A fund formed to exploit intellectual property rights via special purpose vehicles was found by the Upper Tribunal (UT) to be a 'party' to the arrangements aimed at securing its investors' SEIS relief in one such company. This had the knock-on effect of creating disqualifying arrangements in the underlying SEIS company.

Cartoon coconut

In Coconut Animated Island Limited v HMRC [2024] UT/2022/000123, the UT heard that the company was incorporated in May 2017 to exploit the Intellectual property rights of a pre-school animation programme called Coconut Bay.

CHF Media Group Limited was the parent company of a group of companies (the CHF Group). The CHF Group raised funds from third-party investors who were invited to subscribe for shares in special purpose investee companies, each of which held the intellectual property rights to a particular concept or show. Coconut Animated Island Limited (CAIL) was one such company.

  • CAIL made an advance assurance application which included a draft copy of a Production Services Agreement (PSA).
  • HMRC confirmed that, based on the information supplied, they would be able to authorise CAIL to issue compliance certificates. 
  • In July 2018 CAIL entered into a PSA with terms substantially the same as those in the draft provided to HMRC.  Under the agreement, CAIL would pay another CHF Group company for production services.
  • In August 2018, HMRC wrote to CAIL advising them of the new risk-to-capital condition requirement for Seed Enterprise Investment Scheme (SEIS) relief that would apply to shares issued on or after 15 March 2018. 
  • HMRC sent CAIL authority to issue compliance certificates for shares issued between December and February 2018 but refused to authorise certificates in respect of share issues between 19 March 2018 and 5 April 2018.

On its Initial appeal to the First Tier Tribunal (FTT), HMRC put forward three grounds for refusing to authorise the issue of compliance certificates :

  1. CAIL failed the Risk-to-capital condition as it did not have 'objectives to grow and develop its trade in the long term'.
  2. It failed to meet the 'Qualifying company requirement' because at the relevant times, its trade consisted wholly or substantially of 'excluded activities'. These activities were the receiving of royalties or licence fees for Intangible assets it had not created.
  3. The relevant shares issued did not meet the 'general requirements' because they were issued under 'disqualifying arrangements'.

The FTT found for CAIL on points one and two but dismissed its appeal on the grounds of point three.

  • Under point three, the FTT agreed with HMRC that the money raised by the issue of the relevant shares was 'paid to or for the benefit of a relevant person' in accordance with Condition A of s.257CF Income Tax Act 2007 and Condition B was not met. The money raised by the share issue was spent in consequence or anticipation of a disqualifying arrangement.
  • The Upper Tribunal (UT) granted permission to appeal the FTT decision. HMRC also filed a respondent's notice requesting the UT uphold one or more of the grounds rejected by the FTT.

CAIL's grounds for appeal were that Condition A was not met because the FTT had erred in law. The legislation clearly requires there is an arrangement which an individual or company is party to, not merely that there is an 'arrangement'. 

The UT reviewed the FTT decision and considered the scope of the arrangements with the CHF Group. The underlying facts showed that the CHF group was heavily involved in the arrangements to the extent that an amount representing the whole or the majority of the amount raised under SEIS was, in the course of the arrangements, paid to or for the benefit of a relevant person or relevant persons. 

The company's appeal was dismissed.

The UT declined to address HMRC's respondent's notice as the points it raised were complex and the conclusion on the issue from the appellant was sufficient to decide the appeal.

The appeal was dismissed.

Useful guides on this topic

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?

SEIS & EIS: Qualifying trades and 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?

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

EIS or SEIS Advance Assurance from HMRC
HMRC offers an advance assurance application service for both the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). How do I apply? What information is needed? 

How to appeal an HMRC decision
Disagree with an HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

Coconut Animated Island Limited v HMRC [2024] UT/2022/000123