First-tier Tribunal Upholds HMRC Decision in SEIS Case, Emphasizing the Importance of Meeting Legislative Criteria

Introduction

In the case of Legend of Golden Temple Limited & Ors v The Commissioners for HMRC, the UK First-tier Tribunal (Tax Chamber) was tasked with determining the eligibility of ten appellants, linked by a common director, for the Seed Enterprise Investment Scheme (SEIS) relief. This decision is an incisive examination of certain requirements under SEIS, including the Risk-to-Capital condition, the Trading condition, and the presence of Disqualifying arrangements, among others.

Key Facts

The case revolves around the appellants’ intentions to develop audio-visual content related to various religious sites in India and Nepal, and subsequent fundraising efforts through share issuance for which they sought SEIS relief. However, HM Revenue and Customs (HMRC) refused the applications on the grounds that the appellants did not fulfill specific conditions laid out in the Income Tax Act 2007. The key issues contested included whether the appellants met the Risk to Capital condition, observed the Trading requirement, and whether there were any Disqualifying arrangements which could preclude them from the relief.

Legal Principles

Risk to Capital Condition

Under Section 257AAA ITA 2007, the court scrutinized whether the appellants demonstrated long-term growth objectives and a significant risk of loss of capital exceeding the net investment return. The Tribunal rejected the notion put forth by the appellants of their objective to create content in perpetuity, finding instead the main aim was the creation of one or two films. The Tribunal concurred with HMRC’s view of artificial fragmentation of the appellants’ structure to secure more SEIS relief, which did not suggest a goal of trade growth or risk consistent with Section 257AAA.

Trading Condition

In line with Section 257DA ITA 2007, a qualifying trade must be conducted on a commercial basis with the aim of making a profit. The Tribunal noted that the appellants had commissioned considerable additional work without adequate funds, relying on good relationships rather than commercial transactions. With sparse account activity suggesting no continued trade, the Tribunal held that the appellants fell short of demonstrating they traded throughout the necessary period.

Disqualifying Arrangements

Section 257CF ITA 2007 outlines certain arrangements which, if present, render a share issue ineligible for SEIS relief. The appellants argued that there were no such arrangements. However, the Tribunal found that the Prime Focus group companies and Mr. Doshi were connected parties, and the payments to these connected entities satisfied the conditions for ‘disqualifying arrangements’.

Shares Requirement

Lastly, under Section 257CA ITA 2007, shares issued must be fully paid up at the time of issue. Discrepancies in the subscription payments for shares undermined the Eighth Appellant’s compliance, as one of the investors had not paid the full subscription amount.

Outcomes

The Tribunal dismissed the appeals of all ten appellants. It found that the risks associated with the investments were not in line with statutory requirements and that the appellants did not maintain a qualifying trade throughout the requisite period. Moreover, arrangements related to the issuance of shares and the use of investment funds were deemed disqualifying, and the shares issued were deemed not to have been fully paid up due to partial non-payment from an investor.

Conclusion

In conclusion, the Tribunal’s decision underscores the rigorous application of legislative conditions for eligibility under the SEIS. The case serves as a cautionary tale for companies seeking SEIS relief and emphasizes the importance of entities meeting specific legislative criteria, particularly concerning the intention for long-term growth, commercial trading continuity, and the absence of arrangements that could potentially preclude them from reliefs, along with the need for shares to be fully funded upon issue. For practitioners, this case elucidates the boundaries within which SEIS reliefs operate, reinforcing the significance of complying with statutory requirements to qualify for tax advantages.