HM Revenue & Customs v Alan Blackburn Sports Ltd & Anor

For Enterprise Investment Scheme relief, a payment made to a company before the formal application for shares or resolution to allot them is not necessarily a loan or debt. The court must assess the commercial reality and ask whether the payment was made and accepted on an agreement or enforceable understanding that corresponding shares would be allotted. If so, the investor may have subscribed wholly in cash and the payment is not a debt for the purposes of paragraph 13 of Schedule 5B to the Taxation of Chargeable Gains Act 1992. A payment made before any such conditional arrangement is established does not satisfy the statutory requirements merely because shares are later allotted.

HM Revenue and Customs appealed against Peter Smith J’s decision allowing the appeal of Alan Blackburn and Alan Blackburn Sports Limited from the Special Commissioners of Income Tax. The dispute concerned EIS relief claimed for shares allotted between September 1998 and January 2001.

The Special Commissioner allowed relief for three allotments where the share formalities preceded payment, but refused it for allotments where money was paid before an application or resolution. Peter Smith J treated the advance payments as contributions to capital rather than loans and allowed relief for all the allotments. The central issues were whether the advance payments created debts, whether the shares were subscribed for wholly in cash, and whether a single allotment could qualify in part.

1. Appeal partly allowed. The Revenue’s appeal succeeded in relation to the first allotment of 149,998 shares and failed in relation to the later allotments of 350,000 and 240,000 shares.
2. For the 350,000-share allotment, the payments made before the formal share documentation were made and accepted against the background of a consistent course of dealing. Mr Blackburn and the Company understood that the payments would be reflected in a corresponding allotment. The arrangement was properly characterised as an implied agreement or enforceable understanding to allot shares, rather than a loan or debt.
3. Accordingly, the relevant payments were made conditionally on the allotment of shares. Mr Blackburn had subscribed wholly in cash, and the payments did not constitute a debt owed to him within paragraph 13(2)(b) of Schedule 5B. The same reasoning applied to the balance paid before the allotment of the 350,000 shares and to the payments made before the allotment of the 240,000 shares.
4. The court rejected the suggestion that a limited company could not accept capital contributions except as loan capital or share capital. Kellar v Williams supported the view that company law did not prevent an agreement to increase a company’s capital without a formal allocation of shares.
5. The first payment of £111,000 was different. It preceded any established course of dealing or evidence that it was conditional on an allotment. It could not therefore be treated as payment for shares. The statutory requirements were not met because the shares were not subscribed for wholly in cash and were not fully paid up on the relevant analysis.
6. Because the 149,998 shares formed one issue, paragraph 1(2)(f) required the qualifying-business-activity condition to be satisfied for all shares comprised in that issue. The later payment could not sever the issue so as to secure relief for only part of it. The court therefore reversed the decision below only as to that allotment, without remitting the matter.

• Court of Appeal (Civil Division) — [2008] EWCA Civ 1454: allowed HMRC’s appeal in relation to the 149,998-share allotment, dismissed it in relation to the 350,000- and 240,000-share allotments, and did not remit the case.
• High Court, Chancery Division — [2008] EWHC 266 (Ch): allowed the taxpayers’ appeal from the Special Commissioners and treated the advance payments as contributions to capital rather than loans.
• Special Commissioners of Income Tax — decision SPC00606: allowed relief for the 140,000-, 210,000- and 100,000-share allotments, but refused it for the 149,998-, 350,000- and 240,000-share allotments.