CHF Pip! Plc
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 October 2021 |
| Neutral Citation | [2021] UKFTT 383 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 383 (TC)
Judge Nigel Popplewell
Income tax – EIS – Qualifying business activities – Was a trade being carried on – Yes – By the appellant – Yes – On a commercial basis with a view to profit – No – Was it carrying on excluded activities – No – Did it meet the risk to capital condition – No – Appeal dismissed.
[1] This appeal concerns the Enterprise Investment Scheme (“EIS”) and more particularly the respondents (or “HMRC”) decision to refuse to grant authority to the appellant (“Pip”) to issue compliance certificates to its shareholders under section 204(1) of the Income Tax Act 2007 (“ITA 2007”) relating to various tranches of shares issued between 17 May 2018 and 14 November 2018 (“the share issues”).
[2] Broadly speaking, there are two technical conditions which Pip needed to satisfy on the dates of the share issues (the “issue dates”). Firstly it needed to carry on or to exist for the purposes of carrying on a qualifying trade (the “qualifying trade issue”). Secondly it needed to satisfy the “risk to capital” condition (the “risk issue”). Pip says that it did carry on and existed for the purposes of carrying on a qualifying trade and that it satisfied the risk to capital condition. HMRC do not agree.
[3] At the hearing Ms Brown Miss Sheldon and Miss Hughes made clear helpful and eloquent submissions, both orally and in writing. I am grateful for those submissions which have helped me considerably, and I have taken the submissions into account (along with all of the evidence) even though, in reaching my conclusions I have not necessarily referred to each and every argument and item of evidence in detail.
[4] Following the hearing I sought submissions on the presumption of regularity and its application to certain issues in this appeal. Whilst I was awaiting those submissions, the Court of Appeal issued its decision in Ingenious Games LLP v R & C Commrs [2021] BTC 24 (“Ingenious”). Given its implications for the qualifying trade issue I then sought submissions on its relevance. I have received both parties' submissions on both issues for which I am most grateful and which I have taken into account in reaching my decision.
[5] I have set out the relevant legislation in Appendix 1 to this decision. It is copious and complicated. But some of this legislation is more relevant than others, and I set out below that which is relevant to the issues in this appeal. It must be said that there is little disagreement between the parties on the relevant legislation although they have dealt with the risk issue before the qualifying trade issue, whereas I have considered the qualifying trade issue first and only then, if I decide that Pip did carry on a qualifying trade (or existed for the purposes of doing so) (the “trading requirement”) shall I go on to consider the risk issue. References to sections in this decision are to sections in the ITA 2007.
[6] Under section 174 the relevant shares must be issued to raise money for the purpose of a qualifying business activity which means, in the context of this appeal, that Pip needed to carry on a qualifying trade on the issue dates. Furthermore under section 181 Pip needed to have existed wholly for the purposes of carrying on one or more qualifying trades for, effectively, a three year period starting on the issue dates.
[7] Qualifying trade is defined in section 189 as a trade which is conducted on a commercial basis and with a view to the realisation of profits, and which does not at any time in that three year period consist wholly or as to a substantial part in the carrying on of excluded activities.
[8] One of these excluded activities is receiving royalties and licence fees. However there is then a safe harbour for Pip if it was receiving royalties or licence fees if those royalties and licence fees are attributable to the exploitation of relevant intangible assets. To be a relevant intangible asset the whole or greater part in value must have been created by Pip, and where the intangible asset is intellectual property, its creation must have been in circumstances where the right to exploit the intellectual property vested in Pip.
[9] I have set out the risk to capital condition in section 157A below.
(1) The risk-to-capital condition is met if, having regard to all the circumstances existing at the time of the issue of the shares, it would be reasonable to conclude that–
- the issuing company has objectives to grow and develop its trade in the long-term, and
- there is a significant risk that there will be a loss of capital of an amount greater than the net investment return.
(2) For the purposes of subsection (1)(b)–
- the risk is to be determined by reference to a loss of capital, and the net investment return, for the investors generally,
- the reference to a loss of capital is to a loss of some or all of the amounts subscribed for the shares by the investors, and
- the reference to the net investment return is to the net investment return to the investors (whether by way of income or capital growth) taking into account the value of EIS relief.
(3) For the purposes of subsection (1) the circumstances to which regard may be had include–
- the extent to which the company's objectives include increasing the number of its employees or the turnover of its trade,
- the nature of the company's sources of income, including the extent to which there is a significant risk of the company not receiving some or all of the income,
- the extent to which the company has or is likely to have assets, or is or could become a party to arrangements for acquiring assets, that could be used to secure financing from any person,
- the extent to which the activities of the company are subcontracted to persons who are not connected with it,
- the nature of the company's ownership structure or management structure, including the extent to which others participate in or devise the structure,
- how any opportunity for investment in the company is marketed, and
- the extent to which arrangements are in place under which opportunities for investments in the company are or may be marketed with, or otherwise associated with, opportunities for investments in other companies or entities …
[10] I have set out extracts from some of the cases to which I was referred in Appendix 2 to this decision. Those cases are defined in that Appendix and I have used those definitions in the body of this decision.
[11] The basic contentions between the parties are these. Ms Brown submits that Pip carried on a trade which was the creation development production marketing and exploitation of intellectual property namely a children's television series. The commercial exploitation of this intellectual property started with the children's television series which was, effectively, an advertisement, out of which sprang a number of financial opportunities, namely the production of toys, games, Christmas specials, clothing, DVD's etc. which were promoted via a specialist website. This trade had been carried on a commercial basis with a view to profit even though, for commercial reasons, Pip had not exploited the intellectual property itself, given that it did not have the expertise to do so, but had outsourced that exploitation by entering into contracts with companies in the CHF group. It is, is a matter of principle, possible to carry on trade even if all such activities have been outsourced. Pip was entitled to carry out its activities without employing individuals directly and was trading in its intellectual property through the use of subcontractors. But in any event, it had sufficient capability to independently control and supervise the outsourced activities. It was not carrying out excluded activities as it was not receiving royalties or licence fees. But if that is wrong, then those royalties and licence fees fell within the safe harbour in section 195 since Pip had the right to exploit the intellectual property in Pip Ahoy!, as it had created the whole or greater part in value of that intellectual property. No other person was in a position to exploit that intellectual property as no other person had the right to that intellectual property. Pip's trading satisfied the risk to capital requirements
[12] Miss Hughes submits that Pip had next to no independent capabilities of its own; it had no employees and all the activities which Pip carried on were undertaken by others (members of the CHF group); it subcontracted all its ostensible trading activity to third parties and it is not clear what, if anything, Pip actually did. It did not produce the television series nor did it monetise that series through merchandising and licensing. CHF group companies did that. Any actions undertaken by Pip were minimal and Pip was not in control of any business decisions taken as regards the trade since these were taken by CHF group companies. Contrary to the assertions made by Pip, it had no capability to independently control and supervise the outsourced activities. Pip was involved in investment rather than trading activity since all it did was to fund the development of its intellectual property. The income generated by this intellectual property was by receiving royalties and licence fees and thus an excluded activity which did not fall within the safe harbour of section 195 since Pip did not create the greater part of its value in the intellectual property as it had outsourced the animation production activities to CHF and it was CHF group companies and not Pip that had created the value. If, to the contrary, Pip was carrying on a trade, it did not satisfy the risk to capital requirements.
[13] I was provided with a bundle containing a considerable number of documents. I was also provided with a witness statement of Charles William Ward (“Mr Ward”) who also gave oral...
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