Blackburn and Anotherr v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE PETER SMITH |
| Judgment Date | 19 February 2008 |
| Neutral Citation | [2008] EWHC 266 (Ch) |
| Docket Number | Case No: CH/2007/APP/0298 |
| Court | Chancery Division |
| Date | 19 February 2008 |
[2008] EWHC 266 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Peter Smith
Case No: CH/2007/APP/0298
Patrick Way (instructed by Fishburns) for the Appellants
Michael Gibbon (instructed by Solicitor for HM Revenue & Customs) for the Respondents
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Hearing dates: 30 th and 31 st January 2008
Approved Judgment
Peter Smith J:
INTRODUCTION
1. This is an appeal by the Appellants from a decision of the Special Commissioner Dr John Avery Jones CBE released on 28 th March 2007.
2. The appeal concerns the availability of relief (“EIS Relief”) under the Enterprise Investment Scheme pursuant to the Taxation of Chargeable Gains Act 1992 (“ TCGA 1992”) in respect of shares issues made by Alan Blackburn Sports Limited (“the Company”) between 1998 and 2000 to Mr Alan Blackburn (“Mr Blackburn”).
3. This case has been extremely well presented by both sides both in the preparation and the written and oral presentations and I am grateful for that assistance.
BACKGROUND
4. The EIS is a tax incentive scheme which encouraged individuals such as Mr Blackburn to invest in unquoted trading companies such as the Company itself and affords the investors various forms of tax relief where they acquire shares (EIS shares) by such companies. In this case the appeal was concerned with the availability to Mr Blackburn of deferral relief in respect to the EIS shares issued to him by the Company. Deferral relief takes effect so that Capital Gains Tax that would otherwise have arisen on a disposal by an individual of chargeable assets is deferred until the EIS shares are disposed of. Mr Blackburn invested a total of approximately £1,200,000 in the Company by a total of 10 subscriptions and issues of shares between September 1998 and January 2001. This reflected Capital Gains that he had made in respect of other disposals during the period and as I have said above the object of the EIS investment was to invest under that scheme with a view to deferring the Capital Gains Tax liability which would otherwise accrue on the disposal of other assets.
THE COMPANY
5. The Company was acquired by Mr Blackburn off the shelf with the intention of being a qualifying company under the EIS. He and his wife were the only directors and his wife was in addition the Company Secretary. It was submitted by Mr Way who appeared for Mr Blackburn and the Company that it was a classic example of an archetypal one man band; the Company being very much the alter ego of Mr Blackburn. It was also conceded from time to time Mr Blackburn's paperwork was not prepared contemporaneously and was prepared when he and his accountant found the time to do it and not always instantaneously. I think with respect to Mr Way that understates the position. The Special Commissioner found that documents had been put forward which were backdated. All of the documents were apparently prepared by the accountant who unfortunately is now dead.
6. Mr Blackburn over a period of time invested money informally with the Company without a contract of allotment or a share application. Mr Way submitted this was entirely normal state of affairs in the circumstances of the Company where Mr Blackburn was the sole investor and he and his wife were sole directors. It might be the situation that small companies do not carry out the formalities required from time to time but the Court has to be wary of enabling people to be in a better position by inadequate recording and dealing with matters than those who record them at the time they happen.
BASIS OF APPEAL
7. The appeal is based on a decision against the refusal of HMRC to issue forms EIS2 and EIS3 in relation to 10 EIS1 forms submitted by Mr Blackburn on 1/10/02. The Special Commissioner refused the appeal against that refusal in principle insofar as it related to 7 of the EIS1 forms and allowed an appeal in principle insofar as it related to 3 of the EIS1 forms. Attached to this judgment is a schedule in respect of the share issues and the determinations in each case which was helpfully provided by Mr Way.
8. As appears from the schedule ultimately all of the monies which Mr Blackburn provided to the Company were used by it to discharge his liability for share subscriptions. Of course the Company used the expenditure for company purposes.
9. Mr Blackburn provided the money to the Company informally. It is suggested on behalf of Mr Blackburn and the Company that the consequence of that is that without a contract an investor such as Mr Blackburn becomes a volunteer to whom technically speaking the Company owes a debt. When the Company then issues shares to that investor (by writing his name in a share register a little later) then the “technical” debt owed to the investor as a volunteer is extinguished.
10. The Special Commissioner has held that in the situation under review whenever the Company's share register was written up after Mr Blackburn had put money into the Company without a contract then there was a return of value to Mr Blackburn in that his (to use the Appellants' words) “technical” debt was repaid. That has the effect the Special Commissioner determined of denying him EIS relief under the “value received” provision.
THE ISSUE
11. It is submitted on behalf of Mr Blackburn and the Company that he has received no value in any real sense and that he is out of pocket in the circumstances by reference to the entirety of the money that he has put in to the Company. Thus it is submitted that even though the technical debt is written off as a matter of law it is the case that he no value back from the Company as part of this exercise so it is submitted there is no room for EIS relief to be denied in the circumstances.
12. The Special Commissioner was required to make detailed findings of fact before the law could be applied. Having heard all evidence the Tribunal reached factual conclusions which as will appear are materially different to the contentions in various of the 10 EIS applications.
NATURE OF APPEAL
13. The forum for fact finding is the Specialist Tax Tribunal and an appeal to the High Court only lies on points of law unless the Appellants argue that the Special Commissioner's factual findings can be challenged as erroneous in point of law under the principle of Edwards v Bairstow [1956] AC 14. The Appellants make no such submission. Therefore the fact findings of the Special Commissioner are definitive for the purpose of this appeal.
14. The Special Commissioner made three determinations:-
1 Where there was a delay in writing up the share register there was a disqualification of the EIS requirements on the basis that this delay meant that the notional (the Appellants' words) discharge of the debt created by the paying of money to the Company was a receipt of value in Mr Blackburn's hands which is prohibited under TCGA 1992 Schedule 5 B paragraph 13.
2 That where there was a discharge of that debt on the issued shares this was a breach of the requirements “all the shares comprised in the issue are issued in order to raise money for the purpose of a qualifying business activity”.
3 That various share issues which are otherwise separate and which taken in isolation would qualify should be treated as being comprised in a single issue in relation to which the qualifying rules mentioned in paragraph 13 applied thus tainting all of the shares issued treated by the Special Commissioner as one single share issue.
FIRST ISSUE – VALUE RECEIVED
15. The Special Commissioner held that the value received rules applied to issues (1), (6) and (10) in relation to all of which Mr Blackburn paid money into the Company before the share register was written up.
16. It is necessary to consider the value received provisions. The legislation contained various checks and balances to protect against abuse and the value received rules are included amongst those. The purpose of the scheme was to encourage investment. The purpose was therefore to attract fresh money and any device or arrangement which did not attract new money was not allowable. Take a simple example. A Director could not utilise his pre-existing loan account in his favour with a Company to discharge a debt that would fall on him for a subscription for shares.
17. The Appellants contend that when the monies were utilised to pay for the share subscription even though the money had been provided earlier to the Company that debt was a “technical” debt. Accordingly it is submitted Mr Blackburn received nothing back from the Company as a matter of fact and Mr Blackburn has been denied relief on the basis that the value received rules apply “whenever there is a delay in writing up a share register unless there has been some form of contract entered in to beforehand”.
18. The Appellants submit that the Special Commissioner's approach is not in accordance with an earlier decision of the Special Commissioner, and Inwards v Williamson (Inspector of Taxes) [2003] STC (STD) 355.
RELEVANT PROVISIONS
19. The relevant provisions are as follows:-
“The investor makes a qualifying investment for the purposes of this Schedule if:
(a) eligible shares in a company for which he has subscribed wholly in cash are issued to him at a qualifying time …
(b) the company is a qualifying company in relation to the shares
(c) at the time when they are issued the shares are fully paid up (disregarding for this purpose any undertaking to...
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