CAPITAL GAINS TAX – Relief - Enterprise Investment Scheme – Demand Loans at interest before acquisition of qualifying trade – whether money raised wholly employed for the purpose of qualifying trade? – appeal allowed

THE SPECIAL COMMISSIONERS					

	G C TRADING LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	ADRIAN SHIPWRIGHT (Chairman) 

Sitting in public in London on 9 July 2007

Simon Littlejohns of PKF (UK) LLP, for the Appellant 

Colin Williams, Appeals Unit, Wales, Scotland and Northern Ireland, HM Revenue and Customs, for the Respondents 

© CROWN COPYRIGHT 2007

DECISION

Introduction
1.	This is an appeal by GC Trading Limited (“GCT”) against the refusal by the Respondent (“HMRC”) to give authority to GCT to issue a certificate to an individual who had subscribed for shares Mr Goddard (“Mr Goddard”) under section 306 TA in respect of shares issued to Mr Goddard by GCT on 31 March 1999 which would allow Mr Goddard to claim Enterprise Investment Scheme Relief. The Appellant is GCT notwithstanding that the person affected is Mr Goddard.
The Issue
2.	The issue in this case as agreed between the parties is whether the money raised by GCT from the issue of the shares to Mr Goddard on 31 March 1999 was employed wholly by GCT for a qualifying purpose within the requisite period?
3.	No point or issue was raised as to whom the appellant should be or as to jurisdiction HMRC specifically confirmed that this was the case when asked.
The Law
The Legislation
4.	The Law in so far as is relevant is found in Schedule 5B TCGA headed “Enterprise Investment Scheme: Re-Investment”, particularly paragraph 1 headed “Application of Schedule”. This reads:
“1—(1) This Schedule applies where—
(a) there would (apart from paragraph 2(2)(a) below) be a chargeable gain (“the original gain”) accruing to an individual (“the investor”) at any time (“the accrual time”) on or after 29th November 1994;
(b) the gain is one accruing either on the disposal by the investor of any asset or in accordance with section 164F or 164FA, paragraphs 4 and 5 below or paragraphs 4 and 5 of Schedule 5C;
(c) the investor makes a qualifying investment; and   
(d) the investor is resident or ordinarily resident in the United Kingdom at the accrual time and the time when he makes the qualifying investment and is not, in relation to the qualifying investment, a person to whom sub-paragraph (4) below applies.
(2) The investor makes a qualifying investment for the purposes of this Schedule if—
(a) eligible shares in a company for which he has subscribed wholly in cash are issued to him at a qualifying time and, where that time is before the accrual time, the shares are still held by the investor at the accrual time,
(b) the company is a qualifying company in relation to the shares,
(c) at the time when they are issued the shares are fully paid up (disregarding for this purpose any undertaking to pay cash to the company at a future date),
(d) the shares are subscribed for, and issued, for bona fide commercial purposes and not as part of arrangements the main purpose or one of the main purposes of which is the avoidance of tax,
(e) the requirements of section 289(1A) of the Taxes Act are satisfied in relation to the company,
(f) all the shares comprised in the issue are issued in order to raise money for the purpose of a qualifying business activity, and
(g) the money raised by the issue is employed not later than the time mentioned in section 289(3) of the Taxes Act wholly for the purpose of that activity,
and for the purposes of this Schedule, the condition in paragraph (g) above does not fail to be satisfied by reason only of the fact that an amount of money which is not significant is employed for another purpose. 
(3) In sub-paragraph (2) above “a qualifying time”, in relation to any shares subscribed for by the investor, means—
(a) any time in the period beginning one year before and ending three years after the accrual time, or
(b) any such time before the beginning of that period or after it ends as the Board may by notice allow.
(4) This sub-paragraph applies to the investor in relation to a qualifying investment if—
(a) though resident or ordinarily resident in the United Kingdom at the time when he makes the investment, he is regarded for the purposes of any double taxation relief arrangements as resident in a territory outside the United Kingdom, and
(b) were section 150A to be disregarded, the arrangements would have the effect that he would not be liable in the United Kingdom, to tax on a gain arising on a disposal, immediately after their acquisition, of the shares acquired in making that investment.”

5.	Section 289 TA is headed “Eligibility for relief”. It reads:
“(1) For the purposes of this Chapter, an individual is eligible for relief, subject to the following provisions of this Chapter, if—
(a) eligible shares in a qualifying company for which he has subscribed wholly in cash are issued to him and, under section 291, he qualifies for relief in respect of those shares,
(aa) at the time when they are issued the shares are fully paid up (disregarding for this purpose any undertaking to pay cash to the company at a future date),
(b) the shares and all other shares comprised in the same issue are issued in order to raise money for the purpose of a qualifying business activity,
(ba) the requirements of subsection (1A) below are satisfied in relation to the company, and
(c) the money raised by the issue is employed not later than the time mentioned in subsection (3) below wholly for the purpose of the activity mentioned in paragraph (b) above.
(1A) The requirements of this subsection are satisfied in relation to a qualifying company if throughout the relevant period the active company—
(a) is a company which—
(i) is such a company as is mentioned in section 293(2)(a), and
(ii) if it is a subsidiary of the qualifying company, is a 90 per cent subsidiary of that company, or
(b) would be a company falling within paragraph (a) above if its purposes were disregarded to the extent that they consist in the carrying on of activities such as are mentioned in section 293(3D)(a) and (b) and (3E)(a), or
(c) is a 90 per cent subsidiary of the qualifying company and falls within subsection (1B) below.
(1B) A subsidiary of the qualifying company falls within this subsection if—
(a) apart from purposes capable of having no significant effect (other than in relation to incidental matters) on the extent of its activities, it exists wholly for the purpose of carrying on activities such as are mentioned in section 293(3D)(b); or 
(b) it has no profits for the purposes of corporation tax and no part of its business consists in the making of investments.
(1C) In subsection (1A) above 'the active company' means the qualifying company or, where the qualifying business activity mentioned in subsection (1) above consists in a subsidiary of that company carrying on or preparing to carry on a qualifying trade, research and development or oil exploration, that subsidiary.
(1D) Subsections (4A) and (6)6 of section 293 shall apply in relation to the requirements of subsection (1A) above as they apply6 in relation to subsection (2) of that section.
(2) In this Chapter “qualifying business activity”, in relation to a company, means—
(a) the company or any subsidiary—
(i) carrying on a qualifying trade which, on the date the shares are issued, it is carrying on, or
(ii) preparing to carry on a qualifying trade which, on that date, it intends to carry on wholly or mainly in the United Kingdom and which it begins to carry on within two years after that date,
but only if, at any time in the relevant period when the qualifying trade is carried on, it is carried on wholly or mainly in the United Kingdom,
(b) the company or any subsidiary carrying on research and development—
(i) which, on the date the shares are issued, it is carrying on or which it begins to carry on immediately afterwards, and
(ii) from which it is intended that a qualifying trade which the company or any subsidiary will carry on wholly or mainly in the United Kingdom will be derived,
but only if, at any time in the relevant period when the research and development or the qualifying trade derived from it is carried on, it is carried on wholly or mainly in the United Kingdom, or
(c) the company or any subsidiary carrying on oil exploration—   
(i) which, on the date the shares are issued, it is carrying on or begins to carry on immediately afterwards, and
(ii) from which it is intended that a qualifying trade which the company or any subsidiary will carry on wholly or mainly in the United Kingdom will be derived,
but only if, at any time in the relevant period when the oil exploration or the qualifying trade derived from it is carried on, it is carried on wholly or mainly in the United Kingdom.
(3) The time referred to in subsection (1)(c) above is—
(a) the end of the period of twelve months beginning with the issue of the eligible shares, or
(b) in the case of money raised only for the purpose referred to in subsection (2)(a) above, the end of that period or, if later, the end of the period of twelve months beginning when the company or subsidiary concerned begins to carry on the qualifying trade,
and for the purposes of this Chapter, the condition in subsection (1)(c) above does not fail to be satisfied by reason only of the fact that an amount of money which is not significant is employed for another purpose.
(4) Subsection (2)(c) above shall not apply unless—
(a) throughout the period of three years beginning with the date on which the shares were issued, the company or any subsidiary holds an exploration licence which was granted to it, or to another subsidiary,
(b) the exploration is carried out solely within the area to which the licence applies, and 
(c) on the date on which the shares were issued, neither the company nor any subsidiary held an appraisal licence or a development licence relating to that area or any part of that area.
(5) Where, at any time after the issue of the shares but before the end of the period mentioned in subsection (4)(a) above, the company or any subsidiary comes to hold an appraisal licence or development licence which relates to the area, or any part of the area, to which the exploration licence relates, the exploration licence and that other licence shall be treated for the purposes of subsection (4)(a) above as a single exploration licence.
(6) An individual is not eligible for relief in respect of any shares unless the shares are subscribed for, and issued, for bona fide commercial purposes and not as part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.
(7) In this Chapter “eligible shares” means new ordinary shares which, throughout the period—   
(a) beginning with the issue of the shares, and
(b) ending immediately before the termination date relating to those shares,
carry no present or future preferential right to dividends or to a company's assets on its winding up and no present or future ...3 right to be redeemed.
(8) Section 312(1A)(b) applies to determine the relevant period for the purposes of this section.
 (9) In this section “90 per cent subsidiary”, in relation to the qualifying company, means a subsidiary of a kind which the company might hold by virtue of section 308 if—   
(a) the references in subsection (2) of that section to 75 per cent were references to 90 per cent; and
(b) subsection (4) of that section were omitted”.
The Authorities
6.	I was provided with copies of the following authorities which I have read and carefully considered:
Sections 289-312 TA (not all of which was legible)
Schedule 5B TCGA
Forthwright (Wales) Limited v A L Davies
4Cast Limited v Mitchell
The Evidence
7.	A bundle of loose documents was produced. It had not been paginated notwithstanding the direction that it should be. No objection was made to any of the documents and they were all admitted in evidence.
8.	The bundle did not contain the loan agreements. I asked for them but was told that this would require a trawl of the files notwithstanding that they had been produced to HMRC. It was agreed that they would be produced within seven days and served on the Tribunal and HMRC. HMRC would have seven days from such service to make comments or confirm that they did not wish to comment. This was to be in writing and served on both the Tribunal and the Appellant before the end of the seven day period. I would remind those appearing before the Special Commissioners, particularly those without a legal background, that we can only proceed on the basis of evidence and are required to find the facts, findings of primary fact are not appealable and so require to be established. To do this we require the basic documents. Assertion is not as good as evidence.
9.	A Statement of Agreed Facts was produced.  There is read as follows:
(1)	“GC Trading Ltd (GCT) is a company registered in the United Kingdom.
(2)	Until March 2001 the principal activity of GCT was that of a holding company. On that day GCT acquired the trade, assets and liabilities of its subsidiary, Marketing Force Limited (formerly Jejune Limited).  The principal activity of the company is now that of advertising.
(3)	The directors of GCT are Mr T Goddard (TG) and Mr P J Carr (JC).
(4)	TG and JC have considerable experience in the advertising hoardings industry.  On 3 May 1996 they sold their shareholdings in Metro Outdoor Advertising (Scotland) Ltd, realising chargeable gains of £517,500 and £172,500 respectively.
(5)	TG and JC wish to continue their involvement in the advertising industry and sought a tax efficient investment opportunity.  In doing so they sought the advice of PKF in early 1999.
(6)	On 31 March 1999 TG subscribed £511, 200 for shares in GCT.
(7)	On 1 April 1999 JC subscribed £150,000 for shares in GCT.
(8)	On 23 July 1999 GCT loaned £250,000 to GMG Metro Limited at a rate of interest 2% above the bank base rate.
(9)	On 31 December 1999 GCT loaned £43,000 to Goldfern Limited, a company then controlled by TG's late wife.
(10)	On 23 March 2000 GMG Metro Limited repaid the loan of £250,000 to GCT.
(11)	On 27 December 2000 Goldfern Limited repaid the loan of £43,000 to GCT.
(12)	On 15 March 2001 GCT loaned £90,000 to Goldfern Limited.
(13)	On 20 June 2001 Goldfern Limited repaid the loan of £90,000 to GCT.
(14)	GCT submitted forms EIS 1 in respect of the investments made by TG and JC, seeking authority to issue forms EIS 3 to those investors.  Forms EIS 3 will allow TG and JC to claim the tax relief that they seek.
(15)	HMRC formally refused authority to issue forms EIS 3 on 1 October 2002.  The refusal was on two grounds.  The first was that the company did not satisfy the requirements of section 289 (1A) TA and Schedule 5B 1(2) (e) TCGA.  The second ground was that the company did not satisfy the requirements of section 289 (1)(c) TA and Schedule 5B 1(2) (g) TCGA.  In this context concerns had previously been raised by HMRC about the acquisition of subsidiary companies and certain loans made by the company (not being the loans mentioned above).  HMRC still takes the point about the use of funds within section 289(1) (c) TA and Schedule 5B 1(2) (g), but now only in connection with the loans referred to above.  Concerns about these particular loans were not raised until sometime after the formal refusal.
(16)	GCT appealed against this refusal on 23 October 2002.
(17)	It is now common ground the JC qualifies for relief.
(18)	It is agreed that the only point at issue is whether the loans made by GCT represent employment as defined in section 289(1) TA, of the funds raised by the share issue made to TG on 31 March 1999".
10.	It was common ground that:
(1)	The shares had been subscribed for at par in cash on 31 March 1999 and all the requirements for EIS relief were fulfilled other than the qualifying use requirement which was the issue in this appeal. 
(2)	The relevant form EIS 1 was submitted on 19 March 2000, within the time limit.
(3)	GCT was not trading at the time of the subscription but did acquire a qualifying trade within the relevant time for an amount at least equal to the full amount subscribed.
(4)	The trade was a UK qualifying trade.
(5)	The money subscribed for the shares was raised for the purpose of a qualifying trade.
(6)	“Employment” in its ordinary meaning means ‘to make use of’.
11.	It was accepted that whilst HMRC’s Manuals might be instructive they were not law and so not binding on the Tribunal. The statute was what mattered here.
12.	No oral evidence was lead. A witness statement was provided by Mr Carr for GCT.
Findings of Fact
13.	From the evidence I make the following findings of fact:
(a)	I find the matters in the Statement of Agreed Facts as facts for the purposes of this decision.
(b)	I also find that the matters of common ground as facts for the purposes of this decision.
14.	I was told by the Appellant and HMRC did not dispute this, that the loans earned interest which after tax was used as part of the acquisition consideration for the acquisition of the qualifying business together with the amount raised from the share issue.
The Submissions of the Parties
The Appellant Submissions in outline
15.	In essence, the Appellant submitted that it had met all the conditions for the relief.
(a)	HMRC disputed that the money had been used wholly for a qualifying purpose. This was wrong.
(b)	The legislation required all the money in question to be used by the Appellant wholly or entirely for the acquisition of the qualifying trade within the requisite period. This it had done and was therefore entitled to receive authority to issue the EIS 3 as HMRC now accepted that all the other conditions were fulfilled.
(c)	The loans to the other companies were no different from putting the money on deposit at a bank. It was a sensible way of keeping the money until it was needed rather than putting it in a cupboard or under the bed. This was not the employment of the money it was a way of keeping the money until it was needed to acquire the qualifying business. It was not an investment like gilts where the principal could go up or down. It was a demand loan where the amount of the principal receiveable did not vary.
(d)	As all the conditions for EIS Relief had been met the appeal should be allowed.
HMRC’s Submissions
16.	In essence, HMRC submitted that because of the loans the conditions for EIS relief had not been fulfilled so the relief was not due. [In fuller form]
(a)	Paragraph 1(2)(g) requires that “”… the money raised by the issue is employed not later than the time mentioned in section 289(3) of the Taxes Act wholly for the purpose of that activity.”
(b)	It is further provided that “… for the purposes of this Schedule, the condition in paragraph (g) above does not fail to be satisfied by reason only of the fact that an amount of money which is not significant is employed for another purpose.”
(c)	The effect of this is that the money must be employed wholly in the qualifying purpose and no other.
(d)	The making of the loans meant that the money had not been used solely or only to acquire the qualifying trade and so the requirements in paragraph 1(2)(g) were not met.
(e)	HMRC’s Manuals allowing deposit of the money at interest until it was needed was a concession and was not binding on the Tribunal.
(f)	Accordingly, there was no EIS relief due.
17.	Mr Williams accepted, when I put it to him, that on this argument even a deposit at interest at bank until the money was needed would disqualify the share issue EIS relief. He said he considers this to fit in with the intention of Parliament to limit the relief and was the effect of the statute.
Discussion
Introduction
18.	In 4Cast Limited v Mitchell (Inspector of Taxes) [2005] STC (SCD) 287 SpC 455 Dr John F Avery Jones CBE said:
“13. In relation to para (c) [the money raised by the issue is employed not later than the time mentioned in subsection (3) below wholly for the purpose of the activity mentioned in paragraph (b) above] I consider first [Counsel for the Appellant's] interpretation that the word 'wholly' means the whole of the money raised must be employed for the stated purpose, rather than that the money is employed wholly for the purpose. The words at the end of sub–s (3) are that 'the condition in subsection (1)(c) above does not fail to be satisfied by reason only of the fact that an amount of money which is not significant is employed for another purpose'. If any money raised by the issue is expended on another purpose it cannot be said that the money (meaning the whole of the money) has been employed wholly for the stated purpose, but sub–s (3) ignores this if the money employed for another purpose is not significant. Accordingly, it seems to me, contrary to Mr Maugham's submission, that the 'wholly' refers to the purpose, and so the question for me is whether the whole of the money raised by the two share issues was employed wholly for the purpose of the appellant's qualifying trade which it was carrying on wholly or mainly in the UK? In other words, what was in the minds of the directors of the appellant when employing the money, and therefore their purpose: was it wholly for the purpose of the appellant's trade, or was it partly for the purpose of the Subsidiary's trade (or activities)? …”
19.	I respectively adopt this.  Accordingly, I ask myself what was in the minds of the directors of the appellant when employing the money?  This is essentially a matter of fact in each case.
20.	No evidence was lead as to board meetings or similar matters. The Appellant said that the loans were a way of ‘parking’ the money until it was needed to be used to acquire the qualifying trade and not losing value. No evidence was lead to counter this assertion.
21.	The money remained available to the Appellant as it was a demand loan. The value of the receivable remained constant. Technically a deposit at a bank is a loan in the sense that it gives rise to an obligation to make repayment in accordance with the terms of the deposit. On the information before me the loans are entirely consistent with this ie they are the equivalent of a bank deposit.
22.	In the absence of direct evidence I have to infer what was in the minds of the directors. The appellant would assert the purpose was to acquire the qualifying trade and as part of this they had raised the money from the share issue and had to hold or ‘park’ it until it was needed for he acquisition. This is entirely consistent with the use of the money wholly for the acquisition of the qualifying trade within the requisite period and makes commercial sense. The loans were a step in the wider purpose of acquiring the qualifying trade. I find this as a fact.
23.	I find on the balance of probabilities that the acquisition of qualifying trade was what was in the directors’ mind and that the loans were a means of preserving the money to do this. Accordingly, on the particular facts the money raised by GCT from the issue of the shares to Mr Goddard on 31 March 1999 was employed wholly by GCT for a qualifying purpose within the requisite period notwithstanding the loans.

Conclusion
24.	I have found that on the particular facts the money raised by GCT from the issue of the shares to Mr Goddard on 31 March 1999 was employed wholly by GCT for a qualifying purpose within the requisite period notwithstanding the loans. Accordingly, the appeal is allowed.

ADRIAN SHIPWRIGHT

SPECIAL COMMISSIONER
RELEASE DATE:

SC/3161/2006