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In the case of Hoopla Animation Ltd v HM Revenue and Customs (HMRC), Hoopla Animation Ltd (H) faced challenges in obtaining enterprise investment scheme (EIS) relief due to the risk to capital condition and disqualifying arrangements. This case highlights the complexities in navigating tax relief for companies exploiting intellectual property.
Background: Hoopla Animation Ltd (H) obtained advance assurance from HMRC in 2014 for both the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS) in relation to a prospective share issue. The company issued shares in tranches between 2015 and 2018, which overlapped with the introduction of the risk to capital condition. Following a request for further information about the company’s activities, HMRC refused to authorize the issue of EIS certificates for the shares issued in 2018. They claimed that the company did not meet the risk to capital condition, the trade was not qualifying, and disqualifying arrangements were in place.
Legal Framework: According to HMRC guidance, EIS relief is not available if the relevant shares have been issued or the money raised by the issues of the relevant shares, has been employed “in consequence or anticipation of, or otherwise in connection with, disqualifying arrangements.” This applies if one of two conditions are met. The first condition (Condition A) is if the whole or a substantial proportion of the money raised by the relevant share issue is “paid to or for the benefit of” one of the parties to the arrangements. In H’s case, this was considered because the money raised by the share issue was paid to the production company.
Court Decision: The judge found that H’s trade was qualifying, and the risk to capital condition was met. However, the judge also concluded that the monies raised by H were paid to the production company, which was a relevant party due to its position as a counterparty to the Production Services Agreement. As a result, Condition A was met, and EIS relief could not apply. The appeal was dismissed.
Significance of the Case: The most concerning aspect of this case is HMRC’s attempt (and failure) to argue that the trade involving the exploitation of intellectual property (IP) was an excluded activity. It is important to note that the exploitation of IP is permissible for EIS relief as long as the company created it. This case serves as a reminder for companies involved in IP exploitation to carefully navigate the complexities of EIS relief and risk to capital conditions to avoid potential tax issues.
If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.