In Inferno Films Limited v HMRC [2022] TC08472, the First Tier Tribunal (FTT) upheld the appeal of a Welsh film company. It found that there were objectives to grow the business and as such the risk to capital criteria was met, allowing Enterprise Investment Scheme (EIS) status to be claimed.

  • Inferno Films, a Welsh film production company, had made initial Seed Enterprise Investment Scheme (SEIS) share issues which received HMRC approval. The investment came from local business angels.
  • The initial aim of the company was to produce and distribute a film called 'The Ballad of Billy McCrae' (BBM).
  • Small company accounts for 2017 and 2018 provided little information about company activity.
  • An investment memorandum was issued in 2018-19 seeking £400,000 of investment to assist in making the film, which was later re-issued for a less ambitious £50,000. The memorandum detailed the larger plans of the company to develop "a long term presence in film making in Wales" using BBM as a springboard.
  • In June 2019, the company submitted a form EIS1 compliance statement to HMRC in relation to an issue of shares made in April 2019.
  • After seeking further information, HMRC refused to issue a compliance certificate to Inferno because it had not met the Risk to Capital requirements. HMRC was not satisfied that the company had "objectives to grow and develop its trade in the long term". It specifically mentioned the lack of employees and the use of sub-contractors.
  • HMRC upheld their decision on appeal and after a statutory review, so the company appealed to the FTT.

The FTT reviewed the legislation and HMRC's contention that the company did not meet the requirements on the following grounds:

  • It did not actively grow and develop its trade (it effectively just raised cash and passed this on to third parties).
  • It could not be reasonably concluded that the risk of loss of capital could be more than the investor's net capital return as any loss could be offset by film tax credits.

The FTT decided:

  • On the second ground, the net investment return was extremely speculative and entirely dependent on the success of the film, BBM. The distinct possibility that the investors could lose all of their investment was not affected by the availability of tax film credits and so this part of the risk to capital requirement was met.
  • In relation to the first ground:
    • The appellant criticised HMRC for approaching this as if the company were an ordinary manufacturer and not a film production company. Evidence was given that the manner of trading was typical for start-up film companies.
    • It was explained that having more than one project was unrealistic and there was no budget for long-term employees. Using sub-contractors was a standard approach. 
    • The appellant quoted the judge in CHF Pip! plc v HMRC [2021 TC08305, who said, “As a matter of principle it is my view that a company can trade by outsourcing its activities to a third party”.
    • The judge was satisfied that the company's objectives were to grow and develop its trade.

The FTT agreed with the company's arguments and the appeal was allowed.

Useful guides on this topic

EIS: Enterprise Investment Scheme
When can EIS relief be claimed?  What are the conditions for EIS relief?  What are the benefits of EIS relief?

SEIS: Seed Enterprise Investment Scheme
When can SEIS relief be claimed?  What are the conditions for SEIS relief?  What are the benefits of SEIS relief?

Risk to capital: EIS, SEIS and VCTs
'At a glance' guide to the risk-to-capital condition for the Enterprise Investment Scheme (EIS).

External link

Inferno Films Limited v HMRC [2022] TC08472


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