The rules for EIS are a minefield and failure to meet all the conditions disqualifies investments. In a recent Upper Tribunal Case an investment was disqualified because the funds were not used by the company within the time limits.
Mr Richards invested in shares in a trading company, Skye Inns Limited, which carried on a qualifying trade for EIS purposes. He invested in three tranches and claimed EIS deferral relief on all three investments.
The company used the first two tranches to acquire and operate two pubs. The third tranche was to acquire a third pub, but shortly before contracts were due to be exchanged the vendor pulled out. Skye Inns Limited kept the third tranche in an instant access investment account separate from the current account used to operate the two pubs.
One of the requirements for obtaining EIS relief is that the money raised is employed, usually within two years of the issue of shares, for the purposes of the qualifying activity for which it was raised.
The problem here is that the current account was used for the purposes of carrying on the company’s trade, and the company only dipped into the investment account when it ran out of money in the current account. It could not be said, therefore, that the money raised from the share issue was employed for the purposes of its trade.
Employed does not mean spent, but there must be some evidence of earmarking for a specific purpose. However, transactions on current account cannot be amalgamated with transactions on the investment account so as to treat the cash held by the company on a “composite account” from which funds are drawn as working capital.
The Tribunal rejected the claim for EIS deferral relief in respect of the final subscription for shares.
This Decision shows how easy it is to fall into one of the many pitfalls surrounding EIS relief. If the company had simply operated a single bank account Mr Richards may have succeeded in claiming EIS deferral relief. For further information, please contact TaxDesk on 0845 4900 509 and ask for Paula Tallon.