Aftercare instructions for the EIS company directors & shareholders
Not safe yet: the three-year itch
You will have obtained the EIS Relief but all is not safe until three years have passed. Events occurring during this period may lead to a claw-back of all or some of the tax relief originally given.
Connected
You must not become ‘connected’ with the company in that period. That means, broadly, that you must not become an employee or director and must not come to own more than a 30% interest in the company. In certain special circumstances, being appointed a director may be permissible: ask us for details if necessary.
Using the money
The funds subscribed for the EIS shares must be used within two years of the subscription. Where the money raised is used by a subsidiary, the subsidiary must be a 90% subsidiary.
Return of Value
Tax relief will be clawed-back in whole or in part if you ‘receive value’ from the company. Things to watch out for are where the company repays a debt to you or a relative of yours, transfers an asset to you, pays you dividends, interest, remuneration or rent or provides any other sort of benefit. There are some limited exceptions for dividends and interest which are at a “reasonable commercial rate”. Don’t guess: ask us. There may also be a problem if the company or a subsidiary repurchases shares from shareholders (even ones who have not themselves claimed EIS relief). So best talk to us if you are contemplating any kind of capital reorganisation or adjustment.
Disposal of shares
The relief is clawed-back if you sell or gift your EIS shares within the three- year period. It’s OK to transfer to your spouse or civil partner provided they don’t in turn dispose of the shares in the three-year period.
Groups & investments
Except in very limited circumstances the company must not become a subsidiary of another company, it mustn’t “control” any other company other than a subsidiary in which it owns more than 50% of the shares, and non-one else may “control” any such subsidiary.
Smaller holdings of less than 50 per cent will count as investments rather than as subsidiaries. However, care needs to be taken as, unless the value of such investments is insubstantial, they may mean that the enterprise investment scheme company ceases to be wholly a trading company: see the next paragraph.
Trading & Prohibited trades
The company must continue to do nothing other than carry on a “permitted” trade in the UK throughout the three-year period. The only situation where this will not be necessary is where the company fails and is wound up.
All trades are “permitted” unless they are included in the following list of prohibited trades (but remember that in addition any substantial non-trading activity such as property investment is also prohibited)
- Dealing in land, commodities, futures, shares, securities or financial instruments
- Property development
- Dealing in goods other than in any ordinary trade of wholesale or retail distribution
- Leasing, letting assets on hire or receiving royalties or licence fees
- Farming, market gardening or occupation of woodlands
- Operating or managing an hotel, nursing home, residential care home or similar
- Providing services for an associated business which is itself a prohibited trade
Arrangements
Many of the points mentioned above are extended to include arrangements designed to lead to the situation in question. So, for instance, the rule that prevents a company ceasing to carry on its qualifying trade during the three year period also extends to any arrangements which would lead to the company ceasing to carry on its trade, as would an arrangement (option arrangements for example) which would lead to the company falling under the control of another company after the end of the three-year period.