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HMRC internal manual

Venture Capital Schemes Manual

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EIS: income tax relief: general requirements: shares requirement

ITA07/S173

EIS relief is available only where the investor subscribes for shares which meet certain requirements.

Shares issued on or after 6 April 2012

The shares must be ordinary shares which, throughout the three year period (VCM10540) carry:

  • no present or future preferential right to dividends where either :

    • The rights attaching to the share include scope for the amount of the dividend to be varied based on a decision taken by the company, the shareholder or any other person. Note: this exclusion covers only those shares which carry preferential rights and does not therefore prevent the voting of dividends in respect of non-preferential shares, nor does it prevent shareholders from choosing to waive a dividend payment should they wish to do so; or
    • The right to receive dividends is ‘cumulative’ - that is, where a dividend which has become payable is not in fact paid, the company is obliged to pay it a later time, normally once funds become available.
  • no present or future preferential rights to the company’s assets on its winding up, and
  • no present or future right to be redeemed.

Shares issued before 6 April 2012

The shares must be ordinary shares which, throughout the three year period (VCM10540) carry:

  • no present or future preferential right to dividends,
  • no present or future preferential right to the company’s assets on its winding up, and
  • no present or future right to be redeemed.

The rights carried by shares are usually as set out in the company’s Articles of Association or as determined by a resolution of the company.

Ordinary shares

‘Ordinary shares’ means shares forming part of a company’s ‘ordinary share capital’, which is itself defined in ITA/S989 as all issued share capital, by whatever name called, other than capital the holders of which have a right to a dividend at a fixed rate but no other right to share in profits.

Preferential right

A right carried by a share is a preferential right if that right takes priority over a right carried by some other share. Thus where a company has only one class of issued share capital no share carries any preferential right.

The rights carried by ordinary shares may in some cases be preferential as compared with the rights of deferred shares, but this is not necessarily so. In particular, where deferred shares carry a purely theoretical right to a residue of assets in a winding up (for example where, in the case of a very small company, after the first £20million has been distributed to ordinary shareholders the deferred shareholders are entitled to 1p per share) we do not regard the ordinary shares as carrying a preferential right.

Where a company has two classes of issued share capital, and dividends are declared on one class but not on the other, the right of the former class is not a preferential right.

Subscription in cash

The subscription price must be paid wholly in cash (which includes payment by cheque and payment in foreign currency), and the cash must be paid in full by the time the shares are issued.

In the case of Blackburn & Anor v Revenue and Customs Commissioners [2009] STC188 shares were found to be wholly subscribed for in cash and fully paid up at the time of issue although the payment for shares was received after the investor was recorded as a member in the Register of Members. In this case the agreement to issue shares was conditional on payment being received. The payment for the shares was judged to be the final step in the process of issuing shares. Consequently, when the payment was made the condition of the issue was satisfied and the shares were issued as fully paid up. This case is distinguished on its facts; usually payment would not be considered part of the process in issuing shares under the Companies Act. In Blackburn there were also payments before shares were issued - see VCM16050.

There is a separate condition that the shares must be issued to raise money (see VCM12050). We regard cash and money as meaning the same thing in this context.

Date of issue of shares

The date when shares are issued is to be ascertained in accordance with company law (see National Westminster Bank plc v CIR, 67TC1). Shares are issued to a person when that person’s title to them has become complete. When that happens will depend on the circumstances of the particular case, but normally it will be when the shareholding is entered in the company’s Register of Members.

The issue of shares should not be confused with the issue of a share certificate, which merely provides evidence of ownership of shares.