Eugenia Campbell

Written by: Eugenia Campbell

Eugenia Campbell

Tax Director

Enterprise investment scheme relief – no certificate, no relief

Taxpayers with an interest in supporting start-up businesses and an eye on making tax savings may consider subscribing for shares in enterprise investment scheme (EIS) qualifying companies. Investments in such companies can provide generous income tax and capital gains tax (CGT) reliefs, but an investor must hold an EIS3 or EIS5 certificate, issued by the company, in order to make a claim. The EIS3 or EIS5 certificate confirms the qualifying status of the company, the amount of the qualifying investment, and other details necessary in order to make the claim, including the relevant unique investment reference (UIR). Making a claim without this certificate can be costly, as relief will be denied by HMRC and interest and penalties may become due in respect of any tax underpaid as a result. EIS investments may also qualify for inheritance tax business property relief where the relevant conditions are met.

In the recent tax tribunal case of HMRC vs Dr Rizvi, EIS claims covering three years to 5 April 2017 were made by Dr Rizvi’s accountant without the relevant EIS3 certificates having been issued. The accountancy firm had acted for Dr Rizvi for more than 20 years and was latterly owned by the EIS scheme provider. The tribunal was required to determine whether HMRC had issued discovery assessments denying the claims for EIS relief within the time limits for doing so. 

In this case, for a discovery assessment to be valid, the taxpayer or his agent (eg his accountant) must have behaved carelessly. On the facts, the tribunal concluded that the agent had been careless and so HMRC’s assessments were valid, and more than £250,000 tax was due as a result. It is important to note that this case concerned an investment made before the introduction of UIRs in 2019, and HMRC’s systems should now be capable of automatically rejecting claims that do not include the reference provided on the EIS3 or EIS5 certificate. However, as the UIR is reported only as a white space note on the self-assessment tax return, it is still possible that a claim can be made in the return without a certificate in place. Nevertheless, this case confirms that a claim for EIS income tax or CGT relief is invalid where no EIS3 or EIS5 has been issued.

Meeting all relevant conditions is important to avoid forfeiting the following generous EIS tax reliefs for qualifying investments.

  • Income tax relief at 30% on a subscription of up to a maximum £1m in qualifying shares per year, and/or up to the same amount carried back to the previous tax year. Eligibility is subject to several criteria, including the investor’s income tax liability for the relevant years and a holding period of at least three years. Some additional actions, such as remuneration planning, can be considered to ensure reliefs are not wasted. 
  • If an individual sells an asset, realising a capital gain, and reinvests that gain in qualifying EIS shares, a claim can be made to defer the CGT liability on the sale of the original asset until disposal of the new shares. 
  • For inheritance tax purposes, business property relief should ordinarily be available on qualifying EIS shares if they are held for at least two years before a relevant transfer, for example on death, which means that qualifying EIS shares can often be transferred free of IHT. 

The basic requirement to have an EIS3 or EIS5 in place should therefore not be overlooked by investors.

Previously announced changes to expand the scope of a similar tax efficient investment scheme, the seed enterprise investment scheme (SEIS), were confirmed in the Spring Budget 2023, raising the annual amount of investment on which income tax and CGT re-investment reliefs is available from £100,000 to £200,000 from 6 April 2023, which is aimed at helping boost investment in start-up businesses. Separately, the legislation for EIS currently has a sunset clause, meaning it is due to end in April 2025. However, the government has confirmed its intention for the scheme to be extended. 

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