ACCA Advanced Taxation (ATX) Practice Exam

What is the amount of relief withdrawn if shares are not sold on an arm's length basis under EIS, SEIS, and VCT?

1. All income tax investment relief originally given

2. Partial income tax investment relief

3. No relief is withdrawn

4. Only capital gains tax relief is withdrawn

The correct answer is: All income tax investment relief originally given

The correct answer is that all income tax investment relief originally granted is withdrawn if shares are not sold on an arm's length basis under the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCT). The rationale behind this rule is to ensure that these tax reliefs, designed to encourage investment in higher-risk companies, are not misused. An arm's length transaction is one that occurs between unrelated parties or individuals acting in their self-interest. Selling shares that do not meet this criterion may suggest that the transaction was manipulated or not conducted on terms that a market participant would find fair. Therefore, to maintain the integrity of the tax reliefs and protect against potential abuse or tax avoidance, the legislation stipulates that the entirety of the income tax relief originally claimed will be withdrawn. This harsh consequence emphasizes the importance of adhering to proper market practices when participating in these investment schemes. Any other responses regarding partial relief or just the withdrawal of capital gains tax relief do not align with the legislation that governs EIS, SEIS, and VCT. The objective is to deter non-compliance by ensuring that the full benefits of investment relief are contingent upon proper adherence to regulations.