HMRC have published a technical note regarding the application of the Enterprise Investment Scheme (EIS) and how it relates to partnerships. HMRC now consider that Section 183 Income Tax Act 2007 disqualifies a company’s shares from EIS relief where the relevant trade is carried on by the company in partnership, or by an LLP of which the company is a member. This is because one of the conditions for the relief is that the qualifying trade, the preparatory work or the research and development may not be carried on by a person other than the issuing company or a 90% subsidiary during the three year period following the issue of the shares. Where the relevant trade is carried on by the company in partnership, HMRC say this test cannot be satisfied.
This new view clearly causes difficulty for those who have already received an EIS1 authorisation; HMRC confirm that they will not apply this new interpretation in those circumstances and the investors will not be affected.
Where shares have already been issued but an EIS1 form has not yet been received, HMRC will authorise its issue only where they have given an advance assurance in accordance with their Venture Capital Manual.
In cases where the shares have not yet been issued, even where an advance assurance has been received, the new interpretation will apply and an EIS relief will be denied.