Coconut Animated Island Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 August 2022 |
| Neutral Citation | [2022] UKFTT 303 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 303 (TC)
Tribunal Judge Tony Beare, Mr Duncan McBride
First-Tier Tribunal (Tax Chamber)
SEED enterprise investment scheme – Appeal against refusal to authorise the issue of a compliance certificate in relation to certain issues of shares made by the Appellant – Held that the refusal was justified – Although (i) having regard to all the circumstances existing at the time of each share issue, the Appellant had objectives to grow and develop its trade in the long term (so that the risk-to-capital condition requirement (ITA 2007, s. 257AAA) was satisfied) and (ii) the Appellant did not carry on ‘excluded activities’ by virtue of receiving royalties or licence fees because those royalties and licence fees were attributable to the exploitation of ‘relevant intangible assets’ (so that the trading requirement (ITA 2007, s. 257DA) was met), the arrangements pursuant to which the Appellant had issued the relevant shares and applied the proceeds in the course of its trade were ‘disqualifying arrangements’ (ITA 2007, s. 257CF), with the result that the general requirements in respect of the relevant shares were not met – Appeal dismissed.
In Coconut Animated Island Ltd [2022] TC 08575, the FTT found that the no disqualifying arrangements requirement was not satisfied and dismissed the appellant’s appeal against HMRC’s refusal to authorise the issue of SEIS compliance certificates.
This was an appeal against HMRC’s refusal to issue compliance certificates in respect of shares issued by Coconut Animated Island Ltd (the Appellant) between 19 March and 5 April 2018.
The Appellant was a company incorporated to exploit the intellectual property rights to a pre-school animation programme (Coconut Bay) and related spin-offs. Coconut Bay had been conceived by Mr Fenna, the creative director of a member of the ‘CHF Group’ of companies (CHFE) which operated a fund (the CHF Fund) that invited third party investors to subscribe for shares in special purpose investee companies that would hold the intellectual property rights to a particular concept or show. The model was for investors to acquire 50% of the voting rights and equity and for the remainder to be held by the holding company of the CHF Group (CHF MGL). The Coconut Bay concept was approved and the Appellant was incorporated and entered into an agreement with Mr Fenna (the original creator of the concept who later became a director of CHFE) under which Mr Fenna assigned his intellectual property rights to the Appellant for £1 plus 10% of net profits. The Appellant later entered into a production services agreement (PSA) with CHFE for the provision of its employees and sub-contractors to produce ‘webisodes’ (that would be released on YouTube and would substantially increase the value of the intellectual property). The Appellant obtained advance assurance of qualifying SEIS status and issued shares to CHF Fund investors on eleven separate occasions between December 2017 and 5 April 2018. Issue of compliance certificates for the share issues that took place before 15 March 2018 (when the risk-to-capital condition in ITA 2007, s. 257AAA was introduced by FA 2018) was authorised but refused in relation to subsequent share issues.
Initially HMRC refused to authorise the issue of compliance certificates for the later issues on the grounds that the risk-to-capital condition was not satisfied but later advanced two further arguments: first that the trading requirement was not met, and second that there were disqualifying arrangements which meant that the general requirements (s. 257AA(c)) were not met.
It was common ground that the risk-to-capital condition required the Appellant to demonstrate that it would be reasonable to conclude that it had objectives to grow and develop its trade in the long term. The Tribunal considered that this condition was satisfied, citing the three-stage process of starting with the short “webisodes” on YouTube, then moving to longer episodes on other broadcasting channels and finally monetising the concept through licensing and merchandising (as described in the advance assurance letter), backed up by the revenue projections in the investor brochure that showed increasing revenues between years one and five, as evidence of these objectives. In particular, they did not think that the absence of an objective to increase the number of employees (s. 257AAA(3)(a)) was significant because trades in the sector were generally conducted through sub-contractors for sound commercial reasons ( as evidenced by CHF Pip! plc [2021] TC 08305, Inferno Film Ltd [2022] TC 08472) and that in this case an objective of increasing turnover (which had been demonstrated) was more relevant. They also did not think that the fact that forecasts had only been produced for five years was significant – the purpose of the forecasts in the investor brochure was to satisfy the concerns of investors (who typically had a three to five year time horizon) – but this did not mean the Appellant did not intend to grow and develop the business beyond the five years.
In order for the trading requirement in s. 257DA to be satisfied there must be a qualifying trade (defined as for EIS purposes in s. 189) which in turn must not consist wholly or substantially in carrying on excluded activities. HMRC’s view was that the Appellant’s trade was that of receiving royalties or licence fees (an excluded activity within s. 192(1)(e)). The issue turned on whether the Appellant’s activities fell within the exception in s. 195(3) for the exploitation of relevant intangible assets where the whole or a greater part of the value has been created by the company (which is therefore not an excluded activity).
The Tribunal found that there was little direct evidence of whether the assets of the company that gave rise to the royalties and licence fees were ‘relevant intangible assets’ or whether they had been created by the company. On the first point they concluded that, on the basis that the Appellant’s accounts had been prepared in accordance with generally accepted accounting practice and categorised the assets as intangible assets, they were relevant intangible assets. On the second point, they found that the intellectual property had very little value when acquired by the company and that most of its value had arisen through its subsequent development by sub-contractors (commissioned by Mr Fenna) and did not agree with HMRC that the use of sub-contractors meant that it had not been “created” by the Appellant (consistent with the Tribunal decision in Pip!).
It was common ground that there were arrangements, the main purpose of which was to secure that a qualifying business activity was carried on by the issuing company and that the investors would obtain tax relief for the money subscribed for that purpose (s. 257CF(2)(a), (b)). The issue was whether either condition A (money raised paid to or for the benefit of a relevant person) or condition B (in the absence of the arrangements, the activities would have been expected to be carried on by a relevant person as part of another business) – s. 257CF(2)(c), (3), (4)) – applied.
The Tribunal concluded that several members of the CHF Group were party to the ‘arrangements’ (which included the incorporation of the Appellant, its acquisition of the intellectual property and raising of funds by issuing shares to investors in the CHF Fund, and the commissioning of development work and use of the monies raised for that purpose) and that as the members were connected with each other they were a ‘relevant person’. As more than half of the Appellant’s budget was paid to CHFE (a member of the CHF Group) under the PSA, they concluded that condition A was satisfied.
It was not therefore necessary to consider condition B, but for completeness the Tribunal did so and concluded (with some difficulty) that on the basis of the evidence provided, it was not reasonable to conclude that a relevant person would otherwise have carried on the trade because the trade of developing and exploiting intellectual property rights was not part of the CHF Group’s existing activities and, moreover, if SEIS (and subsequently EIS) relief had not been available, the activity might not have proceeded at all.
The Tribunal concluded that although the Appellant satisfied the risk-to-capital and trading requirements, the ‘no disqualifying arrangements’ condition was not satisfied and therefore the appeal failed.
This case bears many similarities to the earlier (EIS) case considered by the FTT in CHF Pip! plc [2021] TC 08305, which also involved an arrangement between the CHF Group and a company incorporated to monetise the intellectual property rights to an animation project aimed at pre-school children. However, in that case the appeal failed as the trading requirement was not satisfied (the trade was not conducted ‘on a commercial basis and with a view to realisation of profits’) and the EIS equivalent of the ‘no disqualifying arrangements’ requirement (in s. 178A) was not considered.
Comment by Stephanie Webber, Senior Tax Writer at Croner-i.
Ms Harriet Brown and Ms Rebecca Sheldon, of counsel appeared for the appellant
Mr Martin Priestley, litigator of HM Revenue and Customs' Solicitor's Office appeared for the respondents
[1] This decision relates to an appeal against a decision by the Respondents made on 30 April 2019 to refuse the Appellant authority to issue compliance certificates for the Seed Enterprise Investment Scheme (the “SEIS”) under section 257EC of the Income Tax Act 2007 (the “ITA”) in respect of shares which were issued by the Appellant between 19 March 2018 and 5 April 2018 (inclusive). Unless otherwise specified in this decision, a reference in this decision to a numbered section should be construed as referring to that...
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