Taxation of Chargeable Gains Act 1992 Schedule 5B paragraph 1A

Failure of conditions of application

Section 1A deals with what happens when shares that initially qualified as eligible shares under the Enterprise Investment Scheme reinvestment relief subsequently fail to meet the required conditions, and the consequences for the investor's capital gains tax deferral.

• Where a post-issue event causes the company to fail the qualifying company test or the gross assets requirement, the shares lose their eligible status from the date of that event, and the deferred gain is brought back into charge.
• Where the money raised by the share issue was not used for a qualifying business activity, the shares are treated as having never been eligible at all, meaning the deferral relief is fully withdrawn from the outset.
• Where the use-of-money requirement is not met, the consequences depend on the timing of the original claim — shares are treated as never eligible if the claim was made after the statutory deadline, or as ceasing to be eligible at that deadline if the claim was made before it.
• None of these consequences apply unless the company itself has notified HMRC or an inspector has issued a formal notice to the company stating that the shares should lose their eligible status — and such an inspector's notice can be appealed.