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Insurer statistics show that EIS accounts for a disproportionate number of PI claims. In this vein, a sole practitioner I recently met cited the professional indemnity premium cost as his reason for not advising his clients on EIS or SEIS. Having been approached on a number of occasions to help out once EIS has gone wrong, our practitioner colleague might be a very wise man.

All is simple with the benefit of hindsight but the SEIS/EIS legislation contains a plethora of traps and I share three of those I have come across in recent months.   

Persons interested in capital

It is well known that an individual who is connected with a company is precluded from obtaining EIS income tax relief on their share investment.  This applies where, in broad terms, the individual, whether alone or together with an associate, possesses, or is entitled to acquire more than 30% of the ordinary share capital, the voting power or an entitlement on a winding up.

It is fairly common knowledge that SEIS/EIS income tax relief is not available to an investor who together with their spouse, civil partner, parent or child holds a 30% plus interest in the company. Indeed, the sibling exception is often greeted with a sigh of relief.   But an ‘associate’ includes not only a relative but also a business partner of the investor.  And this is where it sometimes all goes horribly wrong as it is more common than one might think for business partners to invest together and find their EIS relief lost because their interest in the company exceeds the 30% level.

The EIS share requirement

Growth Shares are often used by companies as employee incentive shares. Due to their lack of economic entitlement their market value will be relatively low, reflecting the fact that, at acquisition they have “hope value” only. The cost to employees of acquiring these shares is therefore made more affordable.  Unfortunately, the existence of such a class of shares in the capital of a company might compromise the EIS position. 

EIS shares may carry no present or future preferential right to a company's assets on a winding-up. The existence of a class of ‘Growth Shares’ which only accrue value once the company’s value passes a predetermined limit might, by their very existence mean that the company’s ordinary shares, the shares that are used for EIS purposes, will gain preferential rights on a winding up. 

This potential EIS trap can be overcome if the Growth Shares carry rights that allow them to rank pari passu with the company’s ordinary (EIS) shares with regard to dividend, voting and rights to the company’s assets on a winding-up but also provide that on a winding up these shares would have an additional entitlement in preference to the ordinary shares of a percentage of the company’s assets.

Permanent Establishment

Up until 2010 the business activity of an EIS company had to be carried on wholly or mainly in the United Kingdom but that rule was replaced by the requirement that the company need only have a ‘permanent establishment’ in the UK. 

But a UK registered office is not sufficient - the company must have a fixed place of business in the UK.  The legislation gives full details of the meaning of a Permanent Establishment.  The Revenue Manuals advises on the situation where the issuing company is the parent company of a group and that company acts mainly as a holding company.

The guidance says “that there is no requirement that the business of one or more of its trading subsidiaries be carried on from the place of business in question. It will be sufficient that the administrative and management functions of the parent company be carried on there.

Thus a UK-registered parent company, which carries out the necessary functions of a parent company from a fixed place of business within the UK, is likely to be considered to have a permanent establishment within the UK regardless of where the activities of any trading subsidiaries are carried on”.


I cannot claim any involvement in X-Wind Power (TC/2016/05086) a First Tier Tribunal Case but mention it because it was decided only last month so is hot off the press. 

The Tribunal denied investors SEIS relief (but allowed EIS relief) because the company completed and submitted an EIS 1 (the EIS Compliance Statement) in error rather than the SEIS 1.  Although the tribunal was sympathetic and accepted that the EIS 1 had been submitted in error, the company’s appeal was dismissed because there is no provision in the legislation for rectification of their mistake.

There are many complex and obscure conditions which need to be fulfilled before relief may be claimed under the Enterprise Investment Scheme (and its little brother Seed EIS) and retained. Usually, but not always, all of these conditions will be considered and reviewed carefully and assiduously before the scheme is put into place. But then, all too often, everyone files the paperwork in a drawer and gets on with the next project and the trapdoors are not firmly

For further details contact Stephen Deustch on 020 8922 9119 or email


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