Cocout Animated Island Limited v The Commissioners for HMRC

For the purposes of the Seed Enterprise Investment Scheme, whether transactions comprise “arrangements” depends on the statutory context and the facts. The components must have sufficient unity, and, under Income Tax Act 2007 section 257CF, must form a plan with the required qualifying-business and tax-relief purposes.

A commercially negotiated, arm’s-length contract may form part of those arrangements. A payment under it may be paid “for the benefit of” a relevant person without any gratuitous intent. A person is a party to the arrangements where, at the relevant time, its involvement is sufficient to treat it as participating in their statutory purpose. Direct involvement in devising the plan is unnecessary.

Coconut Animated Island Limited appealed against the First-tier Tribunal’s dismissal of its appeal from HMRC’s refusal to authorise compliance certificates for shares issued between 19 March and 5 April 2018 under the Seed Enterprise Investment Scheme.

The First-tier Tribunal held that the shares were issued in connection with disqualifying arrangements because Condition A in section 257CF(3) of the Income Tax Act 2007 was met. It rejected HMRC’s other grounds concerning the risk-to-capital condition, excluded activities and Condition B.

The appeal concerned whether the production services agreement was within the relevant arrangements and whether the production company, CHFE, was a party to them and therefore a relevant person. HMRC’s respondents’ notice sought to revive the grounds rejected below.

1. Appeal dismissed. The relevant shares were issued in connection with disqualifying arrangements within section 257CF of the Income Tax Act 2007. That conclusion was sufficient to determine the appeal.

2. The statutory definition of “arrangements” is widely drawn. Its components must have sufficient unity, but the court should not add further restrictions. Their scope depends on their statutory context and the particular facts. For section 257CF, the arrangements must exist or be contemplated when the shares are issued or their proceeds spent, and must have the statutory qualifying-business and tax-relief purpose.

3. The relevant plan included the incorporation of the investee company, acquisition of the intellectual property, share issues, and commissioning and payment for production services. An oral agreement, on substantially the terms later recorded in the production services agreement, existed when the relevant shares were issued. It was designed into the plan and was the means by which the bulk of the proceeds were spent.

4. An arm’s-length commercial contract can form part of the arrangements. Condition A does not require bounty or a gratuitous intention. The words “for the benefit of” also capture payments made to an intermediary for or on behalf of a relevant person.

5. A person may be a party to section 257CF arrangements if its involvement at the relevant time is sufficient to treat it as participating in their purpose. That may extend beyond those who devised the plan. CHFE was a party because its role was designed into the arrangements from the outset, it was party to the operative oral agreement, and that agreement was central to carrying out the qualifying activity. The majority of the funds raised was paid to CHFE. Condition A was therefore satisfied.

6. The tribunal accepted some criticisms of the First-tier Tribunal’s reasoning, but they did not affect the result. It declined to determine the complex issues raised by HMRC’s respondents’ notice because any observations would be obiter.

• Upper Tribunal (Tax and Chancery Chamber): dismissed CAIL’s appeal and upheld the First-tier Tribunal’s result that the share issues were connected with disqualifying arrangements.

• First-tier Tribunal: dismissed CAIL’s appeal against HMRC’s refusal to authorise compliance certificates. It held that Condition A was met, while rejecting HMRC’s alternative grounds.