There are considerable tax reliefs available for investors in start-up companies, and among the more popular is Enterprise Investment Scheme (EIS) relief.
EIS gives Capital Gains Tax (CGT) relief when an investment in shares in a qualifying company is made by a qualifying person and the shares are held for the necessary qualifying period. EIS subscriptions also qualify for Income Tax relief in the year the investment is made.
A recent case shows the need for taking proper advice at each relevant stage of an EIS transaction, as the rules contain important traps for the unwary.
It involved a man who subscribed for £50,000 worth of shares in a qualifying company in January 2005, completing the necessary EIS paperwork. He had no taxable income in the 2004/05 tax year. When he sold the shares in 2011, he expected his gain of more than £280,000 to be CGT free and filed the necessary claim in his 2011/12 tax return.
Regrettably for him, HM Revenue and Customs (HMRC) had other ideas. They spotted that in the year he made his investment, he had made no claim for Income Tax relief on the investment in the relevant tax return. HMRC's argument was supported by the rather arcane wording of the legislation, but in simple terms HMRC claimed that no CGT relief could be due if there was no Income Tax reduction resulting from the subscription for the shares.
The argument went to the Tax Tribunal, which found the wording of the legislation sufficiently clear to overcome the argument that Parliament clearly would not have wished to grant CGT relief under EIS only to those who were able to obtain Income Tax relief in the year they subscribed.
The Tribunal agreed with HMRC that the claim should fail. Interestingly, subsequent commentary on the case suggests that a different argument might have led to success for the taxpayer, so the case may yet go to appeal.