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To OSC or not to OSC – that was the Upper Tribunal’s question

To OSC or not to OSC – that was the Upper Tribunal’s

UT’s decision on definition of Ordinary Share Capital could have wide ranging implications for both corporate and individual shareholders.


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The decision of the Upper Tribunal (UT) in HMRC v Stephen Warshaw [2020] UKUT 0366 (TCC) (Warshaw) has confirmed that cumulative compounding preference shares are ‘Ordinary Share Capital’ (OSC) for Business Asset Disposal Relief purposes. While this decision agreed with that of the First-tier Tribunal (FTT), this is inconsistent with HMRC’s published view and could have wide ranging implications for taxpayers, and not just those looking to claim Business Asset Disposal Relief – the finding could also impact reorganisations, share plans and those seeking to claim group relief or the substantial shareholding exemption (SSE), amongst other reliefs. Both individual and corporate shareholders in companies with compounding, cumulative preference shares and companies with such shares in issue may want to revisit their structure in light of this decision to understand the implications for them.

Whether or not a class of share is considered OSC, can impact whether individual shareholders qualify for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) or Investor’s relief. It also impacts the definitions of 51 percent, 75 percent and 90 percent subsidiaries and whether companies can qualify for SSE or group relief.

In addition, the definition of OSC is referred to for Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) reliefs, for IR35 purposes, in the Employee Management Incentive legislation and other tax advantaged share plans, in the Employee Ownership Trust provisions and is key to a number of other provisions. Therefore, a case that changes the definition of OSC can have material impacts for both income and corporation taxpayers. 

This change in the interpretation of the definition of OSC could therefore have wide and potentially unexpected implications for shareholders in companies that have cumulative, compounding preference shares in issue.

The Warshaw case focused on the tax treatment of cumulative preference shares where the unpaid dividend was compounded. Before the case was heard by the FTT in April 2019, HMRC had published their explicit view that a preference share with a compounding coupon was not considered OSC, provided the rate of the dividend was fixed and cumulative.

As a result of HMRC’s published guidance, compounding, cumulative preference shares were commonly seen in a wide range of company structures – and particularly in private equity backed structures – as they could effectively be ignored for corporate grouping purposes and when considering whether key tax reliefs were available.

In January 2021, the UT confirmed the FTT’s finding that where the unpaid dividend on cumulative preference shares compounded, then the shares were in fact OSC.

While this case found in the taxpayer’s favour, it is expected that the findings are likely to have a detrimental tax impact on some taxpayers depending on the exact structure in place.

As of the date of this article, HMRC had not yet updated their published guidance to reflect the UT’s findings. However, following the FTT’s earlier conclusion, they had accepted that the treatment of compounding, cumulative preference shares would be ‘finely balanced’ and ‘may depend on the facts of the case’.

The fact that the UT has agreed with the FTT is of particular importance, as the UT’s decision creates a legally binding precedent which may be relied upon (as opposed to the persuasive rather than precedent authority of the FTT).

We recommend that any companies with compounding, cumulative preference shares in issue speak to a tax adviser to understand how the findings in this case may impact their tax position and/or that of their shareholders.

Full case transcript: HMRC v Stephen Warshaw [2020] UKUT 0366 (TCC)

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