Tribunal case re the 30% ownership test for EIS relief
An interesting case was recently heard at the Tribunal concerning the eligibility for tax relief of an investment in an enterprise investment scheme (EIS). In this case two taxpayers appealed against HMRC’s refusal to allow tax relief in respect of amounts invested in a public limited company between 2003 and 2005.
The appeal concerned whether the taxpayers were ‘connected’ with the company in question or not. Both parties agreed on the facts which led to the appeal. HMRC refused the appeal on the basis of certain loans the taxpayers had made to the company during 2004 and 2005. HMRC were of the view that the taxpayers were connected with the business under TA 1988 s291B(1) because they held more than 30% of the loan capital and issued share capital of the business.
In fact although the taxpayers held more than 30% of the loan capital of the company they each held considerably less than 30% of the issued share capital.
The tribunal were clear that had Parliament wished the law to be understood in the way put forward by HMRC, the drafting of the relevant section would have been significantly different. A taxpayer is only deemed to be ‘connected’ with a company for the purposes of EIS relief if he holds both more than 30% of the loan capital of the company and more than 30% of the issued share capital of the company. The appeals were allowed.