14 March 2023
Taxpayers with an interest in supporting start-ups and an eye on making tax savings may consider subscribing for shares in EIS qualifying companies. Investments in such companies may potentially provide generous income tax and capital gains tax (CGT) reliefs and EIS investments may also qualify for inheritance tax reliefs, but an investor must have an EIS3 certificate in place before making a claim for the former two reliefs. The EIS3 certificate confirms the qualifying status of the company and the amount of the qualifying investment. Making a claim without this certificate can be costly, in terms of relief being denied by HMRC and the associated interest and penalties of any tax underpaid.
In the 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 was within the time limits for issuing a discovery assessment, denying the claims for EIS relief.
In this case, for the HMRC assessment to be valid, the taxpayer or his agent (ie his accountant) must have behaved carelessly. It was concluded in HMRC’s favour that the agent had been careless and so HMRC’s assessments of a little more than £250,000 were payable. It is often a bone of contention that accountants insist on receiving an EIS3 certificate before claiming any tax relief, which a taxpayer may think is unduly onerous. Ideally, HMRC’s systems should be capable of automatically rejecting claims not including a reference provided on the form EIS3. A unique investment reference number system has now been introduced, which may facilitate this. Meanwhile, this case establishes that a relief claim is invalid without an EIS3 being issued.
Getting it right is important to avoid forfeiting generous EIS qualifying investments tax reliefs which include:
- Income tax relief of 30% on up to a maximum of £1m subscription per year of investment and/or up to the same amount carried back to the previous tax year. This is subject to various factors and criteria including the investors’ income tax liability 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 and reinvests the gain in qualifying EIS shares, a CGT deferral claim can be made to defer the CGT liability on the sale of the original asset.
- For inheritance tax, business property relief should ordinarily be available if the shares are held for two years before a relevant transfer, for example on death, which means that EIS shares can be transferred free of IHT.
Changes to expand the scope of a similar scheme – the seed enterprise investment scheme (SEIS), were promised in the September 2022 mini-budget, however so far, no new legislation has been published. Separately, the legislation for EIS currently has a sunset clause of April 2025, albeit as part of the September 2022 mini-budget the government confirmed its intention for this to be extended. A further announcement in Wednesday’s Spring 2023 budget on these previously announced changes would be most welcome to help boost investment in start-up businesses. Meanwhile, the basic obligation of having an EIS3 in place should not be overlooked by investors.