Hunters Property Plc
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 February 2018 |
| Neutral Citation | [2018] UKFTT 96 (TC) |
| Date | 23 February 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0096 (TC)
Judge Jonathan Cannan
Mr Keith Gordon instructed by Garbutt and Elliot Chartered Accountants for appeared the appellant
Mr Simon Foxwell of HM Revenue & Customs Solicitor's Office and Legal Services appeared for the respondents
Income tax – Enterprise investment scheme relief – Company limited by guarantee – Whether controlled by issuing company – Whether a subsidiary of issuing company – If so, whether a qualifying subsidiary – Appeal dismissed.
The First-tier Tribunal decided that the appellant did not satisfy the requirements for being a EIS qualifying company as its indirect holding of a company limited by guarantee did not meet the control and qualifying subsidiaries requirements.
The appeal concerned whether shares issued by the appellant on 2 April 2015 and 6 May 2015 satisfied the requirements for EIS relief. HMRC had refused authority to issue EIS3 compliance certificates on the basis that:
- the appellant controlled a company that was not a qualifying subsidiary and failed the control requirement in ITA 2007, s. 185(1); and
- the appellant had a subsidiary that was not a qualifying subsidiary and failed the qualifying subsidiary requirement in ITA 2007, s. 187.
The appellant owned 100% of the shares in Hunters Property Group Ltd which in turn held 100% of the shares in Hunters Franchising Ltd (HFL). On 1 May 2015, HFL acquired the entire shareholding of Greenrose Network (Franchise) Ltd and at the same time became the sole member of Greenrose, a company limited by guarantee. HFL was replaced as the sole member of Greenrose in December 2015.
Control, for the purposes of the control requirement in ITA 2007, s. 185(1) is defined in accordance with CTA 2010, s. 450 and 451 (see ITA 2007, s. 257(3)). The FTT agreed with HMRC that the appellant, through its indirect controlling interest in HFL, was able to control Greenrose, meeting the definition of control in CTA 2010, s. 450(2).
The FTT then considered whether Greenrose was a subsidiary of the appellant. The appellant argued that Greenrose was not a subsidiary as the EIS legislation was referring to companies that would be regarded as subsidiaries by virtue of share ownership and therefore ITA 2007, s. 185 and s. 187 did not apply to a company limited by guarantee. There had been a finding of fact that HFL's accounts for the period ending 31 December 2015 had included a reference to Greenrose at Note 21 in relation to subsidiaries. The note said that HFL had acquired and disposed of an interest in Greenrose in the period. The inclusion of Greenrose in this note was based on the definition of subsidiary at Companies Act 2006, s. 1159. The FTT was satisfied that Greenrose was a subsidiary of the appellant.
The appellant put forward an alternative argument that the definition of a qualifying subsidiary in ITA 2007, s. 191(2) was satisfied. This was the basis that as Greenrose has no ordinary share capital, all of its (non existent) share capital is owned by the appellant. The FTT agreed with HMRC that it is not possible to own at least 51% of something that does not exist. Therefore, the FTT decided that Greenrose was not a qualifying subsidiary.
In summary, the FTT decided that:
- the appellant controlled Greenrose during the period when HFL was a member of Greenrose;
- Greenrose was a subsidiary of the appellant applying the definition in the Companies Act 2006; but
- a company with no share capital cannot be a qualifying subsidiary because it cannot be a 51% subsidiary.
The taxpayer's appeal was dismissed.
This decision highlights that the impact of membership of companies limited by guarantee appears to have been overlooked in the EIS code. In addition to EIS, the qualifying subsidiary definition in ITA 2007, s. 191 is also used for:
- company tax share loss relief (CTA 2010, Pt. 4, Ch. 5);
- income tax share loss relief (ITA 2007, Pt. 4, Ch. 6); and
- the seed enterprise investment scheme (SEIS) (ITA 2007, Pt. 5A).
Similar definitions of “qualifying subsidiary” are used for tax relief for social investments (ITA 2007, Pt. 5B, see ITA 2007, s. 257MU), venture capital trusts (VCTs) (ITA 2007, Pt. 6, see ITA 2007, s. 302) and enterprise management incentives (EMI) (ITEPA 2003, Pt. 7, Ch.9, see ITEPA 2003, Sch. 5, para. 11).
As this is a FTT decision, it does not create a legal precedent. However, given the widespread use of the qualifying subsidiary definition, there will no doubt be great interest should the decision be appealed.
[1] This appeal concerns entitlement to enterprise investment scheme (“EIS”) relief in connection with the issue of shares by the appellant. The shares were issued on 2 April 2015 and 6 May 2015. Thereafter the appellant submitted forms EIS1 to the respondents declaring that the shares issued satisfied the requirements for EIS relief contained in Part V Income Tax Act 2007 (“ITA 2007”). The respondents refused to give the appellant authority to issue EIS3 compliance certificates to its shareholders on the basis that certain requirements were not satisfied. In particular, the respondents formed the view that:
- the appellant controlled a company which was not a qualifying subsidiary and therefore failed the control requirement in section 185(1) ITA 2007, and
- the appellant had a subsidiary which was not a qualifying subsidiary and therefore failed the qualifying subsidiary requirement in section 187 ITA 2007.
[2] The respondents refused authority to issue compliance certificates based on the relationship between the appellant and Greenrose Network Marketing Association Ltd (“Greenrose”), a company limited by guarantee.
[3] Section 206 ITA 2007 provides that the refusal of an officer to authorise the issue of a compliance certificate is an appealable decision for the purposes of the Taxes Management Act 1970. The appellant's grounds of appeal may be summarised as follows:
- the appellant did not control Greenrose,
- Greenrose was not a subsidiary of the appellant, and
- if the appellant did control Greenrose and Greenrose was a subsidiary, then Greenrose was a qualifying subsidiary.
[4] The statutory framework in which these issues arise may be briefly summarised. All references in this decision are to ITA 2007 save where otherwise stated.
[5] In broad terms EIS is designed to attract investment in the share capital of smaller, higher risk companies by giving tax relief to investors. Relief is given in the tax year the investment is made where various conditions are satisfied. If the conditions are not satisfied for a period usually of three years then the relief is withdrawn.
[6] Eligibility for EIS relief requires the conditions set out in section 157 to be satisfied. For present purposes I am concerned with section 157(1)(d) which requires the company issuing the shares to be a “qualifying company”. A company will be a qualifying company where it satisfies the requirements of section 180. For present purposes I am concerned with the requirement as to “control and independence” in section 185 and the requirement as to “qualifying subsidiaries” in section 187.
[7] Section 185 provides as follows:
(1) The control element of the requirement is that–
- the issuing company must not at any time in period B control (whether on its own or together with any person connected with it) any company which is not a...
To continue reading
Request your trial
-
Tenconi
...rights with shares where it considers it appropriate to do so. [70] The appellant submitted that the decision in Hunters Property plc [2018] TC 06354 (“Hunter's Property”) supported the view that the term “shares and securities” (including stocks) could include guarantee rights under a purp......