20 Jun 2024

EIS and CGT relief again

Publications

If Income Tax relief is available on a subscription for shares under the Enterprise Investment Scheme (‘EIS’), claim it.  Even if you don’t need it: even if it doesn’t actually reduce the amount of Income Tax you pay.  Why?  Because if you haven’t been given EIS Income Tax relief on the subscription, you don’t get EIS Capital Gains Tax (‘CGT’) relief on any gain on a subsequent sale.

That was established in 2015 by Ames [2018] UKUT 190 (TCC).  And it was the taxpayer’s problem recently in Kalay v HMRC [2024] UKFTT 366 (TC).

In November 2019 Mr Kalay sold some shares in a private company, making a gain of some £8m.  On the face of it, he would have been entitled to claim EIS Income Tax relief on the acquisition of the shares in September 2013.  He claimed EIS CGT relief on the gain.  HMRC enquired into his tax return, pointed out that as Income Tax relief hadn’t been claimed on acquisition, no CGT relief was due on disposal and issued a closure notice accordingly.

Mr Kalay responded by making a claim to Income Tax relief (for the tax year 2013/14, in which the shares had been acquired) in January 2022.  But it was a late claim: the limit for making the claim had expired in January 2020.  HMRC rejected the claim.

Mr Kalay appealed to the First-tier Tribunal against both HMRC’s refusal to accept a late Income Tax relief claim and HMRC’s closure notice denying CGT relief.

HMRC successfully applied for the case to be struck out.

As regards the Income Tax relief claim, there was no right of appeal against HMRC’s refusal to admit a late claim.  Further, although the FTT recognised that the power of ‘care and management’ afforded to HMRC under the Commissioners for Revenue and Customs Act 2005 was wide enough for them to accept a late claim if they chose to do so, the FTT had no jurisdiction to consider how HMRC exercised that power.  Unreasonable exercise (or failure to exercise) the power could be challenged only by judicial review: and it is well-established that the FTT has no judicial review function.

Since there was no possible doubt that the claim to CGT relief depended upon Income Tax relief having been given, it followed that the failure of the Income Tax relief claim also condemned the CGT relief claim to the same fate.  The FTT therefore struck out the appeal against the closure notice.

One intriguing point.

It had been represented on behalf of Mr Kalay that the reasons for his failure to make a timeous Income Tax claim were such that he had a reasonable excuse and that HMRC should have exercised their discretion to admit the late claim.  It is true that regardless of how good or bad those reasons may have been and regardless of what the FTT may or may not have thought of HMRC’s decision, it simply had no power to consider the point.  However, other bodies (including the Upper Tribunal) do.  It will thus still be possible, in principle, for Mr Kalay to seek judicial review (albeit not by the FTT) of HMRC’s refusal to admit a late claim.

What would happen if, hypothetically, such a claim were to succeed and the Income Tax relief were to be granted?  Entitlement to the CGT relief would follow.  What would then happen to the FTT’s striking out of the appeal against the closure notice denying relief: could it be ‘un-struck-out’?  It would be nice for Mr Kalay to succeed on judicial review, if only to supply the answer to that conundrum!

For more information on EIS CGT relief, please get in touch with your usual BKL contact or use our enquiry form.