Tax Partner Newby Castleman LLP
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EIS income tax claim required for CGT relief

3rd Aug 2018
Tax Partner Newby Castleman LLP
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skydiver in action

HMRC’s decision not to grant a late claim for EIS income tax relief was flawed and did not follow its own internal guidance, a judicial review has found.

This case: Ames v HMRC [2018] UKUT 0190 TCC was decided in the Upper Tribunal on the tax issues, and simultaneously heard as a judicial review on the soundness of HMRC’s decision not to accept a late claim for income tax relief.   


In January 2005, Ames invested £50,000 in an indoor skydiving company in January 2005. HMRC accepted that Ames’s subscription for shares was eligible for relief under the Enterprise Investment Scheme (EIS). Ames’s other income was only £42 for 2004/05, and this was wholly covered by his personal allowance, so he did not make a claim for income tax relief on the subscription for EIS shares in 2004/05.

Ames sold his EIS shares in June 2011 for £333,200 and claimed exemption from CGT on the sale under the EIS CGT relief provisions. HMRC denied Ames the CGT exemption on the grounds that he had not made a claim to EIS income tax relief.

FTT decision

The first tier tribunal (FTT) upheld HMRC’s position that exemption from CGT under EIS rules depended upon there having been a claim for EIS income tax relief. During the course of the FTT hearing, HMRC gave Ames to understand that it had the power to allow late claims where the taxpayer had a “reasonable excuse”, although it did not accept that he had such an excuse in this case. 

The FTT’s decision suggested Ames may wish to ask HMRC to reconsider its decision to refuse a late claim, so Ames duly wrote to HMRC requesting his EIS income tax relief claim be accepted on the grounds that he had a reasonable excuse. HMRC refused to allow a late claim and advised that incorrect information had been given at the hearing before the FTT, and that reasonable excuse is not something HMRC consider when deciding whether to accept late claims.

Upper tribunal

Ames appealed to the Upper Tribunal, arguing that it was not necessary for EIS income tax relief actually to be given in order for the CGT exemption to be available: all that was necessary was for the shares to be eligible for that relief. Alternatively, it was not Parliament’s intention to deny CGT relief where income tax relief was available but not claimed. Ames also sought judicial review of HMRC’s decision not to allow his late claim to income tax relief.

The UT dismissed his appeal, stating that it was clear that for the CGT exemption to apply, a claim to EIS income tax relief must have been made and given effect. It was not obvious that the link between the income tax and CGT reliefs was a mistake in law, even if it gave anomalous results for subscribers of EIS shares who had no income tax liability for the year of subscription.

Judicial review

HMRC has a statutory power to extend the normal time limit for some claims (for example, claims to corporation tax group relief). Failing that, HMRC has jurisdiction to admit late claims under its care and management powers on a discretionary basis.

The EIS legislation does not contain specific provisions allowing for a late claim, so Ames’s only option was to rely upon HMRC’s discretionary powers. HMRC had declined to exercise its discretion on the grounds that his circumstances did not fall within any of the cases of “exceptional circumstances” set out in its self assessment claims manual: SACM10040. In particular, “the concept of reasonable excuse does not come into consideration in accepting late claims.

Ames misled by HMRC

Despite acknowledging that Ames had been misled at the FTT on HMRC’s ability to accept a late claim where the taxpayer had a reasonable excuse, HMRC had not considered whether Ames’s situation represented an “exceptional case” where “it may still be unreasonable for HMRC to refuse a late claim.” HMRC had not followed its own guidance and failed to consider the broader merits of Ames’s claim.

In addition, Ames had previously telephoned HMRC regarding the EIS CGT exemption and been told that this would be available. The UT considered that, if HMRC’s own technical experts had misunderstood the rules, how was Ames to understand the requirement to waive his personal allowance (itself not only counterintuitive but difficult to do as most software will allocate this automatically), and then submit an EIS income tax relief claim?

The UT was also influenced by the fact was that making a claim to EIS income tax relief made no difference to Ames’s income tax position for the year; the claim was a mere formality. The UT, therefore, held that HMRC’s decision-making process had been flawed as it had failed to consider the material facts, and remitted the decision on whether to allow Ames’s late claim back to HMRC.


The outcome of HMRC’s further deliberations is not known. I hope that the exceptional circumstances surrounding the Ames case will be acknowledged and HMRC’s discretion exercised accordingly to allow his late claim to EIS income tax relief.

A more interesting point is the clear indication from the UT that HMRC’s own guidance, although not legally binding, is open to judicial review where HMRC fail to act in accordance with it. 

Replies (8)

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Red Leader
By Red Leader
03rd Aug 2018 11:44

I've always found the link between EIS income tax relief and subsequent CGT relief bizarre.

Thanks (2)
Replying to Red Leader:
By TaxSpud
03rd Aug 2018 17:01

But it is there in black and white isn't it and I have always advised clients accordingly. Maybe I am missing something but how can there even be a late claim to income tax relief when he has no income in charge to tax?

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By Trethi Teg
06th Aug 2018 09:43

Another example of paying your !fair" amount of tax!

Parliament quite clearly intended that these investments should qualify for both IT and CGT relief. If one could not benefit from the IT relief why should the CGT relief be denied.

Once again it demonstrates that if the law as written is one the side of HMRC then they will pursue you to the grave to claim thier share or deny you what you are owed.

If however the law is not written to their liking then they will revert to "what parliament intended" and decide what they feel is fair.

The pendulum has swung too far in the direction of HMRC and contributors such as Tax Spud should pend his time lobbying for this to be changed on behalf of his clients rather than offering them the HMRC line and getting paid for doing so.

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By sammerchant
06th Aug 2018 12:42

I get the impression that HMRC are taking every claim for relief personally, as if it's their money at stake. They are supposed to administer the law completely impartially and without bias.
HMRC fail to consider what would be just and equitable and disregard (yes, I know it's hackneyed) the principle of "the man on the Clapham omnibus".
The FTT seems to lean over backwards to accept HMRC's interpretation of the law in most contentious cases.
Perhaps we need a panel to review their decision before the UT gets involved.

Thanks (1)
By ianthetaxman
07th Aug 2018 10:45

At the risk of being shouted down by those wishing to fight the good fight for their clients, this has always been the case, and trying to reverse engineer a claim (late or otherwise) for CGT disposal relief without being able to obtain at least £1 of income tax relief on the subscription in question can't work. I suspect that the FTT should've made it clearer at the time that although there may be a mechanism for late claims, this wouldn't be successful base on the information presented.

I agree that perhaps the legislation was intended not to penalise those who have no income tax liability to relieve, but unless the rules are changed, they are the rules.

I have tried in the past to argue with HMRC on a similar point involving dividends (when the 10% tax credit franked any basic rate liability) and where no income tax was due, but the concept of eligibility and availability when it comes to an EIS claim don't cut it - you must be able to obtain the relief.

Look at the order of the tax calculation process at s.23 ITA 2007 - EIS tax credits are given at step 6, after the tax due has been calculated, so if there isn't any tax due, relief isn't obtained.

Thanks (1)
By AndrewV12
14th Sep 2018 11:14

In January 2005, Ames invested £50,000 in an indoor skydiving company in January 2005

In a what?, An indoor sky diving Company, hhhhhaaaaayyyyyy how does that work.

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Replying to AndrewV12:
By AndyJR81
19th Sep 2018 10:29

There's a few of them around now - basically a vertical wind tunnel.rofit

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By AndrewV12
14th Sep 2018 11:17

I am glad Aims won, but unsure about only £42 of taxable income in 04/05 (my gosh it was a long time ago.

'Ames’s other income was only £42 for 2004/05.'

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