VCM25310 - EIS: income tax relief: replacement capital

ICTA/S302; ITA/S232; ITA/S233

As the EIS is intended to encourage genuinely new investment in companies by outsiders (and by paid directors who were outsiders when they first invested in the company) the legislation needs to ensure that relief is not available to anyone who directly or indirectly owned the trade before it came to be owned by the company. This is done by ICTA/S302, ITA/S232; ITA/S233.

Where the section applies any relief given to the individual is to be withdrawn. (Under ICTA/S312 (4) or ITA/S257 (4) this has the effect that where relief has not yet been given the individual is not eligible for it.)

To decide whether the provision might apply to an investor we have to consider whether, at any time within the three year straddling period (ICTA)/ Period A (ITA) –(see VCM20600), either the individual or any group of persons to which he or she belongs either:

• has more than a half share interest in the trade or part of the trade as carried on by the company or its qualifying subsidiary, or
• controls the company.

In the first case, the provision will apply if the individual or group also had such an interest in the trade, or a part of the trade, at some previous time in the same period when it was carried on by some person other than the company. In the second case, ICTA/S302 and ITA/S232will apply if the individual or group, at some previous time in the same period, controlled another company which was then carrying on the trade or part of the trade.

In addition, ICTA/S302 and ITA/S233also cover the situation where the individual or group formerly controlled a company which then carried on the trade and that company has come to be owned by the company in which the individual has now invested.

In the case of an investor who is a paid director the references above to the previous control of the trade within the relevant period are to be read as references to previous control at any time whatsoever.

For the purpose of deciding whether anyone has a half share in a trade or can control a company the rights and powers of each person are to be taken as including the rights and powers of any associate, see VCM25200, and ‘control' has the meaning given in ICTA/S416 (2) - (6) (see CTM60200 onwards).

The persons to whom a trade belongs, or the extent of their interests in it, are to be determined in accordance with ICTA/S344 (see CTM06020). Note that a person having more than a 50% interest in a trade carried on by a company does not necessarily control that company - for an example, see VCM17250.