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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 qualifying for relief despite connection

ITA07/S169

It is not intended to discourage investors who would like to become directors of the company they invest in (or of a subsidiary) and make their business expertise available to it. Such investors are often known as ‘business angels’. Business angels are allowed to qualify for Income Tax relief despite the fact that they receive payment for their services. However, the rule letting in business angels is tightly drawn. It applies only where:

  • the only way in which the individual is connected with the company following the investment is that he or she (or an associate) is a director who receives, or is entitled to receive, remuneration, and

either

* at the time when the shares are issued, the director has never before been connected with the company in any way, or been involved in carrying on any part of the trade now carried on by the company (or its subsidiary), whether as an owner of that trade or as a director or employee of the owner, or
* the issue of shares is made before the termination date (see [VCM10540](https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm10540)) of a previous issue of eligible shares in respect of which the director satisfied the condition just mentioned or
* the issue is made before the termination date of a previous issue of shares in respect of which the director was eligible for SEIS relief. (see [VCM32010](https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm32010)).

For this purpose, ‘remuneration’ includes such items as benefits, and the remuneration must be reasonable in amount. Any case in which it is thought that the amount of remuneration is not reasonable should be submitted to CTIAA (Structure, Incentives & Reliefs team) after ascertaining the facts but before making a challenge.

An individual who was a director of a company previously carrying on the trade is not regarded as having been necessarily ‘involved in carrying on’ a trade carried on by that company. It is a question of fact whether a director is so involved.

Thomason & Ors v HMRC Commissioners (UKFTT 579) established that the test of previous connection and involvement of director should be applied at the time of issue of the shares. In that case, at the time of the share issue the company had no trade so the directors could not have been involved in carrying on the trade of the company previously. The fact the company then went on to acquire a trade that the directors had previously been involved in did not change the eligibility of the shares already issued as the test applies at the time of the share issue.

Example 1

In September 2010 Mr Allison, a retired management consultant, subscribes for shares in British Jeans Ltd, a company with which he had no previous connection, becoming a director working part-time for the company and being paid remuneration. In April 2011 and in December 2013 he makes further investments in the company.

The receipt of remuneration does not prevent his receiving relief in respect of the shares issued in September 2010 or those issued in April 2011. But December 2013 is more than three years after September 2010, so he gets no relief in respect of those shares.

Example 2

On 1 May 2010 Jim Brown and his three brothers each acquire 25% of Duntradin Ltd, a long-established company which is now dormant, and become directors of it. On 1 June 2010 they each subscribe £50,000 for shares in the company, and these are issued on 2 June. On 8 June, when the company begins spending the money raised on assets to be used in a new trade, each of the brothers enters into a service contract with the company.

Thus on 8 June each of the brothers has become connected with the company as a paid director. However, because they have not become entitled to any payment in relation to the period before 2 June each nevertheless qualifies for relief as a ‘business angel’.