Key Facts
- •Coconut Animated Island Limited (CAIL) appealed a First-tier Tribunal (FTT) decision refusing SEIS compliance certificates for shares issued between March 19, 2018, and April 5, 2018.
- •HMRC refused due to concerns about the 'risk-to-capital condition', 'qualifying company requirement', and 'disqualifying arrangements'.
- •The FTT dismissed CAIL's appeal, finding that Condition A of the 'disqualifying arrangements' test (section 257 CF(3) Income Tax Act 2007) was met.
- •CAIL argued that CHF Media Group Limited (CHF Group), which was heavily involved in CAIL's operations, was not a 'party to the arrangements' as required for Condition A.
- •The majority of funds raised by CAIL were paid to CHF Entertainment Limited (CHFE), a member of the CHF Group, under a production services agreement (PSA).
Legal Principles
The definition of 'arrangements' in section 257HJ Income Tax Act 2007 is widely drawn but requires 'sufficient unity' between component parts.
Crossland v Hawkins [1961] Ch 537, Jones v Garnett [2007] UKHL 35
'Arrangements' under section 257CF must have a main purpose to secure a qualifying business activity and SEIS relief for investors.
Section 257 CF Income Tax Act 2007
A person is a 'party to the arrangements' if they have sufficient involvement at the relevant time, participating in the arrangements' purpose; this can be broader than direct involvement in devising the arrangements.
Section 257 CF(6) Income Tax Act 2007
Condition A (section 257 CF(3)) is met if, as a result of spending funds from a share issue on a qualifying trade, a majority of the funds are paid to a 'relevant person' during the arrangements.
Section 257 CF(3) Income Tax Act 2007
Outcomes
CAIL's appeal was dismissed.
The Upper Tribunal (UT) agreed with the FTT that Condition A of section 257 CF(3) was met because the arrangements for issuing shares included CHFE, a 'relevant person' due to its significant involvement. The payments to CHFE under the PSA were considered part of the arrangements, even though they were under an arm's length commercial contract.