Thank you for your advice. All I had to do was to switch off "Run as Admin" feature, without tinkering with compatibility mode.
I've had this issue since upgrading to windows 8.
I found a work around which resolved the issue on my machine.
Navigate to winscp.exe (or relevant shortcuts) and
right-click Properties -> Compatibility.
Select "Run this program in combatibility mode for:" "Windows 8".
Make sure that "Run this program as administrator" is NOT selected.
(this one got me for a while, seemed counter intuitive).
Save and restart winscp.
Dragging into winscp window from desktop or explorer works now.
I am unable to upload files using drag&drop. I am using Windows 8.1, and WinSCP 5.2.5
What should I try? I have drag&drop switched on with shell extension.