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EIS Qualifying Shares – The Facts

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

EIS Qualifying Shares – Conditions, Investors, Businesses & Individuals

Overview – EIS relief

In order to qualify for EIS relief, the shares issued under the capital raise must be ‘qualifying shares’.

In overview, the following must be satisfied for the shares to be ‘qualifying shares’:

  • They must be Ordinary Shares
  • The must be newly issued / subscribed for
  • They must be subscribed for in cash and fully paid up (unless bonus issue)
  • For the relevant period do not carry any present / future preferential rights

These conditions must be satisfied on issue and for the relevant period (period A) otherwise relief will be withdrawn.

Ordinary Shares & EIS

There is a requirement that the shares must be Ordinary Shares.

What are Ordinary Shares?

Ordinary shares’ means shares forming part of a company’s ‘ordinary share capital’ which is defined in ITA 2007, s989 as:

“all issued share capital, by whatever name called, other than capital the holders of which have a right to a dividend at a fixed rate but no other right to share in profits.”

Broadly, this means that any shares other than fixed dividend shares will usually be considered ordinary shares.

Newly subscribed for in cash and fully paid up

A further condition is that the subscription price must be paid wholly in cash.

This cash must be paid in full by the time the shares are issued. The case of Blackburn & Anor [2009] was one exception to this rule. However, the decision in this case was decided on the facts and we would recommend that shares are not issued until the cash has been received.

Do not carry preferential rights

For the relevant period, the EIS shares cannot carry any present/ future preferential right. This applies to:

  • dividends;
  • company assets on winding up; or
  • Redemption

This means that care should be taken such that the rights on the EIS shares at outset do not ‘outrank’ the non-EIS shares. This test is not only one which should be looked at on issue but also should be monitored throughout.

In particular, care should be taken where the rights of other shares are altered even for commercial purposes as can be seen from case law.

In Abingdon Health[2016] there had been 3 EIS raises. However, between capital raised 2 and 3, ordinary (non-EIS) growth shares were issued to management. As they were growth shares, they only participated in ‘future’ capital of the Company.

As a result, HMRC argued that the EIS shares had preferential rights over the growth shares as the EIS shares could participate in the capital of the company on a winding up but the growth shares could not.

The FTT agreed with HMRC, despite there being no ‘intention’ of this result or the fact that it was unlikely that the preference would arise.

In Flix Innovations [2016], A ordinary shares were issued to the company’s founders and B ordinary shares were issued to EIS investors.

All fine and dandy at this stage.

However, for commercial reasons, some of the A shares were turned in to non-voting deferred shares.

The remaining ordinary shares (including the EIS shares) were the only shares that could participate in the assets on a winding up of the company.

Again, HMRC challenged successfully at FTT and UTT that the EIS shares carried a preferential right over those deferred non-voting shares.

If you have any queries about EIS, whether as a potential investee company or investor, then please do get in touch. Read more about EIS and SEIS services.

Albeit, we can’t give you investment advice as we are not regulated by the Financial Conduct Authority – so please get that type of advice from someone who is!

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