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 3 years.

  • The company made 3 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 1st and 2nd share issues and refused to issue a compliance certificate for the 3rd 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 the 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 intend to claim, EIS relief.

Links

Case reference: Abingdon Health Limited v HMRC [2016] TC 05525

Our subscriber guide EIS: Enterprise Investment Scheme

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