Enterprise Investment Scheme (“EIS”) claim is once again ‘Flix-ed’ out of Court
As you will know, at EIC we do like the Enterprise Investment Scheme (“EIS”). It is a really attractive Government sponsored tax relief for growing businesses. However, that does not mean it is not without its complexities. Indeed, EIS can be very complex and advice should always be taken before putting such a structure together for investors. This case, Flix Innovations Limited (“Flix”) v R & C Commrs illustrates this.
Those with good memories, or an unhealthy interest in such matters, will recall our blog covering the first outing Flix had at the First Tier Tribunal (“FTT”), where the Taxpayer’s appeal lost. This blog covers the second coming of this case and its hearing in front of the Upper Tier Tribunal (“UTT”)
As a recap, Flix required further finance in order to meet the costs of developing and marketing the Company’s product. They, or their advisers, thought EIS would make any investment more attractive to other investors.
As such, the company’s share capital was reorganised to convert some of the share capital held by the two founder shareholders into deferred shares that ranked after the ordinary shares in terms of repayment of share capital on a winding-up (and had no rights to share in any surplus).
As the holders of the ordinary shares were entitled to repayment of the nominal value of those shares before the holders of the deferred shares, HMRC considered that the ordinary shares did not meet the requirement that the shares should not carry any present or future preferential right to the company’s assets on a winding-up. The rotters.
As such, HMRC would not permit the issuance of EIS compliance certificates.
The company appealed, on the basis that the term ‘preferential right’ should not be given a technical meaning. Instead, it should be given an ordinary commercial meaning. The result, it was argued, should be that such an insignificant preferential right should be ignored, and that the principle of statutory interpretation (and a real mouthful) known as de minimis non curat lex should act in order to ignore these trivial preferential rights.
On the question of the de minimis principle of statutory interpretation, the Upper Tribunal considered that the exclusion of shares that ‘carry … any …. preferential right’ indicated a contrary intention and that any right, however insignificant, must be taken into account.
More generally in respect of ‘purposive construction’, the UTT held that it was less likely that narrowly defined legislation should be susceptible to a revised, purposive construction. However, there was no identifiable principle that would prevent this.
That said, it is necessary to separate out the policy intention behind a particular provision and its purpose – see R & C Commrs v Trigg (a partner of Tonnant LLP). If the statutory language of the provision indicated a narrower purpose than the general underlying policy then purposive approach to interpretation should not give effect to a much wider result than the statutory language.
In this regard, the UTT were in agreement that the general purpose of the legislation was to limit relief to ordinary shares carrying the risks and rewards of ownership. However, the language of the relevant sections had imposed a narrower test. As such, they dismissed the appeal.
This case sadly summarises some of the intricacies of the EIS provisions. It also illustrates how HMRC will challenge structures that they feel are in breach of the rules and also that the Court will not be able to offer a ‘get out of jail free’ card to faulty structures.
If you or your clients would like further information relating to the EIS scheme then please do not hesitate to get in touch