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  • Pip Ahoy! – worse things happen at HMRC?

    27 November 2021

    Andy Wood

    Overview

    “Has anyone been to Peppa Pig world?” bumbled our magnificent Prime Minister last week.

    In case you did not notice, his quality as an orator is one of his strengths. I suspect that this will make most people reading this feel almost Churchillian in their public speaking skills by comparison.

    The Rt Hon gentleman did make a good point about our world-class animation industry, however. Yes, dear reader, that is my segue into another tax decision….

    Last month, we saw what I think is the first case (CHF PIP! PLC v HMRC) to consider whether a proposed investment satisfied the Risk to Capital Condition (“R2CC”).

    The Company, CHF PIP PLC, had raised funds successfully under EIS prior to this new condition seeing the light of day. The R2CC has materially reduced the funds raised under EIS on a year on year basis.

    CHF PIP PLC was a branch / descendant of the old Cosgrove Hall films who made Dangermouse. They had acquired IP rights to a TV programme that parents might know, Pip Ahoy. A poor man’s Peppa Pig and yet to have its own ‘World’.

    The Company submitted form EIS1, also known as Compliance Statements, to HMRC in anticipation of being granted authority to issue compliance certificates to investors.

    However, HMRC refused this permission.

    The arguments

    HMRC reasons were as follows:

    • The Company was not carrying out a qualifying trade as required by the EIS rules; and
    • It did not satisfy the R2CC condition

    Unsurprisingly, the taxpayer argued the contrary.

    What did Pip do?

    Essentially, these cartoons are glorified adverts for the merchandise that they sell off the back of the programme – soft toys, action figures and clothing. This is not just my cynical mind; it is accepted in the judgement in this case.

    Indeed, the entity in question had acquired the IP from a third party and sought to, and did as a matter of fact, make a series of programmes about the said Pip.

    HMRC argued that this the fact that the entity outsourced pretty much all of its activities to other group companies meant that it was not carrying on a trade.

    Was there (1) a trade?; and (2) was it conducted on a commercial basis?

    The judge held that the business was carrying on a trade and it did not matter that the activities were outsourced to third parties as these activities should be attributed to the principal entity. However, he determined that the trade was not carried on a commercial basis as required by the legislation.

    This was on the general paucity of evidence around the commercial plans for the business and that figures that were presented were “jaw droppingly optimistic” and “total pie in the sky”.

    He stated that it was up to the taxpayer to evidence its intention of a “serious interest in making profits” and there “was no direct evidence from the guiding minds of Pip during this period…”.

    As such, it was found as a fact that although it was conducting a trade it was not doing so on a commercial basis. Hence, HMRC were correct not to provide formal approval.

    Risk to Capital Condition

    As far as I am aware, this is one of the first cases to discuss the important Risk to Capital Condition.

    There is, sadly, not a huge amount of helpful analysis as the tribunal held that the Company failed on the basis that “it is not reasonable to conclude that Pip has objectives to grow and develop its trade in the long-term” due to the reasons above why it had determined that the trade was not conducted on a commercial basis.

    Conclusion

    The case is rather sensitive to the facts as there was a paucity of direct evidence from the mind and management of Pip. This is perhaps surprising as the burden was on the taxpayer to demonstrate the two main issues in point.

    As such, it does little more than to highlight the importance of the new(ish) R2CC condition. The Pip structure had previously been used ‘successfully’ for many years. However, HMRC will clearly revisit those ‘tried and tested’ structures and examine through its new R2CC lens.

    As referred to above, the requirement has significantly reduced the access to capital under the EIS scheme for companies.

    So, for now, like a Boris Johnson speech, Pip is left floundering.

    Link to full case here.

    If you have any queries about this article, or EIS or Seed EIS in general, then please do get in touch.

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