Many people are already aware that by virtue of s.187 of the Income Tax Act 2007 (the ITA) for a company to qualify for EIS status all of its subsidiaries must be “qualifying subsidiaries”. A recent First-tier Tribunal case has determined that a company limited by guarantee is not a qualifying subsidiary.
In Hunters Property plc v. HMRC  UKFTT 0096 (TC), the Tribunal considered the effect of the inclusion of a guarantee company in the group of a company applying for EIS relief.
A company is a “subsidiary” as defined in s.1159 of the Companies Act 2006 of another company (its “holding company”) if that other company:
- holds a majority of the voting rights in it;
- is a member of it and has the right to appoint or remove a majority of its board of directors; or
- is a member of it and controls alone, or pursuant to an agreement with another person, a majority of voting rights in it,
or if it is a subsidiary of a company that itself is a subsidiary of that other company.
For a subsidiary to be “qualifying” s.191 ITA requires that all of the following conditions be satisfied:
- the subsidiary is a 51% Subsidiary of the relevant company;
- no person other than the relevant company, or another of its subsidiaries, has control of the subsidiary; and
- no arrangements are in existence by virtue of which either of the two conditions above would cease to be met.
A “51% Subsidiary” is defined by reference to s.989 of the Corporation Tax Act 2010 which, crucially, provides that a company (A) is a subsidiary of another company (B) if more than 51% of B’s ordinary share capital is owned directly or indirectly by A.
The Tribunal determined that the guarantee company was a “subsidiary” of Hunters Property plc (Hunters), as a subsidiary of Hunters was its sole member and had the power to appoint and remove directors. However, because a guarantee company does not have any share capital, it was determined that the relevant subsidiary of Hunters was not a “qualifying subsidiary” for the purposes of s.191 ITA. As a result, EIS treatment was denied.
This case is an important reminder that the EIS rules are strictly interpreted. It is important to ensure full compliance with the rules where EIS treatment is desired. Attention should particularly be paid if there are unusual entities in the group. For example UK LLPs and US LLCs would seem to be subject to the same treatment as guarantee companies.
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