The taxman’s interpretation of the Enterprise Investment Scheme (EIS) rules is to be challenged after an investor won the right to force HMRC to reconsider denying tax relief on the EIS investment he made.
The dispute centres on an investment made by Robert Ames back in 2005, when he invested £50,000 in shares in a start-up indoor skydiving company of which he was also one of the founding directors.
Mr Ames said he had obtained confirmation from HMRC that the shares were eligible for income tax relief under EIS rules at the time of investing. He also said he had been advised by HMRC in a recorded phone call that he would be exempt from capital gains tax (CGT) when he sold the shares.
The shares were sold for more than £300,000 in June 2011. But when the time came to claim the tax relief, the taxman said he was not eligible for the relief because he had not claimed income tax relief when he first made the investment.
This has left him with a tax liability of £72,176.80, according to his legal representative.
Mr Ames said he did not claim for income tax relief at the time of making the investment because, in the first year after making the investment, he lived on savings and didn’t take a salary from the business, and so had no significant income.
When he discovered the problem, Mr Ames tried to issue a late claim for income tax relief for the year in question, in order to trigger the capital gains tax relief. But HMRC told him it was too late to do so.
He challenged HMRC’s interpretation of the rules at a First Tier Tribunal (FTT) in 2015 and lost, and he also lost a subsequent appeal.
But after challenging HMRC in the Upper Tribunal in April 2018, the tribunal asked HMRC to reconsider its actions in the case in a draft judgement in June.
HMRC has yet to declare its final decision on the case, leaving Mr Ames with one month to appeal the decision after it has done so.
Alex Davies, co-founder of the Wealth Club, which specialises in tax efficient investments, said other investors could find themselves in the same situation. Though he thought the rules were "very clear".
He said: "It has always been my understanding that you will only receive capital gains tax relief if you also received income tax relief on that investment.
"In my experience the initial tax relief is extremely important in most peoples’ decision to invest in companies qualifying for EIS, therefore I do not believe there will many investors who inadvertently end up like the person in this case, although of course there will be some.
But he added: "I believe the judicial review is not deciding on whether the rule is correct, just whether or not HMRC should have applied some discretion with this particular case.
"Ultimately if he wins, this is good for investors as it does give them some leeway years down the line, if they have inadvertently not followed the rules correctly."