Fashion on the Block – taxpayer successful with substance over form argument

In Fashion on the Block Ltd v HMRC [2021] UKFTT 0306 (TC) the First-tier Tribunal (FTT) held that an Enterprise Investment Scheme (EIS) compliance statement (EIS1) erroneously submitted instead of a Seed Enterprise Investment Scheme (SEIS) compliance statement (SEIS1) should be rectified.

Background

Fashion on the Block Ltd (the Appellant), an online fashion start-up company, received SEIS advance assurance from HMRC. After issuing shares, the Appellant sought to complete and file an SEIS1 form with HMRC. The covering letter to HMRC stated that the SEIS1 form was enclosed with the letter but in fact an EIS1 form was enclosed in error. 

HMRC authorised the Appellant to issue EIS2s (authorising EIS investment). The Appellant noticed the error and immediately notified HMRC.  After initially indicating it would accept a new SEIS1 form, HMRC refused to do so. The investors in the Appellant were therefore prevented from claiming SEIS income tax relief in respect of their relevant shares. 

Under section 257DK, Income Tax Act 2007, qualification for SEIS requires that a company has no previous EIS investment. HMRC interpreted this provision strictly and rejected the Appellant's request to overlook the error. HMRC relied on X-Wind Power Ltd v HMRC [2017] UKUT 290, in which it was held that an erroneous EIS submission was not a nullity. In X-Wind the taxpayer's appeal was dismissed as there is no provision in the legislation for withdrawing, setting aside, replacing or revoking an EIS compliance statement. 

The Appellant appealed.

FTT decision 

The appeal was allowed.

Distinguishing X-Wind from the current case, the FTT noted that HMRC had been made aware of the error (within 18 minutes of the incorrect form being submitted) and knew that the Appellant sought SEIS rather than EIS authorisation. The Appellant had cleared SEIS authorisation, made reference to the SEIS1 form in the covering letter and had no prior EIS investment. 

In the view of the FTT, although it did not have jurisdiction to direct HMRC to exercise its discretion to overlook the error using its collection and management powers, on the facts and under the correct approach to statutory construction, there was no previous EIS investment  and therefore the shares satisfied the SEIS requirements. Accordingly, the EIS1 form submission should not be regarded as an EIS investment. In the alternative, the FTT allowed the appeal on the equitable basis of rectification and the erroneous form should therefore be treated as if it had been rectified to reflect the information and declarations of the correct form. In the view of the FTT, such an approach would not defeat Parliament's intention for SEIS to apply to companies in the Appellant's position.

Comment 

EIS and SEIS are underpinned by detailed and prescriptive provisions, which create a series of potential bear traps for the unwary. This decision will therefore be welcomed by those taxpayers who have to navigate the SEIS legislation. 

It is to be hoped that HMRC will take on board the FTT's comments as to its discretion to overlook minor errors and in similar cases taxpayers will not be put to the trouble of having to seek redress from the FTT. 

Finally, the irony of HMRC relying on a literal approach to statutory construction in this case (as opposed to a purposive construction), will not be lost on taxpayers. 

The decision can be viewed here.