Kevin Read contrasts a recent seed enterprise investment scheme compliance case with two of its predecessors.
The enterprise investment scheme (EIS) and seed EIS (SEIS) legislation is very prescriptive. Indeed, the Office of Tax Simplification recently concluded that the schemes are full of potential pitfalls and recommended that the government should review the rules, with a view to ensuring that procedural issues do not prevent their practical operation.
In the recent case Fashion On The Block Limited v HMRC [2021] UKFTT 306 (TC), the First-tier Tribunal (FTT) seems to have moved more quickly in this regard than the government.
Earlier cases
In X-Wind Power Limited v HMRC [2017] UKUT 0290, the Upper Tribunal (UT) considered whether SEIS relief was due, where the company had filed an EIS (rather than an SEIS) compliance statement in error after issuing shares.
Nothing had indicated to HMRC that the form should have been an SEIS1, so in May 2013, HMRC authorised X-Wind to issue EIS compliance certificates to its investors. In April 2014, an SEIS compliance statement was submitted for another tranche of shares; this one was correct. However, HMRC refused permission to authorise SEIS compliance certificates, as SEIS relief is not available once there has been an EIS issue by a company. X-Wind then submitted form SEIS1 to replace the March 2013 submission, which HMRC refused to accept.
The FTT held that as the EIS1 had been validly submitted, there was no statutory right to submit a replacement. The SEIS was, therefore, not available on any of the investments, a decision confirmed by the UT.
In Innovate Commissioning Services Ltd v HMRC [2017] UKFTT 741 (TC), the appellant had been granted advance assurance from HMRC for an SEIS share issue. It mistakenly then submitted an EIS1 form rather than an SEIS1. HMRC wrote to the company to check that it had intended to submit the EIS1 but, having moved, the company never received the letter. HMRC, therefore, gave authority for the company to issue compliance certificates for the EIS. When the company subsequently submitted an SEIS1 and asked that the EIS1 be withdrawn, HMRC refused.
The appellant said there were differences from X-Wind because it had sought advance assurance and HMRC was aware that it intended to apply for SEIS, but the FTT again held that once granted, HMRC had no lawful means to withdraw the original application.
The Fashion On The Block case
Fashion On The Block Ltd (FOTB) was a fashion technology start-up company that wanted to raise funds by issuing shares under the SEIS, as was clear from the company’s communications with HMRC (which included receiving advance assurance for an SEIS issue).
The FTT held that the adviser subsequently submitting an EIS1 (with the covering letter stating ‘Please find enclosed an SEIS1 form’) was not an acceptable reason for HMRC to deny SEIS relief on qualifying shares. The adviser had realised their mistake and immediately contacted HMRC by email, asking for authority to issue SEIS certificates instead.
With no prior EIS investment, the conditions for SEIS relief to apply had been satisfied. HMRC had taken a literal interpretation of the conditions in the legislation but they should have been applied purposively. The appeal was allowed, meaning that investors could get 50% income tax relief, rather than the 30% available under the EIS.
The FTT also said that, alternatively, the equitable remedy of rectification would apply. In giving the information and declarations, the company believed it was providing what was required for SEIS relief, so the form submitted should be treated as if it had been rectified to reflect the information and declarations in form SEIS1.
Practical tip
Although not setting any binding precedent, this FTT case may help companies that have made procedural errors when using the venture capital schemes.
