A number of interesting features emerged from the recent Upper Tribunal case of Richards v HMRC [2011] UKUT 440 – not least that it contains a reference to Claytons Case (1816). This takes you back – although I hope I’m not the only person to find such a reference irresistible. And who would have thought it would have appeared in a case involving the Enterprise Investment Scheme?  

The rule in Claytons Case is not really a rule, merely a presumption that payments out of an account should be allocated on a first in first out basis.  

Mr Richards subscribed for some shares in a trading company and claimed EIS deferral relief. One of the tests for relief under the EIS is that at least 80% of the money raised from the share subscription is employed wholly for the purposes of the trade within 12 months. The company was intending to use the money for the purchase of a public house but at the last minute the purchase fell through and the company was not able to find another public house in time. The Tribunal referred to the invidious choice faced by the directors saying that:  

“We also obviously note that it was highly 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 officers of HMRC cannot however be blamed for imposing this invidious choice on the directors and the company.”  

This is where Claytons Case comes in. Mr Richards argued that the company had lots of expenditure in the 12 months following the share subscription (and lots of income too) and on a first in first out basis, those expenses could be attributed to the share subscription monies. On this basis, enough of the funds could be said to have been employed for the purposes of the trade within the 12 month period.  

Unfortunately not. The share subscription monies were specifically set aside by the company in a separate investment account and all the trading income and expenses of the company went through the normal current account. (Some of the investment account monies were used – but nowhere near enough). The segregation of the funds meant that the general presumption in Claytons Case had no application and the funds could not be said to have been sufficiently employed by the company to enable EIS relief to be obtained.