ACCA Advanced Taxation (ATX) Practice Exam

In which situation will IT relief be withdrawn for EIS and SEIS shares sold within three years at arm's length?

1. The original amount of IT relief

2. The total sale amount

3. 30% of the proceeds of the sale

4. 50% of the proceeds of the sale

The correct answer is: The original amount of IT relief

When shares acquired under the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS) are sold at arm's length within three years, the Income Tax (IT) relief originally claimed can be withdrawn if certain conditions are met. The correct answer focuses on the original amount of IT relief rather than the proceeds from the sale. The rationale behind this is that the relief initially granted was intended to incentivize investments in qualifying high-risk companies. If the investor sells the shares too early, this can undermine the purpose of the schemes aimed at supporting long-term investments. As such, the government effectively reverses the tax benefit to discourage such premature exits. Specifically, the amount of IT relief withdrawn is equivalent to the original relief claimed on the investment, rather than being based on the sale proceeds. Therefore, if a taxpayer sold their shares within the stipulated period and triggered the withdrawal of tax relief, the adjustment made will only consider the initial relief amount, not how much they made from the sale. Options that relate to percentages of the proceeds do not capture the overarching principle behind the withdrawal of IT relief, which strictly relates to the original relief claimed.