Legend of Golden Temple fails SEIS requirementsby
A director's ever-changing plans to create virtual religious sites ended in failure, with all of the 10 companies set up failing to meet the risk-to-capital condition and the trading condition was a disqualifying arrangement, while one company didn’t meet the share requirement.
One could argue that the most significant issues raised by the case of Legend of Golden Temple and others are around the operation of the UK’s tax tribunal system rather than the underlying Seed Enterprise Investment Scheme (SEIS).
The SEIS legislation embodied in Part 5A Income Tax Act 2007 could be seen as an extension of the longer-established EIS rules in Part 5 and its application by HMRC.
Given the exotic title, you might almost have expected to see the taxpayer represented by Indiana Jones with a plot suitably far-fetched particularly as the cases centre on movies.
In fact, Anshul Doshi, the chartered accountant operating as a media and retail industry entrepreneur who was behind a series of 10 SEIS schemes represented himself, presumably because no lawyer would have risked done so on a no-win, no-fee contingency basis.
We are grateful to Pinsent Masons' clear explanation that costs in first tier Tribunal (FTT) cases are typically borne by the respective parties, which might explain how this apparently frivolous challenge was allowed to take up a great deal of limited legal resource and public funding.
Indeed, while one should never discourage genuine appellants from defending their position in a court of law, many might regard this as a prime example of a case where the full costs should be borne by an appellant.
While employed as an executive by the Prime Focus Group, Doshi set up 10 companies to develop audio-visual material that he hoped to use to pitch to attend famous religious sites in India and Nepal.
In 2017, he applied for investments of £150,000 per company to qualify under the SEIS provisions and received advance assurance from HMRC.
However, his plans were based on loose, often verbal agreements; there were regular changes in the proposals, payments made to associated companies and contradictions and discrepancies in record-keeping – none of which is likely to be acceptable.
Indeed, the purpose had changed by the time of the formal proposal in January 2020, which was refused by HMRC before Covid-19 intervened further complicating the plans and leading to 10 connected appeals before the FTT.
Technicalities relating to the issuing of compliance certificates might have scuppered the claims but these pale into insignificance compared with other failures.
To support its rejections, HMRC submitted that the 10 appellants each failed on three separate grounds:
- they do not satisfy “the risk-to-capital condition” in Section 257AAA ITA 2007;
- they do not satisfy “the trading condition” in Section 257DA ITA 2007; and
- they were engaged in “disqualifying arrangements” as set out in Section 257CF ITA 2007.
In relation to the eighth appellant, HMRC also submitted that the “the shares requirement” in Section 257CA ITA 2007 was not satisfied.
In response, the appellants claimed that they met all legislative conditions and were entitled to issue compliance certificates to enable investors to claim SEIS relief.
The judge concluded that HMRC’s submission that there was artificial fragmentation and that this artificial fragmentation was motivated by the desire to obtain more SEIS relief than would have been possible had there been just one company was correct, which would be enough to dismiss all of the appeals.
Throughout the three years immediately following the issue of shares, each appellant must be carrying on a qualifying trade, and that qualifying trade must not consist (wholly or substantially) of excluded activities.
The judge was not persuaded that any of the appellants met the trading condition by demonstrating that their trade was not an excluded activity and they were unable to provide adequate supporting evidence.
HMRC submitted that a number of Prime Focus companies involved in the arrangements were connected to Doshi by way of his employment by the Prime Focus group at the time that the shares were issued, and further that Doshi was connected to each of the appellants as their director.
The term “arrangements” covers an incredibly wide variety of steps, agreements, plans or proposals. As such, setting up the appellants, with the stated intention to use the Prime Focus group of companies would fall into the category of “disqualifying arrangements”.
It was noted that the first share issues for two of the companies would not have fallen foul of this provision.
The legislation provides that all shares of the same class issued on the same day are the same issue, that all shares of the same issue must be subscribed for wholly in cash and fully paid up at issue.
HMRC argued that as one subscriber admitted to pay £10,000 of the £20,000 due, none of the shares in that issue of shares qualified meaning that the eighth appellant’s appeal must fail.
Investigation into bank statements found that each of the other companies also issued shares prior to receiving full payment, meaning that had the judge not already dismissed nine of the appeals on other grounds, they would have failed anyway, since they did not meet the shares requirement.
The appellants have been granted the right to appeal but may be wise to cut their losses.