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
 
Ruth Pearson
17th October 2019 Is it too early to talk about Christmas!

In December 2018 HMRC wrote to employers to advise of a temporary easement on reporting PAYE information in real time. This was for a number of reasons, one of which could be due to businesses closing over the Christmas period and therefore having to pay staff earlier than normal.   HMRC have received feedback from…

Read More »

Chris Kelly
8th October 2019 Whiting & Partners advises Lettings Agency on finding its new Home

Whiting & Partners, The Corporate Finance Network’s representative firm in Suffolk has advised a well-established lettings agent on its sale to a national group.   The Whiting & Partners Corporate Finance team were approached by their client when they decided to explore opportunities to sell their agency. The team, led by Corporate Finance Partner, Chris…

Read More »

Matilda Mawson
2nd October 2019 Class 2 National Insurance – HMRC’s ongoing issues

July 2015 saw the end of direct debit collection for Class 2 National Insurance. Contributions are now collected through self-assessment and, despite there being 4 years since the change in the way payments are made, HMRC are still having teething problems. The issues arise as HMRC are running two computer systems side by side: national…

Read More »

Ian Piper
1st October 2019 New Off-Payroll Working Tax Rules: Y/N?

Readers, particularly knowledge based contractors working through their own personal service companies, will hopefully now be familiar with the new ‘off-payroll working’ tax rules being introduced in the private sector on 1 April 2020. These are being introduced as part of the Government’s general strategy over recent years to eliminate tax avoidance, tax evasion, and…

Read More »

Richard Alecock
12th September 2019 “Get ready for Brexit” workshops

  The Department for International Trade is hosting “Get ready for Brexit” workshops across the East region, each running from 11:30 – 13:30 followed by a networking lunch.   Please see the link below for dates and venues.   http://x.email.ukti.gov.uk/ats/msg.aspx?sg1=6a523609b267f7129747b384f8f21e3e

Read More »

Steven Denton
10th September 2019 Employer allowance – is it worth the hassle?

The £3000.00 employer allowance ceases at the end of the current tax year. From April 2020 employers will have to re-apply for a di minimis state aid based allowance.   A new HMRC checklist will have to completed to declare the following;   NIC contributions in the previous tax year were beneath £100,000; Confirmation that…

Read More »