Fashion on the Block Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 02 September 2021 |
| Neutral Citation | [2021] UKFTT 306 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 306 (TC)
Judge Heather Gething, Member David Batten
Alesia-Anne Willetts of Fashion on the Block appeared for the appellant
Ms Harry Jones, litigator of HM Revenue and Customs' Solicitor's Office, appeared for the respondents
Seed enterprise investment scheme – EIS1 used in error – Whether that represented a prior risk capital investment – Purposive construction of the SEIS legislation and realistic review of the facts – No prior risk capital investment – Whether unilateral mistake – Whether rectification possible – Yes – Appeal allowed.
The FTT allowed the taxpayer's appeal against refusal to authorise issue of SEIS compliance certificates on the grounds that there had been a unilateral mistake that could be rectified by amending the (incorrectly) submitted form EIS1 to conform with SEIS1.
Fashion on the Block Ltd was a UK-based start-up fashion technology company incorporated on 12 December 2018. It planned to establish a technology platform to enable individuals to use, sell or lease high value fashion items through the website. It would also provide repair and cleaning services. In total, Miss Willetts (the co-founder and CEO) hoped to raise £750,000, later increased to £850,000 to fund the new business. It was intended that the first round of fundraising should qualify for SEIS with subsequent financing being eligible for EIS. She therefore applied for advance assurance from HMRC that the shares would qualify. The form used is the same for SEIS, EIS and VCT purposes but Miss Willetts' covering email was clearly headed “Application for SEIS”. Subsequently HMRC gave advance assurance covering both SEIS and EIS. New shares where then issued to investors totalling £149,990 and Miss Willetts delegated completion of the compliance statement to Ms Hirst of Elm Financial Solutions. Ms Hirst accessed the compliance statement form via the HMRC website but, having saved it, she needed to make an amendment. As this was not possible after saving, she had to complete a fresh form. She believed she had clicked the correct link to obtain SEIS1, completed it and sent it with a covering letter stating “please find enclosed an SEIS1 form”. It later transpired that she had in fact completed EIS1. HMRC responded by email, issuing form EIS2 to authorise the issue of certificates allowing investors to claim EIS relief. Within 18 minutes, Ms Hirst responded to say there had been a mistake and that she needed to issue SEIS certificates. Initially HMRC indicated that they might accept a new SEIS1 but then later decided this was not possible. Fashion on the Block Ltd appealed.
Fashion on the Block Ltd's position was that all necessary conditions for SEIS relief were satisfied, that investors would be adversely affected (tax relief at 30% under EIS not 50%), that the intention was for SEIS relief to be claimed (evidenced by the covering letter and Ms Hirst's immediate attempt to correct the error) and that the conditions for the discretionary remedy of rectification were satisfied.
HMRC's position was that SEIS compliance certificates could not now be issued to investors because s. 257DK was not satisfied because an EIS investment had been made on or before the date of issue of the relevant shares (on the grounds that shares had been issued and the company had provided an EIS compliance statement). HMRC also considered that relief by rectification could not be granted because the FTT did not have jurisdiction and a court order was required. Moreover, replacement of form EIS1 with SEIS1 did not fall within the scope of rectification or recission because it went further than amending the terms.
The FTT concluded that:
- HMRC did have discretion to deal pragmatically with minor anomalies to give effect to parliament's intention (R v IR Commrs, ex parte Wilkinson [2005] BTC 281) and in this case it was clear that the intention was to grant SEIS relief where the conditions were satisfied. However, the FTT did not have the jurisdiction to direct HMRC to exercise a discretion;
- they were not bound by the Upper Tribunal decision in X-Wind Power Ltd v R & C Commrs [2017] BTC 526 as it could be distinguished – in that case the FTT had found that there was nothing to put HMRC on notice that SEIS relief was sought rather than EIS. This did not apply in the current case.
- they did not agree with HMRC that rectification required a court order and found that in this case there was a unilateral mistake. Both form EIS1 and SEIS1 covered essentially the same ground and there were only minor technical differences, therefore it would be possible to rectify the mistake by amending the wording of the completed form.
Therefore the equitable remedy of rectification would be available to Fashion on the Block Ltd and the appeal was allowed on the basis that the form submitted should be treated as if it had been rectified to reflect the content of SEIS1.
It is hard not to sympathise with the appellant in a case where the SEIS requirements were clearly satisfied and there was a genuine (and arguably minor) error in the paperwork. It appears that the FTT also took this view – they drew attention to failures by the HMRC officer in processing the form submitted as an EIS1 rather than pointing out the anomalies as well as indicating that in their view HMRC could have exercised their discretion to allow the error to be corrected.
[1] This case concerns an appeal against a decision of HMRC not to authorise Fashion on the Block to issue Seed Enterprise Investment Scheme (“SEIS”) certificates of compliance to investors in respect of £149,990 paid by the investors to subscribe for shares on 9 February 2020.
[2] During the course of the hearing we heard evidence from Alesia-Anne Willetts (“Miss Willetts”) and Ms Katy Hirst (“Ms Hirst”) for the Appellants.
We find the facts set out below.
[3] Fashion on the Block Limited (“Fashion on the Block”) was a UK based start-up fashion technology company incorporated on 12 December 2018. Alexia-Anne Willetts (“Miss Willetts”) is the co-founder of the company and chief executive officer. She had an intellectual property background and establishing a technology platform for the use and consumption of fashion had been the sole focus of her life in the preceding 24 months. The product is the “Little Black Door”, and it would enable individuals using the platform to store and have a full record of their high value fashion items, and enable them to use, sell or lease items to other individuals through the website. The Little Black Door will also provide repair and cleaning services and will therefore have a logistics operation.
[4] Miss Willetts and her co-founder had some capital which was used in the early development phase but recognised that the business would need seed capital to grow. She hoped to raise £750,000. She also recognised that if the shares in Fashion on the Block could qualify for SEIS relief, the shares would be attractive to potential investors.
[5] In January 2019 Miss Willetts applied for Advance Assurance from HMRC that Fashion on the Block's shares would qualify for SEIS. She made an application on 12 January 2019, and after an exchange with HMRC, she made a further application on 23 January 2019 when she discovered the form she had used was an older version of the application for Advance Assurance. The form for Advance Assurance is the same whether the Advance Assurance is for SEIS, Enterprise Investment Scheme relief (“EIS”) and Venture Capital Trust relief (“VCT”).
[6] It is clear from the email of 23 January which is headed Application for SEIS that accompanies the application for Advance Assurance and the content of the application form that Miss Willets completed on 23 January 2019 that she was applying for Advance Assurance for SEIS for part of the £750,000 capital she hoped to raise. She was asked to resubmit the application and the documents on 24 January which she duly did. It is clear from that application for Advance Assurance that:
- It was confirmed that no commercial sales had taken place, and that the purpose of the capital raising was to undertake platform design and development, run a pilot programme for a new business, and cover employee and other operational costs.
- Miss Willetts ticked the box pertaining to SEIS relief and declared that the value of the company immediately before the share issue will be up to £100,000.
- Miss Willetts had ticked the box dealing with EIS relief.
- The application contains a declaration that certain documents are attached. Those documents were attached. The documents required to support each of SEIS, EIS and VCT are the same. They include the latest business plan, a draft prospectus, details of prospective investors and details of the company's objectives in the long term. There is also a requirement to provide the latest company accounts but as the company was recently incorporated there were no such accounts at the date of the application for Advance Assurance. That was explained in the application. The form also contains a declaration that the applicant expects to be able to complete the declaration on EIS1 or SEIS1.
[7] The Trial Bundle contains the documents attached to the application of 24 January 2019. The draft prospectus is at page 83 of the trial bundle. On page 101 of the bundle there is a description of the phases of development of the business. It sets out the following table of information
| START | ||
| • | Q1 2019 | Phase Alpha- development kick off |
| Mobile app & Desktop | ||
| Brand and messaging testing | ||
| • | Q2 2019 | Build and launch |
| Website build | ||
| Engage with early adopters | ||
| Key Hires | ||
| Secure premises | ||
| • | Q3/4 2019 | Phase Two |
| Soft launch for early adopters | ||
| Pivitol PR & Marketing | ||
| Pre-register and golden ticket | ||
| • | Q1/2020 | Phase Three |
| Launch | ||
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