Preserving EIS Status

30th November 2016

EIS:  Growth Shares and Preference.

Abingdon Health Ltd v HMRC TC05525

This was an interesting case, and a warning for the unwary. The issue at stake was whether HMRC’s withdrawal of EIS relief as a result of a preference created by a new class of growth share was reasonable.

The taxpayer company sought EIS relief in respect of three rounds of subscriptions for ‘preferred’ ordinary £1 shares that took place between March 2012 and February 2014. Although named ‘preferred’ shares, the ordinary shares in fact ranked pari passu with all shares in the company at the time of Rounds One and Two; HMRC accepted the company’s application for EIS relief in respect of those rounds. Between the second and third rounds, the company issued growth shares to certain key employees, and the company’s articles of association were amended to provide for the new class of share. The changes to the articles of association introduced a liquidation preference, so that, on a return of assets on a liquidation, capital reduction or otherwise, the holders of ordinary shares were paid in priority to holders of growth shares, up to the amount of a hurdle (£8,800,000).  The company subsequently applied for EIS relief in respect of Round Three. HMRC rejected the application and withdrew the EIS relief previously authorised in respect of Rounds One and Two, on the basis that the creation of the growth shares meant that the ordinary shares carried a preference so that the requirements for EIS were not met.

The tribunal held that the ordinary shares carried a preferential right to assets on a winding up during the restricted period, so the shares were not qualifying shares for EIS purposes. It considered that the preferential right existed regardless of whether the hurdle was reached. It also held that the preferential right was not so contingent as not to be meaningful, and therefore the company could not rely on the exemption in HMRC’s guidance for preferences which are purely theoretical.

Blog post by: Jeannette Hume.



 
Other items in Blogs
 
James Cater
28th June 2018 Understanding Tax Relief Restrictions

Although we hear of decline in the value of development land, particularly for larger developments, growing houses continues to be more attractive to many than growing crops. Onerous Section 102 levies may apply but the tax regime remains gentle. It should not however be assumed that tax reliefs will be available automatically. Legislation imposes qualifying…

Read More »

Vanessa Pearson
28th June 2018 Career Change? Think Contracting.

There are many benefits over employment, writes Whiting & Partners Contract Specialist, Vanessa Pearson   Changing careers can be a challenge but leaving the employment wage treadmill to become a contractor can increase your earnings, saving on tax and national insurance as well as providing more flexible working hours. Contractors are essentially self-employed individuals who…

Read More »

Daniel Coleman
28th June 2018 Making Tax Digital – Moving Your Company Forward

You, like many businesses have been successfully running for years, maintaining your books and records and submitting correct VAT returns, in turn ticking all the necessary boxes and satisfying HMRC. However, the introduction of MTD will mean a ‘shake up’ to your current methods and may require you to adopt software for the first time.…

Read More »

Philip Peters
28th June 2018 Trading Allowances Change

Do you remember when eBay first emerged and become a revolutionary trading platform for buying or selling and, yes, turning a profit? As social-media has expanded, so have trading websites to the extent that there’s hardly a town, village or group that does not have a ‘buy’n sell’ page.   HM Revenue & Customs have…

Read More »

Jaimie Lane
27th June 2018 Charity annual returns – changes ahead

Later this year The Charity Commission will introduce a tailored annual return which will include some new questions which may require preparation in advance. Overseas expenditure As these new questions will likely require additional preparation, they will be optional for 2018 but become mandatory for 2019 onwards: When spending money outside England and Wales, did…

Read More »

Vanessa Pearson
18th June 2018 Public Sector contractor wins IR35 case

HMRC have lost a second IR35 case this year, and their second case against the same contractor, putting into doubt their own understanding of the IR35 rules. Ian Wells, director of personal service company Jensal Software Limited provided his services to the Department of Work and Pensions via a recruitment agency during 2012 and 2013.…

Read More »