The First-Tier Tribunal has held in Thomason & Others v HMRC [2010] UKFTT 579 (TC). (click here to view) that investors who acquired shares in a management buy-out of business and assets were entitled to claim EIS relief despite having been involved in carrying on the trade before the transfer took place. The appellants had been employed by Tufnol Limited ("Oldco"), which went into administration. Its trade was acquired by Tufnol Composites Limited ("Newco"), of which the appellants were directors and in which they subscribed for shares.
HMRC contended that as a general proposition, management buyouts cannot qualify for EIS relief – the acquiring managers having previously been involved in the trade whose ownership is transferred in the buyout.
In this case, however, the facts were that the initial shares in Newco were acquired prior to the trade being transferred and at a time when the directors met the conditions in section 291A Income & Corporation Taxes Act 1988. The Tribunal held that the test was whether the investors were involved in the carrying on of the trade by Newco at the time of subscribing for the shares and that neither subsequent involvement in carrying on Newco's trade or prior involvement in carrying on the same trade under the ownership of Oldco would prejudice the availability of EIS relief.
The timing of the issue of the initial share issue was crucial to the Tribunal's decision. The relevant legislation is now contained in section 169 of the Income Tax Act 2007 and it appears that the same interpretation will apply.
It remains to be seen whether HMRC will appeal.
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