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Givenchy said that “luxury is in every detail”. He was of course, slightly more famous for his influence on Audrey Hepburn’s wardrobe than his knowledge of Venture Capital tax reliefs.
However, with his emphasis on detail, our French fashion designed friend could easily be talking about EIS and Seed EIS relief.
This is because, despite the fact that they are government-approved tax reliefs, the rules are labyrinthine and there is a tendency for HMRC to adopt a zero-tolerance approach to any infraction of the rules.
This is perhaps emphasised in the recent case of Fashion on the Block. Though, perhaps surprisingly, it had a happy end for the taxpayer.
For now, anyway.
Fashion on the Block (“FOTB”) is / was a UK based start-up fashion technology company.
In order to grow the business, the owners decided to use the Seed EIS regime to attract investors. It should be noted that, other than the procedural issues discussed below, it was acknowledged by both parties that the investors should obtain relief on their investments.
In January 2019, the co-founder applied for Advance Assurance.
Her covering email made it clear she was applying for Seed EIS relief. She ticked the box for Seed EIS for the first £150k she was hoping to raise with the balance of £750k under EIS. The £750k being increased to £850 by a revised application 3 months later.
HMRC provided their Advance Assurance by letter dated 2 May 2019. This letter covered both Seed EIS and EIS.
All well and good… until this point!
It seems that at this stage, the founder of the business passed the responsibility of dealing with the formalities to one of her advisers… and this is where the problems began.
As a refresher, the formalities are as follows:
It is worth bearing in mind that not only are the procedures almost identical, the forms and information required for EIS and Seed EIS are also very similar.
Her adviser, through HMRC’s website, accessed the compliance statement. However, it transpired that she used form EIS1 rather than form SEIS1.
However, and perhaps important to the weight of evidence around intention, her covering letter stated that the form enclosed was SEIS1 rather than the incorrect form EIS1.
It should be noted that HMRC accepted that FOTB intended to apply for authority to issue Seed EIS certificates (unlike in the case of X-Wind Power where HMRC did not readily accept this position).
New shares were issued in FOTB on 9 February 2020 totalling a tenner short of the £150k maximum Seed EIS raise of £150k.
HMRC responded by email on 10 March by providing EIS2 permitting FOTB to issue the certificates to the investors.
Within 18 mins (again, perhaps a relevant point) FOTB’s adviser pointed out the ‘error’ and asked for SEIS2 to be issued instead. HMRC ultimately rejected this plea.
This is important because one of the rules for obtaining Seed EIS relief is that the Company has not previously issued shares under any other venture capital scheme. The issue of the shares and the provision of the compliance statement (EIS1) meant this condition could no longer be satisfied.
Of course, HMRC’s position seems incredibly harsh. However, it is entirely in step with HMRC’s zero tolerance, ‘letter of the law’ approach.
In essence, HMRC argued that there is no mechanism allowing them to withdraw that original compliance statement.
A look at the case law, such as X-Wind Power and Innovate Commissioning Services Ltd would show that the Courts also generally agree with HMRC in this regard.
X Wind Power is an important case as it was an Upper Tribunal case and, as such, binding on the FTT.
In that case, the facts, at first glance appeared similar in that a EIS1 was completed by the applicant company despite the company wanting to issue shares under the Seed EIS scheme.
However, in FTOB, the FTT set out arguments that HMRC would usually trot out against a taxpayer who had used an aggressive tax arrangement.
HMRC had asserted that to allow the taxpayer to replace EIS1 with EIS2 would be contrary to the will of Parliament. The FTT gave this short shrift stating:
HMRC consider the will of Parliament will be defeated if rectification were to be available in a case such as this. On the contrary the will of Parliament to confer entitlement to income tax relief to those that risk their capital by subscribing for shares in companies that have new businesses, will be secured
The FTT then pulled out one of the big guns of statutory interpretation – BMBF v Mawson – and that the correct approach was that the law should be “construed purposively and applied to the facts realistically”. In other words, HMRC’s ‘literal’ approach to the regime was incorrect.
On that purposive basis, the FTT decided there had been no prior EIS investment.
But what of X-Wind Power? Well, the FTT managed to distinguish on the facts as follows. In X-Wind, it was found that there was nothing in the application to put HMRC on notice that the applicant intended to pursue Seed EIS. However, in FOTB, there were several examples of correspondence that referred to Seed EIS and the advance assurance specifically dealt with this. It was clear to all that this was a mistake.
On the basis that the FTT cannot compel HMRC to use its discretion to amend the return, the tribunal found that the equitable remedy of rectification was available to the applicant. As such, the wording of the form could be amended to give effect to Seed EIS rather than the EIS provisions.
As a last gasp, HMRC tried to argue that this could not be done due to the form being subject to Crown copyright! The FTT gave this short shrift.
My view is that this is a sensible decision by the FTT – they have given effect to Parliament’s intention to provide relief for those who stump up investment to finance high risk, growth companies.
It seems perverse to challenge the availability of relief in circumstances where it was clear that obtaining Seed EIS relief was the intention (a point not in dispute!)
Giving HMRC the benefit of the doubt, it might be that they felt their hands were tied. As such, it will be interesting to see whether HMRC appeal this decision.
For more information on EIS and Seed EIS then please visit our EIS Signpost document.
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