In Abingdon Health Limited v HMRC [2016] TC 05525, EIS relief was denied as shares acquired preferential rights on the issue of a new class of growth shares.

To qualify for EIS relief shares must not carry any present or future preferential right to the company’s assets on a winding up at the time of issue and for the next three years.

  • The company made three issues of EIS shares between 2012 and 2014.
  • Between the second and third issues, a new class of A ordinary ‘growth’ shares was created for senior management.
  • HMRC withdrew EIS relief on the first and second share issues and refused to issue a compliance certificate for the third issue, arguing that amendments to the Articles of Association when the growth shares were issued gave the EIS shareholders priority to assets on a winding-up.
  • The taxpayer appealed, arguing that any preferential right was ‘so contingent as not to be meaningful’ as it was highly unlikely the company would ever be wound up.

The First Tier Tribunal (FTT) agreed with HMRC that EIS relief was not available on any of the share issues:

  • The revised articles clearly gave priority to the EIS shareholders on a winding-up:
    • The growth shareholders would only receive anything if the assets were above a ‘hurdle amount’ of £8.8m.
    • Even if they were, the ordinary shareholders would still have first call.
  • The legislation provides for a 'bright line' test. There is no threshold or de minimis to consider.
  • The possibility of preferential rights ever being realised in practice was irrelevant.
  • Although the preferential rights came about by accident, the legislation did not require intention to be taken into account.

Comment

Yet another demonstration of how you must be extremely careful when issuing new classes of shares or amending the Articles if you have claimed, or are intending to claim, EIS relief.

Links

EIS: Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) provides tax incentives in the form of an Income Tax and Capital Gains Tax (CGT) reliefs to investors who invest in smaller, unquoted, trading companies.

External links

Abingdon Health Limited v HMRC [2016] TC 05525

 

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