Gabelle Tax Analysis: New case on EIS relief: When is capital employed for the purpose of a qualifying activity?
On 25 July the Upper Tribunal published its latest decision on EIS relief.
In order to qualify for EIS relief at least 80% of the moneys invested must be ‘employed’ wholly for the purpose of the company’s trading activity within 12 months of the share issue. In a case put before the Upper Tribunal an individual invested in a company which ran public houses, which the company wanted to use to acquire an additional public house. However, shortly before the contracts were due to exchange, the vendor withdrew from the transaction. The company kept the moneys in a deposit account separate from its current account. Two years later the company made losses and the moneys in the deposit account were used to cover those losses. It was also used to renovate and extend the existing pubic houses.
The Upper Tribunal held that the moneys were not employed wholly for the purpose of the company’s trading activity within 12 months of the share issue. The word ‘employed’ is not defined in the tax statutes. The Upper Tribunal stated it is a word which:
“required the money in question actually to be used in some way for the purposes of carrying on the qualifying activity within the relevant one year period. If the moneys had been spent in carrying out the qualifying activity in that period, they would have been employed for the purposes of that activity. However, the concept of 'employed' was wider. Moneys would also be employed for the purposes of an activity if the company had earmarked them in the relevant period for some specific purpose and was keeping them in reserve for that purpose. In such a case the company might be found to have had employed the moneys for that purpose within the relevant period. Whether moneys had been notionally set aside with sufficient precision for a specific purpose so that they could be said to have been employed for the purpose of a qualifying activity would be a matter for assessment by a tribunal on the facts of an individual case. When making that assessment, a tribunal would not be required to rely on the rule that payments into and out of an account were to be treated as being made on a 'first in, first out' basis. That approach was more appropriate to an analysis of the activities in a single account.”
The tribunal’s approach had been correct as a matter of law. The subscription moneys had not been ‘employed’ in the company’s qualifying activities until the company suffered losses two years later.
Practitioners should be aware that there are a number of pitfalls when dealing with EIS investments. If in doubt they should always seek advice to avoid any costly mistakes.