It may be remembered that the case of Taylor v HMRC TC 426 earlier in the year dealt with the question whether an individual is connected with the company for the purposes of the enterprise investment scheme. It is well known that if you have more than 30% of the shares in the company, you are connected with the company and disqualified from the relief. The precise test is a little more complicated. The individual must not possess more then 30% of:
- the issued ordinary share capital;
- the loan capital and issued share capital of the company; or
- the voting power in the company.
Mr Taylor had an interest in the company, and although he held less than 30% of the shares he held more than 30% of the loan capital of the company. He obviously did not breach condition (a) or condition (c), and he claimed that he did not breach condition (b) because he did not hold more than 30% of the loan capital and more than 30% of the issued share capital. HMRC said this was not the right interpretation. He possessed more than 30% of the aggregate of the loan capital and the issued share capital, and therefore he was connected with the company.
On Mr Taylor’s interpretation, the reference to issued share capital in paragraph (b) is rather redundant because if you have more than 30% of the issued share capital you were caught by (a) anyway. Unless paragraph (b) is intended to aggregate the loan capital and the share capital, there would be no need to make reference to issued share capital in (b) at all.
However, the First Tier Tax Tribunal accepted Mr Taylor’s interpretation, although their reasoning was not altogether clear. The Upper Tribunal has now reversed this decision and confirmed the interpretation of HMRC.
As an interesting aside, the Upper Tribunal observed that exactly the same criteria are used to determine connected persons when a company purchases its own shares, and the same meaning must be given to the phrase for that purpose.