HMRC denial of EIS relief

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Not every company can qualify for relief for its investors under SEIS or EIS. Sadly, some companies find out once shares have been issued to investors.  We have explained below why in two recent cases the investors were denied their EIS tax relief and HMRC won their cases.

EIS denied because of preferential rights given to some shareholders

Abingdon  Health Limited [2016] TC 05525

Facts

This case involved the creation of growth shares giving directors special rights.

The company raised three rounds of finance under EIS.  After the second round and before the third round  a new class of shares was created for the company directors known as growth shares.

HMRC had authorised enterprise investment scheme relief for the first two issues, but later withdrew it. HMRC cited an amendment to the articles of association when the growth shares were issued, which gave the holders of EIS shares a preferential right to the company’s assets on a winding-up.  The preference arose because similar rights did not attach to the growth shares.

The taxpayer appealed, saying the preferential right was ‘purely theoretical’.

Finding of the First-tier Tribunal

HMRC won and the investors were refused EIS relief on their investment.  The withdrawal of EIS status applied to investment rounds issued before and after the creation of the growth shares.

  • The First-tier Tribunal noted that to qualify for EIS the shares had to be ordinary shares and not carry any present or future preferential right to a company’s assets on a winding-up. The word ‘any’ in the legislation denoted a ‘sharp and clear bright line test for the existence of any such forbidden right’.
  • This could produce only yes or no answers  – the right to a preference was either present or absent from the class of any shares issued by the company. No threshold or de minimis applied.
  • The fact that the advantage was contingent or theoretical was irrelevant.

The taxpayer’s appeal was dismissed.

EIS denied because not all subsidiaries qualified

This case involved an acquisition which included a company limited by guarantee.  The HMRC won their argument that the investors were not entitled to EIS as a result of one subsidiary in the group not meeting the qualifying conditions.

Hunters Property Plc v Revenue and Customs Commissioners [First-tier Tribunal (Tax Chamber)] 23 February 2018

Facts

The Hunters estate-agency business with many branches. The holding company bought a small franchise of estate agents known as Greenrose and incorporated them within the group.  At the same time, a director of Hunters became the sole member of Greenrose Network Marketing Association Ltd (G), a company limited by guarantee which had no share capital. G was merely a vehicle for holding client funds and had no intrinsic value of its own.  Hunters went onto issue shares which it thought qualified for EIS.

HMRC refused EIS status on the basis of the relationship between the Hunters and G. HMRC concluded that Hunters controlled a company, namely G, which was not a qualifying subsidiary and therefore failed the “control requirement” of subsidiaries required under the EIS legislation.

Hunters argued that it did not control G, that G was not a subsidiary of it and that, if it did control G and G was a subsidiary, G was a qualifying subsidiary.

Finding of the Tax Tribunal

Hunters lost and their investors lost EIS tax relief. The Tax Tribunal found that Hunters did control G as it had put its director in sole charge of G.  Further, where a company had no share capital, as was the case with G being a company limited by guarantee, it could not be a qualifying subsidiary, because it could not be a “51% subsidiary of the relevant company” for the purposes of the EIS conditions.