Skye Inns Ltd and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 December 2009 |
| Neutral Citation | [2009] UKFTT 366 (TC) |
| Date | 15 December 2009 |
| Court | First Tier Tribunal (Tax Chamber) |
[2009] UKFTT366 (TC)
Howard M Nowlan (Judge) (Chairman), Elizabeth Bridge (Member)
Anthony Connelly of PriceWaterhouseCoopers, on behalf of the Appellants
Chris McMeeken and Kathryn Robertson, both of HMRC on behalf of the Respondents
Capital gains tax- relief under Enterprise Investment Scheme- whether 80% of the share capital subscribed had been "employed" in the qualifying company's trade within the twelve month period from the subscription - monies on instant access deposit account - consideration of different business requirements - appeal dismissed
A director who subscribed for shares in his company, in order to fund its expansion, was not entitled to enterprise investment scheme (EIS) relief since 80 per cent of share capital subscribed had not been employed in the company's qualifying trade within the required 12-month time period.
The second appellant (R) had subscribed for shares in the first appellant company (Skye), enabling it to purchase two pub/restaurants from which it was trading. In 2001 R subscribed £1,536,684 for further shares in order to fund major expansion plans including the purchase of another pub/restaurant. When a proposed acquisition fell through and no suitable new acquisition could be found, the appellants decided instead to undertake major improvements at the two existing properties.
R claimed relief under the EIS since his investment in Skye was intended to eliminate a substantial capital gains tax liability. In order to qualify as a suitable EIS investment vehicle, a company had, among other things, to employ 80 per cent of EIS funds raised within 12 months of the shares being issued for the purpose of a qualifying trade. The remaining EIS funds had to be so employed within the next 12-month period.
HMRC took the view that the company could not have "employed" 80 per cent of the funds raised in the 2001 share subscription in its business, because the accounts showed that on the balance sheet date, Skye still had £1,229,071 on deposit with its bankers.
Whether the company had employed 80 per cent of the cash contributed to it in the company's qualifying trade in the relevant 12-month period.
The First-tier Tribunal (Howard M Nowlan and Elizabeth Bridge) (dismissing the appeal) said that, if a contract was due to be completed within the 12-month period, and was completed shortly after the expiry of the period, and the delay involved a breach of contract by the counter-party, there might be a possibility that on such extreme facts the decision would be that cash ear-marked for that acquisition could be said to be employed in the business once the contract bound the company to make the purchase. Where however, as in this case, there was actually no contract, the taxpayer's case was plainly weaker, and it could not be said that moneys that the company merely meant to employ in the business were yet "employed" in the business. The relevant test could not be shown to have been satisfied in the few days before the counter-party backed out of the proposed sale of a third property or because of the general point that it remained the directors' intention that some other pub or restaurant would be acquired.
It remained the directors' intention to employ the funds in the trade, and they never appropriated any of the cash for any non-trade purpose. It was unfortunate that the directors were faced with the unenviable choice of making an acquisition in order to satisfy the tax tests, when they were not content that the acquisition was a prudent one, or else they had to fail the tax tests because they could not find a suitable replacement property. The particular HMRC officers could not however be blamed for imposing that invidious choice on the directors and the company. The tax test imposed a definite time period within which different percentages of the cash raised by a share issue had to be employed in the trade, and there was no exception for the situation where the directors wanted to meet the test but were unable to do so.
Regardless of whether or not the cash funds raised by the share issue were amalgamated in a single deposit account with the ever fluctuating receipts and payments of the current trading, the argument could not be accepted that the share subscription moneys should be treated as having been "spent" and so "employed in the business" by treating every gross cost of the business as having been met out of the share subscription moneys, with all gross income remaining unspent on the deposit account. The only realistic approach was to treat funds raised in the share issue as having been employed in the business only when actually spent on realistic net increases to the net trading assets or when reserved to supplement the current receipts of the trade, either in funding losses or meeting expenses that could be ranked as "current business requirements". It followed that 80 per cent of the funds raised had not been employed in the business in the 12-month period.
1. These appeals both depended on the one seemingly simple question of whether the Appellants could demonstrate that Skye Inns Limited ("Skye") had "employed" 80% of the cash contributed to it, when Mr Chris Richards ("Mr Richards") subscribed share capital in the...
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