UK and International Tax news

Upper Tribunal Upholds FTT Decision In Entrepreneurs’ Relief Case

Monday 18th January 2021

The Upper Tribunal has recently heard an appeal by HMRC from a decision of the First Tier Tribunal in a case involving the availability of entrepreneurs’ relief.

In HMRC v Stephen Warshaw [2020] UKUT 366 (TCC), the UT heard that Mr W had appealed against a closure notice issued by HMRC which denied his claim for entrepreneurs’ relief [before March 2020] on a disposal of shares. The relief was denied on the basis that the company in question was not Mr W’s “personal company”, as required by the legislation, because certain preference shares which he held were not “ordinary share capital”. The FTT allowed Mr Warshaw’s appeal.

HMRC’s appeal against the decision of the FTT raises an important point on the statutory construction of the term “ordinary share capital” for the purposes of entrepreneurs’ relief.  For the relief to apply to the disposal of shares in this case, for the relevant period prior to the disposal, the company must be the individual’s personal company, meaning a company of which at least 5% of the ordinary share capital is held by the individual, and at least 5% of the voting rights are exercisable by the individual by virtue of that holding.

“Ordinary share capital” means 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. In this case, if the preference shares were “ordinary share capital”, Mr W held 5.777% of the “ordinary share capital” of the company. However, if the preference shares were not “ordinary share capital”, he held only 3.5% of the company’s “ordinary share capital”.

The UT had to decide whether the preference shares carried a “right to a dividend at a fixed rate”. If they did, they could be excluded from the definition of “ordinary share capital”, and company would not be Mr W’s “personal company”, and he would not be entitled to entrepreneurs’ relief. If, as the FTT had determined, they did, the relief would be available and HMRC’s appeal would fail.

The UT confirmed that cumulative compounding preference shares were ‘ordinary share capital’ for entrepreneurs’ relief [now Business Asset Disposal Relief] purposes, agreeing with the decision of the FTT.

Whilst HMRC’s published view in its Company Tax Manual is different and remains unchanged to date, the UT decision is likely to have wide ranging implications for taxpayers, where BADR, group relief, reorganisations, share plans, other venture capital reliefs and the substantial shareholding exemption are in point.

For individual and corporate shareholders in companies with compounding, cumulative preference shares and companies with such shares in issue may want to revisit their structures in light of this decision and confirm the impact of the UI decision on them.


If you would like more detail on this decision, please contact Keith Rushen on 0207 486 2378.

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