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SEIS scheme failed due to wrong form submission

31st Oct 2017
Tax writer
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Andy Keates analyses the third case in two years which concerned a failed claim to the Seed Enterprise Investment Allowance (SEIS).

In all three cases, the claims went wrong for the same reason and it really is one of those “there but for the grace of God go I” situations: they used the wrong form!

Innovate Commissioning Services Ltd (TC06152) is the latest of a trio of cases to come before the First Tier Tribunal (FTT) where permission to use SEIS was refused. It follows the cases of X-Wind Power Ltd and GDR Food Technology Ltd.

How SEIS should work

SEIS can apply where investors subscribe for new shares in a start-up company: where permission is granted to use SEIS the investors can claim income tax relief at a rate of 50% on the capital subscribed, and CGT relief at 50% of any gain reinvested.

The legislation (ITA 2007, Pt 5A) says that relief can only be given if the investor has received a “compliance certificate” from the company; and, in turn, the company can only issue certificates if it has received authority from HMRC.

Getting that authority involves the company making a “compliance statement” to HMRC using form SEIS1. One of the compliance tests is that no “previous other risk capital scheme investments” have been authorised for the company (ITA 2007, s 257DK).

What went wrong

Instead of submitting form SEIS1, each of the three companies had submitted form EIS1. This form invites HMRC to authorise investments under the Enterprise Investment Scheme (EIS), a more general risk capital scheme, which only attracts tax relief at 30%. So, when HMRC processed the forms, it only authorised the shares for EIS – which, in turn, permanently disqualified the company from using SEIS!

The problem is made worse by the fact that the legislation has no mechanism for withdrawing or changing a compliance statement once issued.

X-Wind at Upper Tribunal

In July 2017 the Upper Tribunal (UT/2017/0290 TCC) heard X-Wind’s appeal against its loss before the FTT. There were two arguments:

  1. The EIS1 form hadn’t been a “compliance statement” for EIS purposes since it was meant to be one for SEIS purposes;
  2. The company could make a supplementary claim under the auspices of TMA 1970 s.42(9) in order to rectify its position.

The judge rejected both arguments. 

  1. The form the company submitted “was, on its face, a compliance statement for the EIS which satisfied the [statutory] requirements … the company’s intention, even if … negligent, does not prevent it from having provided a compliance statement”. Therefore, HMRC was right to authorise EIS, which in turn blocked SEIS.
  2. There simply is no way to use TMA 1970, s 42(9) in this case. The compliance statement is not itself a claim, so none of the claims mechanisms in the Taxes Management Act 1970 apply. For there to be any way of unpicking the foul-up, it would have to be found within Part 5 of ITA 2007.

Innovate’s appeal

This company thought it might have a better chance than either of the companies in the preceding cases since their lawyers had written previously to HMRC seeking advance assurance that SEIS would be available.

HMRC had agreed that, based on the information given, all would be in order, and invited the company to submit form SEIS1. Surely, the company argued, HMRC could have seen that it was a simple error and that the authorisation sought was actually for SEIS.

In X-Wind, the tribunal judge had said it was a pity HMRC hadn’t asked more questions. The problem is, in the case of Innovate HMRC did ask more questions! On 6 August 2015 HMRC wrote to the company pointing out that, while their earlier assurance requests had referred to SEIS, the actual form submitted had been for EIS. The HMRC Officer asked: “please either provide the correct SEIS1 or confirm the EIS1 should be processed”. When no response ensued, on 23 September 2015 HMRC issued a form EIS2 (granting authority to issue EIS certificates) to the company’s known address of 1 Mariner Court.

However, chaos intervened again: on 25 August 2015 the company made a change of registered office (to 5 Mariner Court) and claimed never to have received HMRC’s letter of 6 August 2015. Certainly, the EIS2 form issued on 23 September was returned to HMRC by the Post Office. It was only in January 2016, following a number of phone calls and emails, that a copy of the EIS2 reached the company.

The company tried to submit a fresh form SEIS1, but HMRC said they could not accept it because of the previous EIS1. HMRC could not simply substitute one form for the other because there is no statutory power to do so.

The Innovate decision

The fact that Innovate had asked for advance assurance on SEIS didn’t help them. The company “was entitled to change its proposal to claiming EIS relief rather than SEIS”, and HMRC was within its rights to proceed with an ostensibly valid form, especially when they received no response to their letter asking that very question.

The judge also looked a little deeper into the trigger for EIS being authorised. HMRC had always taken the position that the effective “point of no return” was when they issued EIS2 authorising the production of compliance certificates.

However, on closer examination it appears that they were not going far enough: the strict wording of the legislation suggests that what matters is the submission by the company of a compliance statement (ie the EIS1), not HMRC’s response to it (ITA 2007, s.257DK(2)(b) applies). Following the Upper Tribunal’s comments on X-Wind, it is also clear that even if that EIS1 was sent in error, it is enough to do the damage.

Once again, the company’s appeal failed: only EIS relief at 30% is available, not SEIS relief at 50%.

And the moral is…

Use the right form! A company should use an experienced and qualified adviser who can make sure the right form is used.

If you are an adviser, the moral is even starker: unless you are 100% comfortable with handling SEIS claims, either call in a specialist or make sure your PI cover is up to scratch. 

Replies (2)

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By ianthetaxman
01st Nov 2017 11:11

Generally, advance assurance is requested for both SEIS and EIS at the same time on the same application unless it's specifically stated that this isn't the case.

Perhaps this has been part of the reason for the confusion when preparing the formal compliance statement in these cases?

Previously, assurance had to be sought separately but in recent years, a combined form is used.

I agree that it's vital to ensure that the correct paperwork is submitted, so that it matches the facts.


Thanks (0)
By scout pet
01st Nov 2017 13:30

I almost made the same mistake. I was fortunate that the Inspector of Taxes was eagle eyed and phoned to query whether it was EIS or SEIS. I was pointed to the right SEIS form and this was duly resubmitted.

All ended well and tax forms and repayments were processed efficiently.

Thanks (1)