The Enterprise Investment Scheme (EIS) and Seed EIS (SEIS) are fiendishly complex tax reliefs, and just complying with the detailed statute requirements can be difficult. Imagine the frustration when HMRC introduced requirements for SEIS which simply aren’t there in law.
Oxbotica Limited v HMRC  UKFTT 308 (TC06538) concerned an application for SEIS relief by investors in a technology company. Oxbotica was a spin-off from Oxford University which followed an established pattern in having been set up with a relatively small amount of share capital, with the offer of more substantial loan finance to be provided by the University. The company was formed with £1,000 of share capital, and three subscribers sought SEIS relief on their combined investment of £316, representing 31.6% of the company’s share capital.
HMRC first declined the company’s request to issue SEIS compliance certificates on the grounds that “subscriber shares, issued on formation of the company, rarely qualify” for SEIS. That may well be so, but I would hope that HMRC would try to establish the actual facts of the case before declining the company’s request to issue compliance certificates. Evidence of the shares having been fully subscribed in cash was provided.
HMRC’s next line of attack was that the amount of money raised by the share issue must be of “meaningful use to the company in its business”. There is no minimum statutory investment within the SEIS legislation. There is a maximum per investor (£100,000), and indeed within the EIS rules there is a minimum (£500), but this case concerned SEIS, and the legislation does not require a share subscription to be above a certain level to qualify for tax relief.
Purpose of share issue
HMRC’s response was that SEIS was designed “to allow smaller investors to make investments via crowd-funding websites”. That may well be true but it does not alter the fact that the legislation does not say as much.
Further, HMRC asserted that as Oxbotica had already secured debt finance from Oxford University, the small amount of capital raised by the share issue meant that the ‘real’ purpose of the share issue was not to raise money for the purpose of a qualifying business, but to secure capital gains tax relief on a future sale of shares. HMRC also contended that the money raised had been used to defray legal fees. However, it was subsequently accepted that the funds had been spent on general business expenses.
The company sought a review of HMRC’s decision under the statutory review system. The review letter was described by the tribunal as “poorly drafted”, but its decision upheld HMRC’s position in denying Oxbotica’s request to issue SEIS compliance certificates.
The FTT judge had little difficulty in upholding Oxbotica’s appeal on the grounds that there was no statutory minimum for an investment under SEIS or a requirement for an issue of shares to be the only means by which funds are raised for the business. The fact that a loan offer had already been provided by Oxford University was, therefore, no grounds to deny relief. Money had been raised by the share issue and those funds had been spent within the company’s business.
The third strand of HMRC’s argument, ie that the purpose of the share issue was a gateway for capital gains tax relief, was likewise dismissed on the grounds that CGT relief is only in point if the business is successful, and wishing an investment to succeed is likely to be in the mind of every investor. HMRC had not argued that the arrangement was uncommercial, or that the ‘tax avoidance’ condition in the income tax relief rules was met (there is no equivalent condition in the capital gains tax provisions).
One of the most interesting aspects of this case is HMRC’s focus on what it believed to be the purpose behind the SEIS legislation, at the expense of the statute itself. The judge observed: “[HMRC’s] focus was again and again and again on the articulation in their own guidance that the intention of parliament when enacting the legislation was to facilitate the raising of ‘meaningful’ amount of money by reference to the business undertaken by the fund raiser…”.
This is a good reminder that HMRC guidance is only its view of the legislation: in many cases the guidance is helpful but it is no substitute for the law itself.
Bizarrely, HMRC also seemingly thought it reasonable that it should be the arbiter as to whether an amount of money was ‘meaningful’ in the context of a business. On that basis, as the judge observed: “SEIS would become relief entirely at the discretion of HMRC”.
I wonder how this case ever came before the tribunal. You really couldn’t make it up, but HMRC thought it could.