In The Legend of the Golden Temple & Others v HMRC [2023] TC08999 ten companies created by a common director were disqualified from the Seed Enterprise Investment Scheme (SEIS), for failing to meet the risk-to-capital condition, the trading condition and the shares requirement. Creating ten companies to perform the work of one evidenced a Disqualifying Arrangement too.
A company director and chartered accountant, Mr Doshi, sought to raise funds from investors under the Seed Enterprise Investment Scheme (SEIS) pursuant to a new venture to creating audio-visual content related to religious sites.
Mr Doshi commenced trading with one company, and a plan of making a single film. In a covering letter to HMRC it was stated: "On receipt of the advance assurance from you, the company will invite investors to subscribe for 150,000 ordinary £1 shares and proceed to phase 1 of the project of making a 60 second teaser film and printed content. The director believes that the market in the production of religious films and documentaries (especially in the Indian sub-continent) is huge. There is already considerable interest in this project from potential investors."
Having raised nearly all the funds in one company, he set up nine more companies. Each one potentially engaged in the same activities and attracting investors under the SEIS scheme.
HMRC refused to authorise the issue of compliance certificates on the grounds that the SEIS conditions were not met.
None of the investors in the ten appellants were able to support their claim to SEIS relief on their investment unless they could show they have a SEIS compliance certificate issued to them by the company in which they invested.
The companies appealed and co-joined their appeals to the First Tier Tribunal.
HMRC submitted that the appellants did not satisfy key Risk-to-Capital condition or the Trading Condition and were engaged in Disqualifying Arrangements. In respect of the first company formed, HMRC also submitted that the Shares Requirement was not satisfied either.
The appellants submitted that they met all legislative conditions and were entitled to issue compliance certificates to their investors to enable those investors to claim SEIS relief.
The FTT found there was very little Risk to Capital: the original plans were to create one (or possibly two) film(s) and (possibly) a TV series, which was a risky subject matter, however, Mr Doshi had no intention of taking on staff and almost all of the work of each company was to be subcontracted to the Prime Focus group companies and other individuals, parties all connected to the appellant companies through Mr Doshi. Further, those persons connected to Mr Doshi were prepared to work for little or no money.
The companies were also unable to meet the trading requirements throughout the three years immediately following the issue of shares, as there was little evidence of trading.
£10,000 of shares issued to the first company were unpaid and did not meet the requirements of being (a) are subscribed for wholly in cash, and (b) are fully paid up at the time they are issued.
The FTT concluded that HMRC were correct in their submission that there was artificial fragmentation and that this artificial fragmentation was motivated by the desire to obtain more SEIS relief than would have been possible had just one company been set up in place of the ten appellants (or if the work had been undertaken in-house by Prime Focus).
Finding that Disqualifying arrangements were also evident the appeal was dismissed.
Useful guides on this topic
Risk to Capital: EIS, SEIS, VCT
Why do so many start ups fail to meet this key condition?
SEIS: Seed Enterprise Investment Scheme (subscribers)
When can SEIS relief be claimed? What are the conditions for SEIS relief? What are the benefits of SEIS relief?
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?
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 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 links
The Legend of the Golden Temple & Ors v HMRC [2023] TC08999
