Keeping horses not a trade for EIS relief

In Valyrian Bloodstock Limited v HMRC [2022] TC08578, the First Tier Tribunal (FTT) denied Enterprise Investment Scheme (EIS) relief to a business that bought and kept horses. The risk to capital condition was not met: there was no qualifying trade so no long-term objective to grow and develop a trade.

Valyrian Bloodstock Limited was set up in February 2019 with a single shareholder. Its activities were the raising of horses and other equines and the purchase and sale of bloodstock.

• Its website described it as offering EIS investment syndicates.
• In March and June 2019 shares were allotted to four investors.
• During 2019 six horses were purchased for a total cost of £192,400. Commission was paid on the purchase of each horse.
  • The horses were to be sold aged two or three years old without having been trained.
  • The intention was that when a horse sold the proceeds would be reinvested in a new horse.
  • All funds raised were required for the keeping of the horses meaning that no more could be bought until one was sold.
• In November 2019 the company provided HMRC with four EIS1 compliance statements.
  • Since the company had not applied for Advance assurance that it met the conditions for relief HMRC asked for additional information. This showed that:
    • The horses were stabled with a third party with amounts being paid for this and for medication, farriers fees, etc at £8,670 per horse per year. The financial information was, as described by the FTT, 'sketchy' and 'inaccurate' with other documentation appearing to be in draft form only.
    • The company did not have any cash flow or financial forecasts or a business plan.
  • HMRC refused to issue the necessary EIS certificates on the grounds that:
    • The Risk to capital condition had not been met.
    • The company did not meet the Qualifying trading company requirement: it could not have an ordinary trade of wholesale or retail distribution as the trade consisted to a substantial extent of dealing in goods of a kind that are held as an investment.
  • The company Appealed the decision after a statutory review upheld it.

The FTT dismissed the appeal:

• It was necessary to look at the circumstances at the time the shares were issued, together with contemporaneous evidence. Whilst there was some indication in the correspondence from the company that a continuing trade was intended, this was dated nearly 18 months after the share issues.
• The business model was high risk but there was no evidence that it was anything other than a three-year investment and no evidence to demonstrate the growth and development of the company.
• It was instead an investment opportunity in a 'wrapper' that was perceived as being tax efficient. The horses were held for capital appreciation rather than as trading stock.

Useful guides on this topic

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

Risk-to-capital: EIS, SEIS and VCTs
What is the risk to capital condition? Why is it important?

SEIS & EIS: Qualifying trades & activities
What is a qualifying trade or activity for Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) relief? Which trades do not qualify for relief? What are the excluded activities?

SEIS & EIS: Share issue checklist
Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) share issue checklist: Issue and allotment of shares

External link

Valyrian Bloodstock Limited v HMRC [2022] TC08578