Valyrian Bloodstock Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 August 2022 |
| Neutral Citation | [2022] UKFTT 306 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 306 (TC)
Judge Anne Scott, Member Patricia Gordon
Enterprise investment scheme – risk-to-capital in ITA 2007, s. 157A(1)(a) – whether at the date of issue the appellant had objectives to grow and develop its trade in the long-term – whether the appellant exists wholly for the purpose of carrying on a qualifying trade – no – appeal dismissed
The FTT upheld HMRC’s refusal to authorise the issue of compliance certificates by a bloodstock company on the grounds that there was no intention to grow and develop the trade (and the trading requirement was not met because the activities were excluded by ITA 2007, s. 189).
The appellant was a company incorporated in February 2019 with a sole director (Mr (Nick) Brown). Its activities were the raising of horses and purchase and sale of bloodstock. Between February and June 2019, the appellant issued £400,000 share capital. Funds of £192,400 were applied in acquiring six horses, which would be sold on as 2-3 year olds (in approximately two years’ time) without undergoing training. They were to be kept at a third party stud, costing approximately £8,670 per annum per horse. There were no detailed financial forecasts, business plan or prospectus and no application for advance assurance (of qualifying EIS status) was made.
HMRC refused the appellant’s request to authorise the issue of EIS compliance statements on the grounds that the risk-to-capital requirement was not met and the appellant appealed. HMRC also argued that the activities were excluded activities as the appellant was “dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution”.
Mr Brown had also been involved in two other similar ventures, one of which had received advance EIS assurance (prior to the introduction of the risk-to-capital condition). Four of the five investors appeared as witnesses, but had varying recollections of how the investment had been pitched to them and the Tribunal preferred to give weight to contemporaneous documentary evidence (citing Hargreaves [2019] TC 07090 on approach to evidence). The Tribunal were satisfied that the investments were high risk (ITA 2007, s. 157A(1)(b) but although the investors had expressed an intention, if advised by Mr Brown, to continue to trade after the horses initially acquired had been sold, all of the evidence (including a website produced by Mr Brown) indicated that each venture was intended to trade for a three year term. The Tribunal had seen no indication that revenue would increase, there was no longer-term forecast and there was no business plan to demonstrate growth and development of the company. They therefore concluded that there was nothing to suggest anything other than a three-year investment and no evidence of an intention to grow and develop the appellant (s. 157A(1)(a)). The risk-to-capital condition was not therefore satisfied.
The Tribunal also agreed with HMRC that the trading requirement (s. 189) was not satisfied because the activities were excluded by s. 193, as the assets (bloodstock) were being held with a view to capital appreciation – they were not being actively marketed, they were not bought and sold in different markets, the only costs incurred were those necessary to keep the horses in good condition and the appellant did not at any point take physical possession of them.
The appeal was therefore dismissed.
As was emphasised by the Tribunal, it is not enough for an investment to be “high risk” in order to satisfy the “risk-to-capital” requirement – there must also be an objective of growing and developing the business in the long-term. The explanatory notes to FA 2018 state that “the risk to capital condition is a principled approach to reduce opportunities to use the schemes for tax motivated investment” and it was clear that the Tribunal regarded this as such a scheme: “looked at objectively, we find that it was an investment opportunity in a “wrapper” that was perceived as being tax efficient”.
Comment by Stephanie Webber, Senior Technical Writer, Croner-i Ltd.
Mr Stephen Williams of Williams Solicitors LLP appeared for the appellant
Mr Dave Lewis, litigator of HM Revenue and Customs' Solicitor's Office appeared for the respondents
[1] This appeal concerns the availability of relief under the Enterprise Investment Scheme (“EIS”) in respect of an issue of shares in the appellant on 22, 28 and 29 March 2019 and 19 June 2019. After the shares were issued the appellant made four applications on EIS Compliance Statement VCSEIS1 v0.1 form (“EIS1”) to the respondents (“HMRC”) who decided that the appellant did not meet the criteria for EIS. HMRC refused to grant the appellant authority under section 204(3) Income Tax Act 2007 (“ITA”) to issue Compliance Certificate EIS3 to its shareholders under section 204(1) ITA.
[2] With the consent of the parties the form of the hearing was video attended by both parties, various observers and the four witnesses for the appellant using the Tribunal video hearing system. A face-to-face hearing was not held for the convenience of all parties.
[3] Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such the hearing was held in public.
[4] The documents before the Tribunal were contained in a Bundle extending to 578 pages together with a separate Bundle of Authorities. We had Skeleton Arguments for both parties and Mr Williams helpfully furnished a copy of his Closing Submissions.
[5] In the days before the hearing the Tribunal had sight of the correspondence between the parties which was copied to the Tribunal administration in Birmingham.
[6] The appellant's agent had argued that the witness statements should be taken as evidence-in-chief since no contrary argument had been advocated by HMRC. HMRC objected and said that the timescale for the hearing should be extended because there were now four witnesses who required to be cross-examined.
[7] Frankly, we were surprised.
[8] We had read into the appeal and it had been my intention to raise at the outset the argument that the three additional witness statements by the investors were, no doubt, interesting. Nevertheless, in large part, they were expressions of their opinion of the risk level of the investment. Witnesses, unless expert witnesses, speak to the facts. Whilst we noted the opinions, our role is to decide on the facts, as proven.
[9] Therefore, at the outset of the hearing, I raised the whole issue of the relevance of those witness statements.
[10] The parties both then argued that they both wished to explore the evidence. We did. We heard evidence from Mr Nick Brown, Mr Neil Greatorex, Mr Malcolm Lindley and Dr Paul Darer.
[11] Mr Williams argued that HMRC's reliance on Hargreaves1 (“Hargreaves”) should be disregarded since that case was irrelevant as the issue there turned on the mind of a hypothetical officer rather than on the intention of the parties to an EIS scheme. We disagree. Whilst, of course, it deals with a completely different part of the tax legislation, nevertheless, we agree with Judge Amanda Brown QC and Member Duncan McBride in Cry Me A River Ltd2 (“Cry Me”) where they state at paragraphs 11 to 14 as follows:–
[11] There are a number of cases which, over the last decade, have considered the approach to be taken in respect of oral evidence received, particularly concerning facts and matters which occurred sometime before the giving of the evidence. These cases have been comprehensively reviewed in the judgment of Judge Brooks in Hargreaves [2019] TC 07090.
[12] So far as material in the present appeal the Tribunal notes, from that judgment, that a certain degree of caution is to be taken because:
[26] …
- memories are fluid and malleable, being constantly rewritten whenever they are retrieved …
- the process of … litigation … subjects the memories of witnesses to powerful bias …
- witnesses, especially those who are emotional, who think they are morally right, tend very easily and unconsciously to conjure up a legal right that did not exist …
[13] The judgments summarised by Judge Brooks conclude that:
The best approach from a judge is to base factual findings on inferences drawn from documentary evidence and known or probable facts. “This does not mean that oral testimony serves no useful purpose … But its value lies largely … in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.”
[14] This approach is particularly relevant in the present appeal.
[15] Mr Lewis had relied only on the first sentence in the quotation from Hargreaves in paragraph 13 of Cry Me. The broader context provided in these paragraphs from Cry Me are particularly relevant in this appeal because, as will be seen, we had some difficulties with evidence and the relevant “facts and matters” all occurred a long time ago. It should be noted that, the hearing in this matter having been listed for 21 April 2022, on 1 April 2022, Mr Williams intimated that he had only recently been appointed and wished to file additional evidence. Thomas Quinn, and specifically Mr Beard to whom we refer later, had been the previous representatives. The witness evidence from the three investors was probably dated thereafter (we say that because Mr...
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