Take care when submitting an application for EIS or SEIS relief

The Seed Enterprise Investment Scheme (SEIS) encourages individuals to invest in start-up companies by offering certain tax reliefs. An investor may be able to reduce… Read more

The Seed Enterprise Investment Scheme (SEIS) encourages individuals to invest in start-up companies by offering certain tax reliefs. An investor may be able to reduce their income tax liability by 50% of the funds used to subscribe for shares, up to an annual investment limit of £100,000 and on disposal of such shares be exempt from capital gains tax (after a minimum holding period).

The Enterprise Investment Scheme (EIS) is similar but aimed at small, high-risk companies and investors can expect up to 30% of the cost of the shares to be offset against their income tax bill (up to an annual limit of £1 million).

A company cannot apply for SEIS certification, if an EIS investment has already been made.

In Innovate Commissioning Services Ltd v HMRC [2017] UKFTT 0741 (TC), Innovate sought SEIS certification. However, it inadvertently submitted the wrong form with HMRC, using Form EIS1 rather than Form SEIS1. On receiving the Form EIS1, HMRC wrote to Innovate checking whether it had intended to submit Form SEIS1 and noting that, if Form EIS1 was authorised, Innovate could not then correct the position. Innovate did not respond; as it had moved address and did not receive the letter. HMRC therefore gave authority for Innovate to issue compliance certificates under the EIS regime. Once Innovate realised the error, they submitted a SEIS1 and asked to withdraw the EIS1. HMRC refused stating that once it had certified Innovate under EIS, it did not have the power to accept a substitute Form SEIS1. The effect of this was the denial of superior tax reliefs under SEIS.

Innovate brought proceedings against HMRC but the First Tier Tribunal agreed with HMRC and held that a company could not substitute a SEIS compliance statement for an incorrectly submitted EIS compliance statement after HMRC’s authorisation of the compliance statement (this followed previous decisions in X-Wind Power Limited v HMRC and GDR Food Technology Limited v HMRC). HMRC’s authorisation of the compliance statement was ‘the point of no return’. It is important to note that the Tribunal Judge remarked that the legislation provided that the provision of the compliance statement by the Company itself would be sufficient to prevent further filings being made.

This case highlights the need to be careful in filing the correct compliance statement for EIS or SEIS relief and the consequences of failing to do so. Once HMRC authorise the compliance statement, it will be too late to reverse any mistakes.

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