HM Revenue and Customs Brief 77/09
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Issued 16 December 2009
HMRC Interpretation of Section 183 of ITA
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.
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.
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
- 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.
About the Author
© Crown Copyright 2009.
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Article Published/Sorted/Amended on Scopulus 2009-12-18 18:28:59 in Tax Articles