to which it is applied to identify the rate of the dividend. This meant that the preference shares did not give right to a dividend at a fixed rate.

Read the decision.

Why it matters: These were slightly unusual preference shares and the judge recognised the fact that the dividend entitlement attached to these shares was not fixed, despite the reference to a fixed percentage. 

Also reported this week:

Issue: 1442
Categories: Cases