In Innovate Commissioning Services Ltd v HMRC [2017] UKFTT 0741 (TC), the First Tier Tribunal held that a company could not substitute a Seed Enterprise Investment Scheme (SEIS) compliance statement for an incorrectly submitted Enterprise Investment Scheme (EIS) compliance statement.

Background

EIS was introduced in 1994 to encourage investment in small, higher-risk companies. Broadly, if a company qualifies for EIS then, subject to completing a minimum holding period:

  • a person subscribing for shares in that company can set 30% of the subscription price off against her income tax bill (up to an annual limit of £1 million); and
  •  a sale of those shares is exempt from capital gains tax (CGT).

SEIS was introduced in 2012 to encourage investment in start-up companies. It is broadly the same as EIS, except that income tax relief applies at 50% up to an annual limit of £100,000.

A company cannot apply for SEIS certification if an EIS investment has already been made.

What happened?

Innovate sought SEIS certification. However, it submitted Form EIS1 to HMRC instead Form SEIS1.

On receiving the Form EIS1, HMRC wrote to Innovate asking whether it had intended to submit Form SEIS1 and noting that, if Form EIS1 were authorised, Innovate could not then correct the position.

Innovate did not respond, as it was in the course of changing its address and HMRC’s letter had been delivered to its old address. HMRC proceeded to certify Innovate under the EIS regime.

On learning of this, Innovate’s lawyers wrote to HMRC to ask to substitute Form SEIS1 for the incorrectly submitted Form EIS1. HMRC refused, stating that, once it had certified Innovate under EIS, it did not have the power to accept a substitute Form SEIS1. Innovate brought proceedings.

What did the Tribunal decide?

The Tribunal agreed with HMRC. It followed previous decisions in X-Wind Power Limited v HMRC(First Tier Tribunal), X-Wind Power Limited v HMRC (Upper Tribunal) and GDR Food Technology Limited v HMRC. Each of those cases dealt with similar facts and, in each case, the Tribunal held that HMRC was entitled to refuse to substitute a Form SEIS1 for an incorrectly submitted Form EIS1.

Innovate had argued that its case was different because HRMC had given it advance assurance that it would qualify for SEIS and so was “on notice” that Innovate was seeking SEIS certification. Indeed, HMRC had queried the fact that it had submitted a Form EIS1, rather than Form SEIS1.

However, in the judge’s words, “if the drift of [Innovate’s] argument here is that HMRC have behaved unreasonably or incorrectly in giving the EIS authorisation in response to the Form EIS1 then – even if that is a matter for this Tribunal – I reject it”.

Although HMRC’s view has so far been that the “trigger” for refusing substitution occurs when HMRC certifies a company for EIS, the judge went further. He said this view has no basis in legislation, and the point of no return in fact occurs earlier when the applicant submits the Form EIS1 to HMRC.

(He did suggest that, if a Form EIS1 is submitted without authority, it could be substituted. However, that was not the case here.)

Practical implications

This case serves once again to emphasise the need to be thorough and exercise extreme care when submitting an application for EIS or SEIS relief. The moment the relevant form is submitted to HMRC, it may be too late to reverse the mistake. Even a completely innocent mistake in submitting the wrong form will have the effect of denying the potentially superior tax reliefs under SEIS.