First-tier Tribunal considers "subscriber shares" in EIS relief share exchange rules

The First-tier Tribunal has decided that the shareholders of an Enterprise Investment Scheme (EIS)-qualifying company (target) that another EIS-qualifying company (buyer) acquired by share exchange lost their EIS income tax relief because the buyer was not a company in which the only issued shares were subscriber shares.

EIS income tax relief continues to be available when a new company acquires the EIS share issuing company using a share exchange if certain conditions are satisfied. One of those conditions is that the acquirer is a company in which the only issued shares are subscriber shares (section 247(1)(a), Income Tax Act 2007). There is no definition of "subscriber shares" for this purpose. For more detail, see Practice note, Enterprise Investment Scheme (EIS): EIS reliefs and share exchanges.

In the present case, the AIM-listed buyer acquired the target in return for issuing shares to the target's shareholders. The tribunal decided that "subscriber shares" in section 247(1)(a) meant shares that were issued to those who subscribed to a company's memorandum of association on its initial formation. The tribunal found that the issued shares of the buyer were not these subscriber shares. Therefore, section 247(1)(a) was not satisfied and the target's shareholders lost their EIS income tax relief, which would also mean that the shareholders' lost their EIS capital gains tax exemption. The tribunal was unable to explain why Parliament provided for the relief to continue in the narrow situation of superimposing a new, pure holding company but did not provide for relief in an entirely commercial share takeover of one EIS company by another.

The decision reminds taxpayers that the EIS rules are prescriptive so they should be careful to ensure that they fall within the letter of the law. The relevant EIS rules are the same as the Seed Enterprise Investment Scheme rules (as to which, see Practice note, Seed Enterprise Investment Scheme (SEIS)) so the same issue can arise with SEIS investments. The appellants sought clearance that the transaction was being carried out for bona fide commercial reasons. It is not clear from the judgment whether this was before (as required by section 247(1)(f)) or after the share exchange took place. However, practitioners should be aware that HMRC is only required to rule on the application sought and is not required to point out the consequences of the proposed transaction.

Case: Finn and others v HMRC [2014] UKFTT 426 (TC) (Judge Howard M. Nowlan and Mrs Shameem Akhtar).