Thomason and Others v HMRC
28 April 2011
The Appellants had been employed within a manufacturing and distribution business (OldCo) which went into administrative receivership.
The Appellants conducted a buy-out by which a new company was acquired (NewCo) and NewCo purchased the assets of OldCo from the administrative receiver. Upon acquiring NewCo, the Appellants became directors and each acquired two ordinary shares of £1.
Further shares in NewCo were issued to the shareholders upon NewCo's acquisition of the assets of OldCo. The Appellants claimed EIS relief in respect of both issues of shares.
HMRC challenged the availability of EIS relief for both issue of shares arguing that the Appellants failed to satisfy the conditions for relief by reason of an "involvement". HMRC also pointed out that the first issue of shares failed to satisfy the minimum subscription requirement of £500.
s.291(1) ICTA 1988 provides that an individual qualifies for EIS relief in respect of eligible shares in a company if he subscribes for the shares on his own behalf, and he is not connected with the company within the period of two years before the share issue, until immediately before the termination date relating to the shares.
However, s.291A ICTA 1988 provides an exception which allows EIS relief to be granted despite a "connection", so long as that connection only arose as a result of an entitlement to receive remuneration as a director. The two conditions that need to be satisfied are 1) that the director only be paid reasonable remuneration and 2) at the time that the shares were issued, the director had not been connected with the company.
In this case, the Tribunal considered that it was clear that the second condition could not be satisfied in respect of the second issue of shares. By then the Appellants has been directors of NewCo for a year and NewCo had traded in that year. However, the Tribunal commented that this second share issue could satisfy s.291A ICTA 1988 with the effect that if the second condition could be satisfied in respect of the first issue of shares, then the second share issue would also become eligible for EIS relief.
With regard to the first share issue, HMRC argued that at that time, the Appellants were involved in carrying on all or part of the trade of OldCo in their capacity as employees of OldCo. HMRC went on to state that the trade of OldCo, by whom the Appellants were employed, was the same trade carried on afterwards by NewCo. Therefore the Appellants had, at the time of the first issue shares to them, previously been involved in carrying on (as employees) the whole or some part of the trade which was subsequently carried on by NewCo. Therefore, HMRC claimed that the second condition was not satisfied in respect of the first issues of shares, and that the claim must fail.
The Tribunal considered that the questions to be addressed were:
1 whether "the trade carried on" by NewCo could be regarded as having a separate and continuous existence in its own right, so that the Appellant's involvement in the trade as employees of OldCo before NewCo was formed could be taken into account; and
2 whether HMRC's interpretation of s.219A was "unnecessarily strained".
In response to question 1, the Tribunal held that the natural meaning was that the question of whether there was a previous involvement should be tested at the time of the first share issue. The Tribunal therefore concluded, as in relation to the first issue of shares, that the NewCo had never carried on any trade, and as such, the Appellants had not been involved in a trade carried on by the NewCo.
In response to question 2, the Tribunal had already concluded that the first issue of shares could satisfy the conditions to be eligible shares, then the effect of s.291A was to enable the second issue of shares to be eligible also.
Therefore it was held that EIS was available on both share issues.
At this stage, it is not known whether HMRC will appeal the judgment. However, it seems likely as the Tribunal's decision to allow EIS relief on the issue of both sets of shares has been criticised for their conclusions as regards the minimum share subscription.
The first issue of shares did not satisfy the minimum share subscription of £500, which HMRC touched upon in their submissions to the Tribunal. The Tribunal should have therefore concluded that, for the reason of the low subscription level, that EIS relief was not available on those shares.
If the first issue of shares was not deemed to satisfy the conditions for EIS relief, then it follows that the Appellants could not rely on s.291A in order to obtain the relief for the second issue of shares.
Therefore, if HMRC were to appeal, it would appear likely that they would be successful in the Upper Tribunal for the reason outlined above. If this were the case, the Appellants may realise how they were lucky to obtain the First Tier Tribunal's sympathy!