Blackburn (t/a Alan Blackburn Sports Ltd) v Revenue and Customs

For EIS relief, the court must identify the legal character of money paid to a company before shares are formally issued. Money paid as a capital contribution, pursuant to an intention to increase the company’s capital, is not necessarily a repayable loan. Where the facts establish a capital contribution, the later issue of shares does not involve repayment of a debt and the value-received provisions are not engaged. The court must also consider whether connected share issues form one issue: relief is unavailable unless all shares comprised in that issue were issued to raise money for qualifying business activity. A Quistclose trust requires money to be provided for a sufficiently specific purpose with a residual beneficial interest if that purpose fails; it does not arise merely from a general intention to subscribe for shares.

Alan Blackburn and Alan Blackburn Sports Ltd appealed against a decision of the Special Commissioner concerning the refusal of EIS certificates for ten share issues made between 1998 and 2000. The Special Commissioner found that money was paid into the company before applications for shares were made in several cases. He treated the intervening obligation as a debt and held that its discharge on the later share issues amounted to receipt of value under the EIS provisions. He also treated certain connected share issues as single issues.

The central questions were whether the payments created repayable loans or capital contributions, whether the value-received provisions applied, whether related share issues were properly aggregated, and whether the payments were held on a Quistclose trust.

1. Appeal allowed. The Special Commissioner’s factual findings were definitive because the appeal lay only on a point of law. The court nevertheless disagreed with the legal characterisation of the payments.
2. On the particular facts, the generalised intention that money paid into the company would be used for shares was sufficient to treat the payments as capital contributions rather than loans. The company therefore did not owe Mr Blackburn a repayable debt. The later issue of shares did not repay a debt within paragraph 13 of Schedule 5B to the Taxation of Chargeable Gains Act 1992.
3. The reasoning in Kellar v Williams [2000] 2 BCLC 390 supported that analysis. Where shareholders agree to increase a company’s capital without a formal allocation of shares, the contribution may form part of the company’s owners’ equity rather than a shareholder loan.
4. Absent that conclusion, the court would have upheld the Special Commissioner’s analysis. Money paid without an application for shares would ordinarily create an implied obligation to repay. Its later appropriation to discharge the subscription price would then constitute an arrangement involving repayment of a debt and receipt of value.
5. As an alternative, the court rejected the challenge to aggregation. If shares formed one issue, relief required all the shares comprised in that issue to have been issued to raise money for qualifying business activity. Shares affected by receipt of value could not be separated from the remainder.
6. The proposed Quistclose trust argument failed. A Quistclose trust, as explained in Twinsectra Ltd v Yardley [2002] 2 AC 164, requires money to be provided for a particular purpose with a residual beneficial interest if the purpose is not carried out. The company had applied the money to qualifying expenditure, and the facts disclosed no residual beneficial interest.

1. High Court (Chancery Division) — appeal from the Special Commissioner’s decision released on 28 March 2007. The appeal was allowed.