No EIS relief due to subcontractor relationship

In Hoopla Animation Limited v HMRC [2023] TC08683, the First Tier Tribunal (FTT) found that a subcontracting company's involvement in the allocation of funds raised under an EIS share subscription was a disqualifying arrangement. As a result, EIS relief was blocked despite the subcontracting being on commercial terms.

• In 2014, Hoopla Animation Limited (Hoopla) was granted Advanced Assurance that it would be entitled to issue shares qualifying for SEIS or EIS relief.
• Hoopla’s trade was producing an animated children's TV show and thereafter exploiting its Intellectual Property (IP).
• Shares were issued between 2015 and 2018.
• In 2018, HMRC requested further information about Hoopla’s activities.
• Following receipt of that information HMRC refused to authorise compliance certificates to shareholders as they contended that the required conditions for relief were not met.
• Following an unsuccessful Review, Hoopla Appealed to the FTT.

The FTT found that:

• Hoopla met the Risk to Capital Condition as it had the clear intention to grow and develop its trade:
  • The objective of growing and developing a trade is meant to expand it over time such that the business evolves and becomes more complex. This included expanding the number of employees or turnover of the trade.
  • That Hoopla did not have employees was not fatal, it had access to subcontracted employees as it required.
  • Connected party subcontracting could be a sign that the risk to capital condition is not met if that labour is subsidised by the connected party, however, this was not the case here with market contracts being agreed.
  • Hoopla could demonstrate it intended to monetise the animated show and increase its turnover.
  • Hoopla’s executive producer was remunerated by reference to its turnover.
  • Broadcasting was the first step in creating the IP that could then be further monetised by merchandising, publishing and online content.
  • That later steps in this process had been carefully considered but not actively pursued at the time of the share issue showed that turnover growth was being pursued and sensible long-term business planning had been undertaken.
• Hoopla was engaged in a trade which involved the receipt of royalties and licensing fees, however as Hoopla created the asset itself, relief was available:
  • The producer of the works is the person who decides what to make and how to make it. This was the executive producer acting as an agent for Hoopla.
  • That the physical production of the animated show was outsourced did not mean that Hoopla had not created the asset from which fees were received.
• There were also disqualifying arrangements:
  • Monies raised from the share subscriptions were paid to the production company for producing the animated show.
  • The production company was a counterparty to the Production Agreement and played a part in the assignment of EIS funds to Hoopla and was therefore a 'relevant person'.
  • That the payments were agreed by the parties to be on third-party terms did not change the legislative analysis.

The appeal was dismissed.

Useful guides on this topic

EIS: Enterprise Investment Scheme: At a glance (Freeview)
When can EIS relief be claimed?  What are the conditions for EIS relief?  What are the benefits of EIS relief?

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

SEIS: Seed Enterprise Investment Scheme (subscriber)
When can SEIS relief be claimed?  What are the conditions for SEIS relief?  What are the benefits of SEIS relief?

SEIS: Seed Enterprise Investment Scheme (Freeview)
When can SEIS relief be claimed?  What are the conditions for and benefits of SEIS relief? 

EIS or SEIS: Advance assurance from HMRC (freeview)
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

Hoopla Animation Limited v HMRC [2023] TC08683