Those who put their money into nascent businesses can in certain circumstances claim tax credit under the Enterprise Investment Scheme (EIS). However, as one case showed, in order to qualify for such relief, investors must place their capital at genuine risk and relevant businesses must have an ambition to grow in the long term.
A small film production company issued shares to eight investors from whom it had raised £50,000. It sought the authority of HM Revenue and Customs (HMRC) to issue certificates of compliance to the investors, entitling them to EIS relief. HMRC refused the request on the basis that the requirements for the grant of such relief contained in the Income Tax Act 2007 had not been met.
HMRC contended that the company did not have objectives to grow and develop its business in the long term and that there was no significant risk that the investors would suffer a loss of capital in an amount greater than their net return on their investments. Pointing to the company's lack of employees and fixed assets, HMRC argued that it was little more than a shell, focused on a single film project.
The company, however, argued that the only way for a new and modestly resourced film company to achieve long-term success is to start from small beginnings. The company could not realistically raise funds to make more than one film at a time. It was not, however, a single project venture and was on a mission to expand. The example was given of famed producer George Lucas, whose success with his second film, 'American Graffiti', enabled him to go on to make 'Star Wars'.
In upholding the company's appeal, the First-tier Tribunal (FTT) found that the risk to capital criteria found in Section 157A of the Act were clearly met in that the prospects of the investors making any return on their share subscriptions, whether by way of income or capital growth, were extremely speculative. Those prospects were entirely dependent on the success of the company's first film project.
The FTT was satisfied that, when the new shares were issued, the company's clear objective was to grow and develop its trade in the long term. It had since done its best to transform that objective into reality. Its aim was to make and release a series of further films in due course, as finance permitted. HMRC were therefore obliged to grant the company authority to issue certificates of compliance to the investors under Section 204 of the Act.