Revenue & Customs Brief 77/09

HMRC Interpretation of Section 183 of ITA

Introduction

This Revenue & Customs Brief explains HM Revenue & Customs’ (HMRC) interpretation of how section 183 of the Income Tax Act 2007 (ITA) applies to companies where the relevant trade is carried on in partnership or by a limited liability partnership, and the implications for new investment through the Enterprise Investment Scheme (EIS). This Brief was first published as a Technical Note on 9 December 2009 and this revised version corrects a typographical error in the original.

Background

The EIS makes available various tax reliefs to investors who subscribe for shares in a company which meets certain qualifying conditions.

One of the conditions is that the relevant:

  • qualifying trade
  • preparation work ,or
  • research and development

is at no time during the three year period following issue of the shares, carried on by a person other than the issuing company or a qualifying 90 per cent subsidiary of that company.

Interpretation

During recent consideration of the EIS legislation HMRC has revised its view of how the legislation has effect in relation to partnerships. HMRC considers that the relevant legislation at section183 of ITA has the effect of disqualifying a company where the relevant trade, preparation work or research and development, is carried on by the company in partnership or by a limited liability partnership of which the company is a member. This is because where any of these activities are carried on in partnership or by a limited liability partnership; there are persons other than the issuing company or a qualifying 90 per cent subsidiary of that company carrying on the activity.

How HMRC intends to implement this interpretation

HMRC is obliged to apply the legislation correctly and its discretion to waive tax which ought to be collected, or to give relief from tax other than as permitted by statute, is very limited.

HMRC will apply this new interpretation as follows:

  • where, on or before 9 December 2009, shares have been issued and the certificate of compliance authorised under the procedure in sections 204-206 of ITA following receipt of an EIS1 has been issued, we will not apply this interpretation, and an investors’ ability to claim relief will not be affected by it
  • where, by 9 December 2009, shares have not been issued then, irrespective of whether the company has had an advance assurance, we will apply our understanding of the law as set out in this Note. So, if shares are then issued we will not authorise the issue of the certificate of compliance for the shares where the relevant trade, preparation work or research and development, is carried on by the company in partnership or by a limited liability partnership of which the company is a member, and
  • where shares have already been issued on or before 9 December 2009 but the issue of the certificate of compliance has not yet been authorised under the procedure in sections 204-206 of ITA, we will authorise its issue only where we have given an advance assurance in accordance with section VCM21010 of HMRC’s Venture Capital Manual. This only applies in relation to the particular share issue for which the assurance was sought, and where the request had stated that the relevant trade, preparation work or research and development would be carried on by the company in partnership or by a limited liability partnership of which the company is a member. In those circumstances only, provided a favourable response was issued to the company under section VCM21040 of HMRC’s Venture Capital Manual, HMRC will not refuse to authorise the issue of the certificate of compliance solely on the basis that we do not (now) believe that they meet the requirements of section 183 of ITA. The shares and the issuing company must meet all the other requirements of the EIS regime for the relevant period.

HMRC recognises that this change of view may have adverse implications for those who had intended carrying out a trade in partnership. As announced in the Note on venture capital schemes published today on the HMRC website, we intend to consult more generally on how to ensure that the EIS scheme is targeted appropriately at small businesses. As part of that consultation HMRC welcomes comments on the law as it applies to partnerships.

For further information about the effect of this Note, companies can contact Kathryn Robertson on 020 7147 2589 (email: Kathryn Robertson) or Des Ryan on 020 7147 0818 (email: Des Ryan), or if they have already been corresponding with the Cardiff or Maidstone Small Companies Centre, their contact in that office.

Issued 16 December 2009