Income Tax Act 2007 section 257LH

Requirement for no collusion with a non-qualifying investor

Section 257LH prevents investors from circumventing the eligibility restrictions on social investment tax relief by entering into reciprocal or circular investment arrangements with individuals who would not themselves qualify as eligible investors.

• Throughout the longer applicable period, there must be no arrangements under which the investor (or an associate) invests in a social enterprise as part of a wider scheme involving cross-investments in other companies.
• The arrangements must not provide for another person to invest in a different company, where that person is someone other than the original investor.
• No party to the arrangements may be an individual who would fail the eligibility tests in sections 257LF (restrictions on being an employee, partner or paid director) and 257LG (the requirement not to hold an interest in the capital of the social enterprise) if those tests were applied to that individual in relation to the other company.
• This anti-avoidance rule targets circular arrangements — for example, where directors of separate community interest companies invest in each other's enterprises to sidestep the rules that would disqualify them from investing in their own.