Tribunal – EIS – Who is a connected party?
An interesting appeal was recently heard at the Upper Tribunal concerning the eligibility for tax relief on an investment in an enterprise investment scheme (EIS). Two taxpayers had appealed against HMRC’s refusal to allow tax relief in respect of amounts invested in a public limited company between 2003 and 2005.
The First Tier Tribunal had allowed the appeals on the basis that 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. HMRC appealed to the Upper Tribunal. The facts of the case were not in dispute.
The Upper Tribunal had to decide whether the nominal value or the subscribed value of the share capital is to be used in calculating the 30% figure. The Upper Tribunal Judge was clear there can be a substantial difference especially where the nominal value is small in comparison to the amounts actually subscribed for each share.
In reaching a decision, the Upper Tribunal reversed the First Tier Tribunal’s decision on the basis that the 30% threshold applied to ‘a single, composite category’ which included loan capital as well as share capital. HMRC was therefore 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.
The taxpayers are therefore excluded from claiming EIS relief and HMRC’s initial assessment was upheld.