EIS qualification

EIS qualification

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S,185 ITA 2007 states that a company issuing shares will not be a qualifying company if it is controlled by another company, or by another company and a connected invidual.

I have a case where the hopeful EIS issuing company "E" is owned by a variety of shareholders including Company A (40%) and Company B (20%) and individual C (5%)

Individual C also has absolute control over each of Company A and Company B.

The smallest irreduceable collection of entities which control company "E" is therefore individual C, for which purpose he requires no connection with any corporate body otherwise than indirectly down the "tree".

So, in light of this, does the target company E fall foul of S.185?  It seems to me that to include Companies B and C with indivual C requires a doublecounting of control.

It may help if I could understand what mischeif the government had in mind in preventing corporate control of the issuing company, and any light on that would also be appreciated, but a straight "yes it qualifies" or "no it does not" is the principal concern.  Take it as read that there are no other potential breaches of conditions.

As an ancillary question, if your answer is "no, it does not qualify", would your answer change if individual C had no direct shareholding in Company E (ie without his personal 5%)?

Thanks

With kind regards

Clint Westwood

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By Steve Kesby
01st Aug 2013 00:21

Independence

The purpose of the test is that the EIS company should be independent; it should be at the top of the corporate pile; another body corporate shouldn't have control or effective control of it.

Ignore C; A and B (which are both corporates) by virtue of being connected persons (by virtue of S.993(5)) have control of E, so I'd say E fails the independence test fairly successfully without any double-counting.

I think that also answers your ancillary question, based on my view.

As ever though, it's worth putting it to the SCEC in Maidstone, to see what they have to say.

EDIT: Just to add when you refer to the smallest irreducible group to have control and then conclude that C has control, that's the wrong test. The smallest irreducible group applies for determining common control, and applying the control test in S.450 CTA 2010, which involves attributing the rights of associates.

For the purposes of ITA 2007, S.185(2) (although not section 185(1)) the control test set out in S.995 ITA 2007 applies (see S.257(3)), which doesn't make attributions itself, hence the attribution part of the test in S.185(2)(a)(ii).

That test simply asks is there any company who (together with its associates/connected persons) has control of the EIS company without it actually being a subsidiary? The answer to that question is yes, there are two such companies.

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By nogammonsinanundoubledgame
22nd Aug 2013 15:45

Under my reading of s.185, no group of companies can ever qualify for EIS.

S.185(1) says that in order to qualify, any subsidiaries of the EIS company must also be qualifying EIS companies.

But S.185(2) says that a subsidiary cannot be an EIS qualifying company.

So under no circumstances can a holding company own a qualifying subsidiary.  So the holding company can never qualify, as it will inevitably fall foul of S.185(1).

???

With kind regards

Clint Westwood

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By Steve Kesby
22nd Aug 2013 17:55

That's not what S. 185 says at all

S.185(1) says that any subsidiary of the investee company must be a "qualifying subsidiary". Qualifying subsidiary is then defined in S. 191 as a 51% subsidiary of the investee company (90% for some purposes) and of which no other company has control.

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By nogammonsinanundoubledgame
22nd Aug 2013 17:59

Got it, thanks,

I agree

With kind regards

Clint Westwood

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