Investors Lose Tax Breaks For Flouting EIS Rules

Tax experts are warning Enterprise Investment Scheme (EIS) that claiming relief is complicated and it’s easy to fall foul of the rules.

Two recent cases before tax tribunals look at EIS and capital gains tax – and the same rules apply to the smaller Seed Enterprise Investment Scheme (SEIS).

Tax advisers Gabelles are concerned taxpayers are not taking enough care over the finer details when dealing with EIS and SEIS tax reliefs.

“The two recent cases show how complicated EIS and SEIS rules are and that the tax man will examine claims to make sure they are applied correctly,” said a spokesman for the firm.

“The detail of the law must be followed. Taxpayers must claim relief even if their tax position is unaffected at the time because it may put them at a disadvantage later if they do not.

Diving into a deal

“Investors also need to ensure the company is carrying on a qualifying activity because the tax man is looking for people using EIS and SEIS as avoidance schemes.”

Both cases were heard by the First Tier Tax Tribunal.

In the first, Robert Ames v HM Revenue & Customs (HMRC), the tribunal agreed with HMRC’s argument that to qualify for capital gains tax relief, the taxpayer must have claimed income tax relief on an EIS investment even if his personal allowance covered the amount involved and his tax position was unaffected.

If not, the tribunal ruled, the taxpayer could not claim capital gains tax relief on leaving the scheme.

In this case, Mr Ames was a sky-diving instructor who was part of a team that developed an indoor simulator and he sold his shares in the company at a significant profit.

He argued that as EIS shares, they were exempt from CGT. HMRC took the view that as no EIS claim was made regarding the shares at the start of the investment, they were not covered by the scheme when sold.

Not a commercial venture

In the second case, East Allenheads Estate Limited v HMRC, the tribunal heard the company operated a grouse shooting estate and accommodation for visitors.

Sole shareholder Jeremey Herrmann put £6.5 million into the company and claimed EIS deferral relief.

Much of the money was spent on repairing the accommodation to a high standard, including paying out £2.8 million for a Magritte painting.

HMRC argued that much of the work and the spending were to the director’s benefit as he lived in the property, and was outside the scope of an EIS.

The tribunal decided the business was not a commercial venture as losses were recorded for some years, but a vehicle for providing Mr Herrmann with personal benefits and that spending millions on art and antique was not incidental to the business.

The claim was dismissed and EIS deferral relief was withdrawn.