VCM11040 - EIS: income tax relief: the investor: no tax avoidance

ITA07/S165

An investor in a company is not eligible for relief unless the subscription is made for genuine commercial reasons and not as part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.

Commerciality

This requirement rules out any subscription which is motivated by considerations of benevolence. This could be the case if, for example, the company were the proprietor of an unsuccessful professional football club and a supporter of the club paid a large premium for shares in the company; that may well not be a commercial subscription. Similarly, if the company is owned by a person whom the investor wishes to benefit, and the investor pays a large premium for the shares with the object of increasing the value of the other person’s shares, that too would not be a commercial subscription.

Deathbed investments are unlikely to be made for genuine commercial reasons.

Avoidance schemes

The subscription for the shares of the company must not form part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax.

The reduction of an investor’s tax liability which flows from the schemes in the circumstances intended by Parliament is obviously not a tax advantage at which this rule is aimed. We therefore do not have to judge whether a subscription for eligible shares would have been made if it had not attracted relief.

The scope of the provision cannot be described precisely, but it may apply in any situation where there are grounds for thinking that the circumstances are not ones in which Parliament intended the relief to be available.

Before any case is challenged solely on these grounds a report should be made to CT Innovation and Growth(CTI&G).