The Enterprise Investment Scheme (EIS) offer significant tax reliefs to individual investors buying new shares in the company. Availability of relief under the EIS took centre stage in a tax tribunal case brought by Inferno Films Ltd. Spoiler alert: Inferno won.
The EIS is one of four venture capital schemes designed to allow certain types of small, higher-risk, unquoted trading companies to raise capital.
Inferno, a film production company based in Wales, needed funding to make a psychological thriller, ‘The Ballad of Billy McCrae’.
A company must meet stringent conditions for relief to be available to an investor. For example, the investment must generally be made within seven years of the company’s first commercial sale, and the amount of capital raised in any 12-month period is limited to £5 million (£10 million for knowledge-intensive companies).
For Inferno, the condition under the spotlight was the risk to capital condition. This requires the company to use the money for growth and development, and stipulates that the investment should entail the risk of the investor losing more capital than they are likely to gain as a net return.
HMRC argued that Inferno failed here because it did not have ‘objectives to grow and develop its trade in the long term’. Specifically, it highlighted Inferno’s lack of employees and the fact that it subcontracted many of its activities. It suggested that Inferno was at best, a vehicle to provide finance for a series of individual projects. Inferno said its approach conformed to film industry norms and was the only realistic course of action for a small start-up venture. Its argument was upheld by the tribunal, which found that sufficient long-term aims did exist, as evidenced by its commitment to the Welsh film industry.
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