Companies intending to raise funds through schemes that offer tax relief to investors should always obtain expert advice to ensure they comply fully with the rules applying to those schemes. Recently, two companies that had issued shares under the Enterprise Investment Scheme (EIS) failed in their appeals against decisions that they had not begun to trade within two years of the shares being issued.
Both companies planned to generate electricity from gas, and had issued shares with the intention that the individuals who subscribed for them would qualify for EIS relief. For EIS relief to be available, the companies needed to have commenced trading no later than two years after the shares had been issued.
HM Revenue and Customs took the view that both companies had commenced trading too late, principally because their plants had not been producing and supplying electricity by the EIS deadline. They appealed to the First-tier Tribunal (FTT), arguing that a trade could commence before the trader begins actual supply.
The FTT found that a trade commences when a trader is 'open for business', in the sense of being ready to supply goods or services. This required the trader to have assembled any infrastructure needed to supply those goods or services. As neither company had achieved this by the EIS deadline, neither had begun to trade by that date.
Ruling on the companies' further appeal against that decision, the Upper Tribunal (UT) considered that the FTT had viewed the presence of infrastructure and the ability to supply goods or services as legal tests, rather than as useful questions to ask when analysing the facts. The UT found that the FTT had erred in identifying 'principles' that did not exist in law and concluding that the companies' appeals failed because their activities did not satisfy those principles. The FTT's decision was set aside. The FTT had made clear and comprehensive findings of fact, and the UT considered that it was able to remake the decision itself.
One of the companies had been unable to generate electricity by the deadline because its plant was neither completed nor operational. The fact that it was simply incapable of generating any income at that time was a firm pointer against its trade having begun by then. While it had entered into contracts for the completion of the plant and contracts that would allow it to earn income once that happened, that formed part of its preparations to trade, rather than conducting the trade. The other company had still been exploring where its trade would be carried out from and had not started construction. The UT concluded that neither company had begun to trade by the deadline.