In Putney Power Limited and Piston Heating Services Limited v HMRC [2024] TC09300, the First Tier Tribunal (FTT) denied EIS relief as neither company was found to be ready to trade by the required deadline.
- The companies 'Putney' and 'Piston'both issued shares on 4 April 2016.
- In January 2020 HMRC decided the shares were ineligible for Enterprise Investment Scheme (EIS) purposes and the decisions were upheld on Statutory review in September 2021.
- Both of the appellants appealed.
The FTT confirmed the rules: to be eligible shares, the companies had to begin to carry on a qualifying trade by the two-year EIS deadline of 4 April 2018.
- Putney had obtained Advance assurance from HMRC that the shares would qualify. Its EIS1 explained its trade as the 'provision of heat to businesses' with a commencement date in December 2016 at which point HMRC believed it was building an energy centre. In fact, its only activity had amounted to leasing two customers Dyson fans.
- Piston submitted an EIS1 in June 2017 similarly explaining its trade when in reality its only activity was also to lease a Dyson fan to one customer.
HMRC argued:
- Neither company was Trading because the power stations constructed by the appellants were not producing and supplying electricity by the deadline. In the hearing, they were keen to put on record that the explanation of the trade in the EIS1 was not pivotal as the nature of the trade often changes during the early period in a company's life.
- In October 2016, Putney entered into heads of terms with a company in respect of a site for a peaking supply (when the national grid does not have sufficient electricity). After doing due diligence the agreement was finalised in May 2017 with construction work commencing in September 2017. The work should have been completed for Putney in December 2017 but was not completed until August 2018 and Putney received liquidated damages as compensation for the delay.
- Piston's first target site was aborted by July 2016 but an alternative was found and heads of terms were signed in October 2016. This was also for supply in the capacity market. The lead constructor for a new site was appointed in April 2018 and Piston had not commenced construction by the EIS deadline. Construction began in October 2018 and the site started producing electricity in August 2019.
- HMRC said the caveat 'to the extent that' from the case of Mansell v HMRC [2006] had been misunderstood in the case of John Douglas Wardle v HMRC [2024] TC09213. It makes no sense for a business to be considered operational whilst challenging whether it has been set up. Similarly, in the case of Towers MCashback LLP v HMRC [2011] it is clear that set-up must have been completed before a trade can start. The Wardle decision was not consistent with the test developed in Khan v Miah [2001] of being ready to face customers.
The appellant argued:
- Putney was ready to face and find customers by 4 April 2018 as it had already entered into a relevant contract. Construction didn't need to be completed.
- For Piston, the appellant pointed to dealings with third parties which were immediately and directly related to the supplies to be made. Whilst it had further steps to take, it had reached a point of engaging with customers with the real possibility of profit by 4 April 2018.
The FTT found:
- It was possible to be open for business and thus trading whilst having no customers, rather like a restaurant that is open but without diners. The failure to be supplying electricity on the EIS deadline date of 4 April 2018 did not necessarily mean the appellants were not trading. That said, the companies did need to be ready to trade so set-up must be complete.
- The contracts Putney had entered into by the deadline date gave rise to a real possibility of future loss or gain at an operational level so from Mansell, the third stage was met albeit the conditionality of the contracts meant the activity was suspended until the plant was commissioned.
- By contrast, the heads of terms Piston had signed enabled it to walk away from the project without penalty so there was no real possibility of future operational risk or reward at the key date.
- Nonetheless, from all the case law examined, a trade is not set up before the time when the intending trader can supply whatever goods or services will form the subject matter of the trade. The trading infrastructure must be actually, and not just contractually, assembled before a trade can be said to have commenced. This infrastructure needs to be operational even if not wholly complete.
Both appeals were dismissed.
Editorial comment
One of the issues we often face in practice is 'when does a trade commence?' The judge in this case noted he had arrived at a different conclusion to that from the Wardle case. Whilst not an authoritative decision, this latest case sets a higher bar as the measure of beginning to trade.
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External link
Putney Power Limited and Piston Heating Services Limited v HMRC [2024] TC09300