5. Income tax relief: withdrawal of relief

Transcription

1 5. Income tax relief: withdrawal of relief 5.1 Overview The preceding chapters mainly considered conditions which would preclude EIS relief from being granted on application. We will now consider situations where relief is initially granted, but has to be withdrawn due to a disqualifying event before the termination date. In some cases, relief is only partially withdrawn, and a calculation is necessary to determine how much. This will consequently affect any loss relief claimed on the shares (if applicable), as the allowable loss is adjusted for any income tax relief given which has not yet been withdrawn. We will consider this in further detail later on. It should be noted at the outset that HMRC have the power to raise a discovery assessment under TMA 1970, s. 29 if they discover that any of the information on the EIS1 form was incorrect. This can also attract a penalty if the information was submitted fraudulently or negligently. Law: TMA 1970, s Changes of circumstances before termination date As alluded to in the preceding chapters, a number of the specific conditions have to be met right up to the termination date of the relevant shares, not just at the date of the share issue. These conditions have been discussed in detail already; however those which need to be met throughout the holding period for the shares are summarised in the following table for ease of : Condition Relevant period Chapter Legislative (ITA 2007) Investor must not become connected Company must be a trading company A s. 163 B s

2 Income tax relief: withdrawal of relief Condition Relevant period Chapter Legislative (ITA 2007) Company must carry out a qualifying activity Company can only control qualifying 51% subsidiaries, and must be independent All subsidiaries must be qualifying subsidiaries Any property management subsidiaries must be 90% subsidiaries Maximum risk finance investments company has raised cannot exceed 12 million ( 20 million for knowledge-intensive companies) B s. 183 B s. 185 B s. 187 B s. 188 B s. 173AB In addition to the above conditions, recall that the money raised by the share issue needs to be employed for a qualifying purpose within two years of the share issue date, or relief will be withdrawn as was the case in Skye Inns and in Benson Partnership. Cases: Skye Inns Ltd and Mr Chris Richards v HMRC [2009] UKFTT 366 (TC); Benson Partnership Ltd v HMRC [2012] UKFTT 63 (TC) 5.3 Disposal before termination date Introduction In addition to breaching the conditions set out in the table above, relief will be wholly or partly withdrawn in most circumstances where the investor makes a disposal of the shares before the termination date. Recall that the termination date is three years from the date of the share issue, or three years from the date that the qualifying trade commenced if this is later. The legislation actually refers to Period A; however as it is impossible for the shares to be disposed before they are actually issued, we are only 39

3 Enterprise Investment Scheme concerned in practice with the period beginning with the share issue date and ending with the termination date. For this reason it is essential to determine exactly when the share issue date is. This was discussed in Relief is not withdrawn if the shares are transferred to a spouse or civil partner who is living with the investor at the time of the transfer Disposal not at arm s length If a disposal takes place before the end of Period A, and does not take place on arm s-length terms, the EIS relief will be withdrawn in full. This will automatically mean that any deferred gains will come back into charge immediately, and no automatic entitlement to share loss relief is enjoyed. A bargain is generally held to be made at arm s-length if all parties to the transaction have acted in such a way as to get the best deal for themselves. The fact that an individual may not have got the best terms possible does not necessarily mean that the bargain was not made on arm s-length terms the crucial factor is the intention. A bargain cannot be said to be made on arm s-length terms if there is an intention by one party to confer a gratuitous benefit on another. This would include a situation where a shareholder knowingly sells his shares for much less than they are worth. Note that (contrary to popular misconception), a disposal may be held to have taken place otherwise than on arm s-length terms even if the parties are unconnected Disposal at arm s length Where an early disposal does take place on arm s-length terms, relief is only fully withdrawn if the sales proceeds are equal to or greater than the subscription price. Where the sales proceeds (if any) do not exceed the subscription price, a partial withdrawal of relief takes place. The amount of relief withdrawn is calculated using the following formula: 40

4 Income tax relief: withdrawal of relief Relief withdrawn = sales proceeds x original rate of relief Note that the relief is not simply withdrawn at 30%, because share issues made on or before 5 April 2011 would have attracted relief at 20%. Example withdrawal of relief Meredith subscribed for 1,000 shares in EIS Ltd for 100,000 on 31 December 2012, claiming EIS income tax relief of 20,000. EIS Ltd did not start trading until 1 December 2014, meaning that the termination date for the shares is 1 December Meredith sold all her shares for 40,000 on 1 June This is before the termination date, despite being after the third anniversary of the investment. The relief withdrawn will be 20% x 40,000 = 8,000. The remaining 12,000 is not withdrawn. Where a partial withdrawal is made, the calculation for an allowable loss is affected as this depends on relief which was given but not withdrawn. This is discussed in Chapter 6 below (loss relief). The partial withdrawal provisions protect investors who have made genuine commercial investments, but who can clearly see that the company has not been successful. They can therefore cut their losses and receive at least some proceeds for the shares without being penalised by a full withdrawal of the relief Part disposals EIS relief given in respect of a particular share issue is treated as accruing evenly across all shares acquired. If, therefore, only part of the holding is sold prior to the termination date, only a proportion of the relief is withdrawn accordingly. If the shares are sold for a marginal profit, the apportionment is fairly straightforward. So if 40% of the shares held are disposed before the termination date, 40% of the original relief will be withdrawn. The situation is slightly more complicated where the shares are sold at a loss. 41

5 Enterprise Investment Scheme Example Meredith (continued) part disposal Consider Meredith s situation from above again; however this time she only disposes of 600 shares for 25,000. Because the relief is deemed to accrue evenly over the subscription, these 600 shares account for 12,000 of the original relief. The amount to be withdrawn will be 25,000 x 20% = 5,000. The remaining 400 shares account for 8,000 of EIS relief, and any further withdrawal cannot exceed this 8,000 even if the shares are sold before the termination date at a profit. The relief not withdrawn on disposal of the 600 shares (i.e. 7,000) is never withdrawn. One further consideration needed is the situation where full relief could not be utilised, for example where there was not sufficient income tax liability to use the maximum relief. In the circumstances, the calculation for the reduction is amended as follows: where: Relief withdrawn = sales proceeds x original rate of relief x A/B A = the actual tax reduction given in s B = the maximum possible tax reduction (i.e. qualifying investment x EIS rate) Liquidations Where the reason for the disposal before the termination date is a liquidation entered into for genuine commercial reasons, the treatment depends on whether the liquidator makes any distribution to the shareholder before the termination date. If there is no such distribution then the proceeds used for calculating the withdrawal are nil and so no withdrawal is made. If, however, some distribution is made by the liquidator, the amount will be treated as value received, and at least partial withdrawal will be necessary. The calculation of the withdrawal in these circumstances is considered later in this chapter. Law: ITA 2007, s