Revenue & Customs Case Notes

Tax Evasion

On 8th February 2012, HM Revenue & Customs announced that it intends to crack down on tax evasion, specifically that of Traders buying and selling goods online. They will also target Electricians who test and certify electrical office equipment. 
EIS tax relief to set you free
HMRC will use new technology to compare Tax Returns made by Traders against transactional information obtained from third parties. Irregularities investigated and proven will invoke penalties and in serious cases, criminal investigation.

This clampdown will benefit Accolade Office Supplies by eliminating rogue traders in the same way that Google did by 'policing' their Product Search price comparison website.

Dealers in legitimate (not counterfeit) products benefited from Google introducing rigorous data standards which 'levelled the playing field' (e.g. bar codes). Now all items displayed on Google Product Search have to show prices inclusive of VAT.

HMRC versus Eclipse Films

A Tribunal has dismissed the appeal of Eclipse Film Partners against HMRC's decision that it was not carrying on a trade that allowed it to qualify for E.I.S. status. 289 wealthy individuals invested £50 million, hoping to receive a £117 million tax refund. 

£44 million was given to the promoter of the scheme and £6 million went to Disney.

Barclays Bank circulated £790 million between various Disney companies utilising a zero-capital weighted basis to engender an economic loss of £50 million. The idea was that this loss would be counter-balanced by a tax refund claimed on a 10 year pre-payment of interest covering the first period of a 20 year cash flow projection.

Revenue & Customs argued that the Eclipse plan was nothing more than a way of offering investors a large amount of tax relief, rather than carrying out any trade.

HMRC has been allocated nearly a billion pounds to crackdown on such complex tax avoidance schemes. They are focussing on closing down aggressive E.I.S. schemes which deny the UK vital funding by getting around the will of Parliament. The Court was told that 40 Eclipse and many similar EIS film schemes are being investigated.

HMRC versus Rangers F C

When investors deal directly with an EIS approved company,...there are no fees. It's even possible for a new EIS shareholder to receive reasonable remuneration as a Non-Executive Director, provided that they own less than 30% of the company.

Fund Managers impose fees on money that clients subscribe for EIS shares, partly to cover their costs in carrying out due diligence before investing in any company.
A measure of their thoroughness will be if Octopus / Ticketus emerge unscathed.
On 14th February 2012, Rangers were forced into Administration over an unpaid tax bill of £9 million. Ticketus, the firm that financed Glasgow Rangers with £24 million has stressed that it bought the club's season tickets and did not lend the money.

Administrators Duff and Phelps revealed on Thursday 16th that the Ticketus money (£24 million) appeared to have gone into the account of a parent company. 

Fund Manager Octopus Protected EIS is continuing to work with the Administrators of Rangers Football Club regarding their investment in Ticketus. Joint administrator David Whitehouse said: "Our understanding is the funds from Ticketus didn't come through the company's accounts so we haven't got visibility on that and that's what we are trying to get."

The loan is not secured against any assets of the club which means Ticketus is unlikely to be repaid in full if Rangers exit administration, according to the BBC.

Octopus owns the £100m company Ticketus in its £500m Protected EIS (Enterprise Investment Scheme) product and used to hold it in its secure VCT (Venture Capital Trust), although Octopus confirmed that this investment was closed months ago.

Octopus' company literature described Ticketus as "an example of a VCT qualifying company that has the characteristics that we will seek for investments. All the investments we make are into companies with lower risk business models".

Ticketus had similar deals with English clubs; Plymouth Argyle, Hull City & Watford.

Shareholder cash goes up in smokeWhyte Fired When Investors' Cash Goes Up In Smoke 

Rangers FC owner Craig Whyte is also Board Secretary at Pritchard Stockbrokers, a business that was recently banned by the Financial Services Authority because of the way it handled their Client Assets. The FSA acted because of serious concerns that the firm had failed to arrange adequate protection for clients’ assets when it allowed client money to be used to fund Pritchard’s own account.

Contrast the above tale of investor woe with Accolade's transparent approach. All shareholders have password controlled on-line access to the Profit-Loss Account. Directors, auditors, employees, AND investors keep a close eye on the profits at a transaction level. All suggestions for enhancing shareholder value are considered.

Tax Relief Lost When EIS Money Was Not 'Employed' In Time

The following Case Notes confirm the necessity of complying with the DETAIL of Enterprise Investment Scheme rules. Always keep in mind that HMRC have the benefit of hindsight when deciding whether E.I.S. requirements have been met.

The time constraint of 'employing' all of the money subscribed can lead to unwise decisions being taken by Commercial Managements. Fund Managers often exert undue pressure as they risk losing all of their relief if one company fails to comply.

Looking out for investor interestsTwo recent Tax Tribunal decisions have clarified when money can be said to have been 'employed' by an E.I.S. company, thereby meeting one of the qualifying rules for capital raised through the issue of new shares under the Enterprise Investment Scheme. 

The two Enterprise Investment Scheme cases in question were Skye Inns + Mr C Richards v HMRC (Upper Tier Tribunal, 2011) and Benson Partnership Limited v HMRC (First Tier Tribunal, 2012). In both Tribunals, Revenue & Customs successfully argued their case.

Both the Benson and Skye Inns cases relate to an earlier set of the EIS rules which had more stringent tests for when a company needed to 'employ' the money raised. Previously, the requirement was for at least 80% of the share capital raised to be 'employed' within 12 months and any remaining funds 'employed' within 2 years. 

Even though EIS rules have changed, Skye Inns & Benson Partnership are relevant on the basis that there is still a need to 'employ' money within a specified period.

In the case of Skye Inns, Christopher Richards subscribed for 3 tranches of shares in a company which proposed to operate pubs. Skye Inns used the money from the first 2 tranches to buy two public houses and HMRC accepted that in these cases EIS qualifying conditions had been met. Mr Richards' 3rd subscription in December 2001 was for about £1.5 million of shares. Skye Inns had intended to use this money to acquire yet another public house, but the proposed purchase fell through and they could not find a suitable alternative. Therefore they deposited the money in a separate account, spending half within a year on improvements to its existing public houses and some more cash on meeting trading losses incurred by the pubs. 

This meant that there was a 30% shortfall in complying with the EIS requirement for 80% to be 'employed' within 2 years. Skye Inns sought to bridge this gap by arguing that its remaining funds had been employed by virtue of being earmarked for future improvements to its pubs and/or meeting future losses of the company.

The Tribunal accepted that the money actually spent had been 'employed' for EIS purposes. The Tribunal also recognised that 'employing' money for the purpose of a qualifying business activity was a wider concept. This included 'earmarking' money for a specific purpose (which did not necessarily have to be a purpose requiring expenditure in a specific period) and keeping money in reserve for that purpose. 

It was down to a question of fact as to whether money had been set aside with sufficient precision for a specific purpose. Could it be said to have been 'employed' in the requisite sense? Skye Inns was unable to demonstrate, as a matter of fact, that it had 'earmarked' funds with sufficient precision. The evidence did not reveal any clear intent to set aside funds for a specific purpose. In fact, a significant cash balance had been retained for over two years after the share subscription. 
Enterprise Investment Scheme relief was therefore withdrawn. 

In the Benson case, the company provided a consultancy and advisory service on construction projects. In 2004 it agreed to manage the building of a dwelling and hired another company, Lebeau, to undertake construction work. Benson would pay fixed amounts to Lebeau once specific construction milestones had been reached. 

It was common ground between Benson Partnership & HMRC that at least 80% of the E.I.S. money had not actually been spent within 12 months. Because of the decision in Skye Inns, Benson Partnership argued that at least 80% of the share money had nevertheless been 'employed' within 12 months. Construction had progressed to the point where Benson Partnership was liable to make payments to Lebeau and had earmarked sufficient funds to meet the liabilities and the 80% test.

The Tribunal accepted that once agreed construction milestones had been reached, Benson Partnership became liable to make payments to Lebeau and at that point in time, a stage payment could be said to have been 'earmarked' (and hence 'employed'). However, the Tribunal was not satisfied that the project had progressed sufficiently for enough stage payments to become due; or that Benson had 'earmarked' any funds for payment to Lebeau. Benson Partnership had not accrued liabilities in its accounts, and there was no other evidence of 'earmarking'. 
Enterprise Investment Scheme tax relief was therefore denied. 

Little comfort as it may be to the two taxpayers involved, decisions in Skye Inns and Benson Partnership provide other companies with some flexibility in spending Enterprise Investment Scheme funds. It is now clear that a company need not actually SPEND all the money raised from the issue of EIS shares within 2 years.

That money could still be 'employed' for a qualifying business activity...if it is precisely 'earmarked'. This spares Directors from the unenviable task of spending money within 2 years to satisfy EIS tests, whether or not such expenditure is prudent. Instead, money could be precisely 'earmarked' for a specific commercial purpose, with the likelihood of still being 'employed' for EIS purposes. 

Growth, even in a harsh environmentAlthough it will ultimately be HMRC's interpretation of fact whether a company has 'earmarked' money with sufficient precision, the following steps should be taken: 
(1) Funds 'earmarking' to be recorded in Board minutes; 
(2) Company accounts to incorporate the 'earmarking'; 
(3) EIS money should be deposited in a separate account. Even when all the above measure have been applied, it is worthwhile advising HMRC, in writing, of the proposed use.

Remember that HMRC have the benefit of hindsight in considering whether the EIS requirements have been met. It will therefore be prudent for any set-aside funds to actually be spent within a reasonable period of time. 

In Skye Inns, the fact that there was insufficient evidence of money being spent in a commercially sensible time was one reason that the taxpayer failed in his appeal. 

In the case of Benson Partnership, the Tribunal also considered whether Bensons carried on an Enterprise Investment Scheme 'qualifying trade'. This means trading on a commercial basis with a view to the realisation of profits, but excluding certain types of proscribed activity. 'Property development' is one such proscribed activity; this being the development of land by a company which has, or at any time has had, an interest in the land. Despite HMRC's submissions to the contrary, the Tax Tribunal concluded that Bensons had not engaged in 'property development', as it had no interest in the land on which Lebeau was carrying out construction work.

HMRC Close Limited-Life Arrangements Loophole

There is soon to be legislation which will disqualify from Enterprise Investment Scheme status; "shares which are issued subject to arrangements whose main purpose is to generate access to relief in circumstances where either the benefit of the investment is passed on to another party to the arrangements, or the business activities would otherwise be carried on by another party".

The legislation is aimed at 'limited-life arrangements', which have been popular with VCTs. This is yet another strand of the Government's strategy to clamp down on aggressive tax planning by Venture Capital Trusts. HMRC is determined that EIS should be used for its intended purpose... wealth creation via investment in small scale business rather than as a method of tax avoidance.

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Inaccessible Pinnacle 
Sgurr Dearg 
Isle of Skye 

Photo taken by Bill Gray, 
Managing Director @ Accolade, 
Sunday May 1st 2011

"He either fears his fate too much,
Or his deserts are small,
That puts it not unto the touch, 
To win or lose it all."

Extract from 'My Dear and Only Love' written in 1643 by James Graham, Marquis of Montrose. 

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An Enterprise Investment Scheme is an appropriate venture for UK income tax payers who can self-certify being a sophisticated investor.
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