No EIS relief for non-commercial trade

In CHF PIP! Plc v HMRC [2021] TC08305, the First Tier Tribunal (FTT) found that a company's issue of shares to investors did not qualify for EIS relief. Despite the company trading, that trade was not undertaken on a commercial basis with a view to profit.

• In September 2011, CHF PIP! Plc 'Pip' acquired Intellectual Property (IP) rights to an entertainment concept aimed at pre-school children.
• Pip’s objective was to make saleable programmes and licence associated merchandise.
• The production and licensing of the IP were outsourced to companies under the control of the shareholders and directors of Pip.
• HMRC had confirmed that the ordinary shares would qualify for Enterprise Investment Scheme (EIS) relief and that the trade was a qualifying trade for EIS purposes in 2011 and 2013.
• Between May and November 2018, Pip issued 12 tranches of shares and submitted compliance statement forms EIS1 to HMRC.
• HMRC was not satisfied that on the dates share issue that:
• • The company carried on or existed to carry on, a qualifying trade.
  • The risk to capital condition was met.
  • HMRC refused to give authority to Pip to issue compliance certificates to its investors denying them EIS relief.
• Pip Appealed to the FTT.

The FTT found that:

• At the time of the share issues in 2018, Pip was carrying on a trade that was creating and exploiting its intellectual property by using outsourced services.
• It entered into contracts licensing programmes to television and other streaming services and entering into merchandising agreements.
• The directors of Pip acted in the company’s best interest, despite having interests in other entities to which work was outsourced.

In considering whether that trade was undertaken on a commercial basis with a view to the realisation of profits, the FTT viewed the profit test is purely subjective and the business in question needs to be considered.

• Pips turnover had been decreasing year on year, falling to £9,594 for the year to 31 July 2018, operating losses were made for each year from 2012 to 2018.
• Evidence to show that the goal of its activities were to make a profit on the balance of probabilities was limited to projections and a plan to revamp and relaunch the programmes.
• The projections were described by the FTT as “jaw-droppingly optimistic to the extent of being total pie in the sky”, inconsistent with a prior director’s reports and Pip went into administration in 2021.

Finding that “the figures are a pious hope rather than evidence of a genuine intention to make a profit”, the FTT dismissed the appeal.

While that conclusion was sufficient to dismiss the appeal, the FTT went on to consider whether:

• Pip was not carrying on excluded activities as:
  • The royalties and license fees received were attributable to the exploitation of relevant intangible assets which had been created by Pip.
• Pip did not satisfy the risk to capital condition as:
  • These unrealistic projections when compared to the trading history of the company did not make it reasonable to conclude that Pip had the objectives to grow and develop its trade in the long term.

Useful guides on this topic

EIS: Enterprise Investment Scheme: At a glance
This is a freeview 'At a glance' guide to the Enterprise Investment Scheme (EIS).

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?

How to appeal an HMRC decision
Disagree with a 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

CHF PIP! PLC v HMRC [2021] TC08305