HMRC made to cry a river over SEIS defeat

In Cry Me a River Ltd v HMRC [2022] UKFTT 182 (TC), the First-tier Tribunal (FTT) held that the production of a single film did not prevent the appellant from meeting the SEIS risk to capital criteria.

Background

Cry me a River Limited (the appellant), was a special purpose vehicle film production company established to create a particular film, Cry me a River.  It was associated with Secret Channel Films (SCF), which had been the owner of the intellectual property rights to six script ideas. 

In January 2015, the appellant requested advance assurance from HMRC that it was a qualifying company for the purposes of the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) (both of which are provided for in Income Tax Act 2007 (ITA)) and that any shares allotted would be qualifying shares for these purposes. SEIS provides relief from both income tax and some capital gains tax in connection with a qualifying investment. In March 2015, it received the assurance it had sought.

In May 2017, the appellant issued 1,666 B shares to Clifford Grantham, in consideration of an investment of £39,984 (investment A). In June 2018, it issued 2,084 B shares to each of Catherine Morgan and Victor Scalzo, for investments of £50,016 each (investment B).

In September 2017, the appellant entered into an agreement with Storyline NOR AS (SLine) to co-produce a film.  It was envisaged that the appellant and SLine would jointly make all financial, creative and technical decisions related to the film, and would be responsible for the delivery of the 'final print' of the film.

On 30 May 2018, the writer of the film's screenplay (also associated with SCF) confirmed that he had assigned his rights in the film to the appellant and SLine. On 30 June 2018, the appellant entered into an agreement with the author pursuant to which he assigned all his rights of use and exploitation in the original screenplay to the appellant. 

In August 2018, the appellant issued a further 521 B shares to Clifford Grantham in consideration for his writing-off a £10,000 loan that he had made to the appellant in 2017 (investment C).  

In July 2019, the appellant sought authority from HMRC to issue SEIS certificates in respect of investments A and B. This was granted in respect of investment A but denied in respect of investment B on the ground that the 'risk to capital', 'qualifying business activity' and 'disqualifying arrangements', conditions were not met in respect of this issue of shares.

The appellant appealed to the FTT. 

Legislation

Section 257EC, ITA, provides that a company may apply to HMRC for authority to issue a certificate of compliance in respect of an identified share issue.

Section 257CF, ITA, sets out 'disqualifying arrangements' that prevent an issue of shares from qualifying for SEIS relief.

Section 257HG, ITA, sets out the meaning of a 'qualifying business activity' which a company must have to qualify for SEIS (the Own Qualifying Business condition).

Section 257AAA, ITA, sets out the risk to capital condition, stating that it is met if, "having regard to all the circumstances existing at the time of the issue of the shares, it would be reasonable to conclude that … the issuing company has objectives to grow and develop its trade in the long-term, and … (b) there is a significant risk that there will be a loss of capital of an amount greater than the net investment return.", and noting that risk is to be determined by reference to a loss of capital and the net investment return to investors taking account of the value of SEIS relief (the Risk to Capital condition).

FTT decision

The appeal was allowed. 

The FTT concluded that it was never intended that SCF would produce the films itself, but rather that each production would be undertaken by a special purpose vehicle of which the appellant was one.  This was commonplace in the film industry.  The FTT found that this was not fatal to meeting the Risk to Capital condition.  In the film industry, 'success breeds success' and the fact that there was, at least initially, only capacity to produce one film at a time could not preclude a conclusion that the appellant intended to grow and develop its business.  The FTT therefore concluded that the appellant met the Risk to Capital condition.  

In relation to the Own Qualifying Business condition, the FTT took judicial notice of the fact that many film and television productions were co-produced.  It therefore considered that the appellant's trade was one of co-producing films, which was sufficient to constitute a discrete trading activity.  While SLine was, formally and practically, also a co-producer of the film, this did not stop the appellant from meeting the Own Qualifying Business condition.

The FTT gave short shrift to the contention made by HMRC that absent the potential availability of SEIS relief it would have been reasonable to expect that the whole or most of the qualifying business activity would have been carried on by SCF, and that the main, or one of the main purposes of the assignment of production rights to the appellant, was to enable SEIS-qualifying investment in excess of that available to SCF to be raised.  It noted that, on the evidence, it appeared that SCF had never intended to produce the films itself, and the development of intellectual property rights (which SCF did undertake) was also a qualifying business activity.  SCF had not issued any SEIS-qualifying shares and so it was difficult to see that a main purpose of the arrangements was to obtain SEIS relief in excess of that which would have been available to SCF.  The FTT therefore determined that there were no 'disqualifying arrangements'. 

Comment

The world of film production is no stranger to disputes with HMRC in relation to the availability of tax reliefs, and it is refreshing to see a clear and pragmatic decision in favour of the taxpayer in this context.  However, perhaps the most striking thing about this decision is the context in which it arises, rather than the decision itself.  The EIS and SEIS regimes both contain highly technical requirements and it is easy for a taxpayer to commit a 'foot-fault' (even having sought advance assurance from HMRC) thereby removing the ability of investors to claim SEIS and EIS reliefs in respect of their shares. Those contemplating issuing EIS or SEIS-qualifying shares need to proceed with care.

The decision can be viewed here.