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November 13, 2017
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If I could turn back time: Innovate Commissioning Services Ltd v HMRC

The recent case of Innovate Commissioning Services Ltd v HM Revenue & Customs [2017] highlights the importance of ensuring that the correct documentation is sent to HMRC. In this case, Innovate Commissioning Services Ltd (ICSL) accidentally submitted the wrong application form to HMRC which resulted in a costly mistake for the company and its investors.

EIS & SEIS Relief

The Enterprise Investment Scheme (EIS) and the Seed EIS (SEIS) are both HMRC approved schemes which aim to encourage individuals to invest in small UK companies by offering tax relief on the amount invested.

The maximum amount that can be invested by each individual and the income tax relief available can be summarised as follows:

Max. Investment Tax Reducer % Max. Tax Reducer
EIS £1m 30% £300,000
SEIS £100,000 50% £50,000

In order for an individual to qualify for relief, the company must submit the appropriate forms to HMRC (EIS1 for EIS shares, or SEIS1 for SEIS shares) to ensure that the company is compliant with the rules.

Background

  • ICSL was keen to raise funds for further investment, and it was agreed that SEIS qualifying shares would be issued up to the maximum subscription amount.
  • Advance assurance for SEIS was requested, and was subsequently approved by HMRC. In their response, HMRC stated that form SEIS1 must be submitted, with a link to the necessary form.
  • The EIS1 form for EIS relief was signed by the director of ICSL, and submitted to HMRC.
  • HMRC acknowledged receipt of EIS1 and in a letter to ICSL drew attention to the fact that advance assurance had been claimed under SEIS, and the subscription amount was the maximum for SEIS. In light of this, HMRC requested confirmation that the EIS1 should be processed, or alternatively for the correct SEIS1 form to be submitted.
  • It later transpired that ICSL had recently changed address and had failed to notify HMRC, and therefore the letter was sent to an old address.
  • As HMRC did not receive a reply from ICSL, they issued an authority to issue an EIS compliance certificate in respect of the shares detailed on the form EIS1.
  • When ICSL became aware of their mistake, they requested that form EIS1 was withdrawn so that form SEIS1 could be submitted in its place.
  • In line with legislation at ITA 2007 s257DK(2)(a) & (b), HMRC refused to withdraw form EIS1 as the EIS certificates had already been issued.

The Case

ICSL argued that form EIS1 had been filed in error, and it was clear from previous correspondence and the advance assurance application that the intention of ICSL was to issue SEIS shares. While HMRC accepted that ICSL may have intended to provide an SEIS compliance statement, that is not what was done and an EIS compliance statement was provided instead.

The Decision

Upholding the decision in X-Wind Power Ltd v HMRC [2017] the Court held that the EIS1 form remained valid and ICSL’s appeal was dismissed, resulting in the investors in the company receiving the lower rate of relief.

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