Income Tax Act 2007 section 178A

The no disqualifying arrangements requirement

Section 178A prevents EIS income tax relief where shares are issued in connection with arrangements designed to artificially channel venture capital scheme tax reliefs to particular parties or to dress up an existing business as a new qualifying activity.

• Shares must not be issued, and money raised must not be used, in connection with disqualifying arrangements — that is, arrangements whose main purpose is to secure venture capital tax reliefs for a contrived qualifying business activity.
• Condition A is breached where the money raised ends up being paid, directly or indirectly, to or for the benefit of parties to the arrangements (or persons connected with them), so that the bulk of the funds effectively circulate back to insiders.
• Condition B is breached where, without the arrangements, the business activities funded by the share issue would reasonably have been expected to be carried on as part of an existing business by a party to the arrangements or a connected person — in other words, an existing trade has simply been repackaged.
• The rule applies regardless of whether the issuing company itself is a party to the disqualifying arrangements, and it covers a wide range of tax reliefs including EIS, SEIS, social investment relief, capital gains deferral relief, and loss relief on share disposals.