In Hunters Property PLC v HMRC [2018] TC06354 shares issued failed to qualify for EIS as the company controlled a company limited by guarantee, it was a subsidiary but the lack of share capital meant it was non-qualifying under the EIS rules.
Hunters Properties (HP) issued shares intended to qualify for relief under the Enterprise Investment Scheme (EIS).
- Previously it has acquired various business, Hunters Franchising Limited (HF) which owned Greenrose (G), a not-for-profit company limited by guarentee.
- Two of HP's directors became the directors of G.
- HMRC refused to give the HP authority to issue EIS3 compliance certificates, it said that HP controlled a company which was not a qualifying subsidiary and therefore failed the “control requirement” in section 185(1) ITA 2007, and failed the “qualifying subsidiary requirement” in section 187 ITA 2007.
- HP appealed on the basis that it did not control G, G had no shares and was therefore not a subsidiary, however if it did control G it was a subsidiary and a qualifying one.
The tribunal considered the control test relevant for EIS, s450(2) CTA 2010 and decided that HP had an indirect controlling interest: HF could remove board members and exert control.
On the subsidiary point it looked at the Companies Act decided that G was a subsidiary and having no share capital made no difference to that. However, as it had no share capital it could not be a '51%' subsidiary as required by the EIS leglisation.
The appeal was dismissed.
Comment
As the judgment notes, HMRC's view is that a company limited by guarantee “breaks a group”: a company must have issued share capital to be a qualifying subsidiary. Whilst it seems harsh that a wholly owned company can be at once a subsidiary but not a 51% subsidiary this is apparently little case law, and as this seems illogical at face value, perhaps we will see an appeal.
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