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HMRC internal manual

Venture Capital Schemes Manual

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HM Revenue & Customs
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EIS: income tax relief: the investor: connection: directors excluded

ITA07/S168

An individual is connected with a company as a director at a time in period A (see VCM10540) only if he receives a payment from the company other than a ‘permitted payment’ (see below), or becomes entitled to receive such a payment in respect of any part of that period. Similarly, where an associate (see VCM11100) of the individual is a director of the company, that individual is connected with the company only if that associate receives, or becomes entitled to receive, a payment other than a permitted payment.

This rule is extended to cover payments made to the individual indirectly or made to his order or for his benefit.

The rule is also extended to cover payments made by any ‘related person’ - that is:

  • any company of which the individual or his associate is a director and which is either a subsidiary or a partner of the first company or of any subsidiary of it,

and

  • any person connected (under ITA07/S993) with any such company or with the company which the director has invested in.

Example

Andrew, Brian, Catherine and David each subscribe for 25% of the share capital of a new company called Organic Parsnips Ltd, of which they all become unpaid directors. They are also the owners of a company called Just Carrots Ltd, a company of which they have been paid directors for many years.

Any three of those individuals can control each company, so the two companies are connected by virtue of ITA07/S993. Because the four individuals each receive payments from a company connected with Organic Parsnips Ltd, they do not qualify for relief on their subscriptions.

Permitted payments to directors

In determining whether a director is a ‘paid director’, certain payments are ignored. They are as follows:

  • any payment or reimbursement of expenses which are wholly, exclusively and necessarily incurred by the director in the performance of his duties,
  • any interest which represents no more than a reasonable commercial return on the amount lent,
  • any dividend or other distribution which does not exceed a normal return on the amount invested,
  • any payment for the supply of goods which does not exceed their market value,
  • any payment of rent which does not exceed a reasonable commercial rent,
  • any reasonable and necessary remuneration which:

    • is paid for services rendered in the course of a trade or profession, other than secretarial or managerial services or services of a kind provided by the person to whom they are rendered, and
    • is taken into account in calculating for tax purposes the profits of that trade or profession.