Loan to business disqualified its owners from EIS relief

29 November 2010

The Upper Tax Tribunal has denied entrepreneurs’ investment scheme tax relief to two company directors on the basis that they had loaned substantial sums to the company.

The case is HMRC v Taylor & Haimendorf (FTC/43/2010[2010]UKUT 417). The two taxpayers were directors of Wrapit Ltd, an Internet wedding list gift business. They had claimed EIS relief on some income generated by their investment in the company.

During the relevant tax years (2004-5) the two directors owned between 16 and 19 per cent of the company’s issued shares.

They had also made substantial short-term loans  to the company to tide it over slack periods. These loans ranged from 25 to 37.5 per cent of the company’s loan capital.

EIS relief is only available to persons who are not connected with the company, where “connected” is defined by s.291 of the Income and Corporation Taxes Act 1988. 

Unfortunately that section is ambiguous; included in the “connected persons” category are people who own “more than 30 per cent of the loan capital and issued share capital of the company”.

This could mean someone who holds more than 30 per cent of the total of loan capital plus issued share capital; or it could mean that the 30 per cent threshold had to be applied to both the loan capital and to the issued share capital.

There is also ambiguity over whether “issued share capital” referred to  actual value or nominal value of the shares.

HM Revenue & Customs naturally preferred the first interpretation, as well as using the nominal value of the share capital in their calculation. That disqualified the two directors from EIS relief.

Taylor and Haimendorf appealed to the Commissioners and lost. They then appealed to the First-Tier Tribunal, who in March this year rejected HMRC’s interpretation and allowed EIS relief.

In turn HMRC appealed against the FTT ruling. Earlier this month the Upper Tribunal duly reversed the FTT’s decision, holding that HMRC was entitled to add together the value of a director’s loan to his company and the value of his holding in the company’s issued share capital.

Taylor and Haimendorf are thus excluded from claiming EIS relief.

According to tax consultants KPMG, the decision has wider impact than for EIS relief alone. The same criteria are used to determine the meaning of “connected” in the rules for the purchase of own shares in s.1062 Corporation Taxes Act 2010 (formerly s.228 of ICTA 1988).

“The case highlights the need for great care when structuring investment in companies, and how the nature and amount of investment by others can influence the relative percentage holdings of individuals wishing to qualify for EIS relief”, commented KPMG.



Upper Tax tribunal (PDF file)





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