A recent decision by the Court of Appeal highlights the importance of making sure that investments on which Enterprise Investment Scheme (EIS) tax relief is being claimed adhere to rules set out by HM Revenue and Customs (HMRC). In the decision, the court allowed a Mr Alan Blackburn the major part of a claim for tax relief on investments totalling £1.19 million, but rejected some of the claim.
The EIS is designed to help smaller companies raise finance by giving tax relief to investors who subscribe to new shares in those companies. Information published by HMRC stresses the importance of adhering to the rules, not just at the time of the investment but for at least three years afterwards. Failure to keep to the rules will result in tax relief not being given or, if it has already been given, being withdrawn. See HMRC's website for further information on the EIS.
Mr Blackburn made a total investment in Alan Blackburn Sports Ltd. – a company owned by Mr Blackburn and his wife – of £1.19 million. He did this in six stages between September 1998, when he invested £150,000 into his company, and October 2000. In October 2002, Mr Blackburn duly applied for EIS relief on each of the share allotments but was turned down by HMRC on all amounts.
Mr Blackburn appealed to the Special Commissioners and his appeal was allowed in the case of three of the allotments where, by the time payment for the shares was received, Mr Blackburn’s application for shares and the company’s resolution to allot them had been documented. The other three claims were rejected.
Mr Blackburn then appealed to the High Court against the latter part of the Special Commissioners’ decision and won the appeal, leading to a subsequent appeal by HMRC to the Court of Appeal.
The Court of Appeal heard Mr Blackburn’s case that, in each of the share allotments, he had paid money into the company on the understanding that shares would be issued. HMRC argued that, in the absence of proper applications and resolutions to allot the shares, the money paid into the company on each occasion was merely a loan to the company, later redeemed in shares. As such, HMRC argued, Mr Blackburn did not ‘subscribe wholly in cash’ for the shares, as required by the legislation.
Following considerable legal argument as to the intentions of Mr Blackburn in making payments to the company, HMRC’s appeal was dismissed except for the first sum invested. This has resulted in Mr Blackburn being able to claim EIS tax relief on £1.04 million of his investment, but not the initial £150,000.