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.