Although long-term has not been defined, the nature of an SPV is that they are set up for a specific purpose for example to develop a project.
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 some cases of when and why investors will be denied their EIS tax relief.
EIS denied because of preferential rights given to some shareholders
Abingdon Health Limited  TC 05525 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 EIS 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’.
HMRC won and all investors refused EIS relief
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 Tax 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.
EIS denied because not all subsidiaries qualified
Hunters Property Plc v Revenue and Customs Commissioners [First-tier Tribunal (Tax Chamber)] 23 February 2018 involved an acquisition which included a company limited by guarantee. The guarantee company had no share capital but a director of the Hunters was made a director of the guarantee company. The guarantee company was not trading and used for a very limited purpose.
Outcome – HMRC won and all investors refused EIS relief
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.
The Tax Tribunal found that Hunters did control the company limited by guarantee as it had put its director in sole charge. Further, where a company had no share capital, as was the case with any 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.
EIS denied because of a Special Purpose Vehicle (SPV)
A new risk to EIS relief has been introduced in the Finance Bill 2018. EIS relief will be denied if:
- The objective is not to grow and develop its trade in the long-term; and
- The EIS investment is not high risk.
Demonstrating growth and development for EIS purposes
In order to demonstrate growth and development the company seeking EIS assurance will need to show that it intends to increase the following in the long term:
- Revenues; or
- Customer base; or
- Number of employees
Demonstrating high risk for EIS purposes
HMRC will deny EIS relief if they find the company cannot demonstrate that the EIS investment carries a significant risk that the investor will lose more capital than they gain as a return.
Why will HMRC deny EIS relief for SPVs?
An SPV is a legal entity created for a limited purpose. They are used in many industries such as property and film . They are used for a number of purposes such as:
- Buying a Business;
- Financing of a project; or
- Setting up of joint ventures
Most SPV’s are subsidiaries of a holding company. EIS relief will not be permitted if a company is controlled by another company. The holding company might qualify for EIS status if they can show that the investment money is being used to grow and develop the business. However the SPV will not qualify.
The new risk to capital condition makes it difficult for an SPV to show for EIS purposes that they are looking to grow and develop in the long-term.
Although long-term has not been defined, the nature of an SPV is that they are set up for a specific purpose for example to develop a project. They therefore generally do not have scope for future expansion and fall at the first hurdle. When the project is nearing the end, the SPV will seek to reduce its staff not expand. As the money will only be used for a specific purpose and not to grow and develop the business, the SPV will be denied EIS status.
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