Hoopla Animation Limited v The Commissioners for HMRC

For the EIS disqualifying-arrangements provisions, a person is a “party to” arrangements where the person has sufficient involvement that it is appropriate to treat them as participating in the arrangements’ purpose. The required degree of involvement is contextual and may extend beyond devising the arrangements. A counterparty to a production services agreement forming part of the arrangements can therefore be a relevant person.

Payments made to a relevant person under an arm’s-length commercial services contract may be paid “to or for the benefit of” that person. The provision does not require gratuitous intent. Where these conditions are met, the arrangements may be disqualifying notwithstanding the commercial nature of the payments.

Hoopla appealed against the decision of the First-tier Tribunal, reported as [2023] UKFTT 00024 (TC), which dismissed its appeal against HMRC’s refusal to authorise compliance certificates for EIS shares.

The shares financed an animation project. The production services agreement appointed a company in the same group to provide production services, and the agreement formed part of the arrangements. The issues were whether that company was a “party to” the arrangements and whether payments under an arm’s-length subcontracting agreement were paid “to or for the benefit of” a relevant person under section 178A of the Income Tax Act 2007.

1. Appeal dismissed. The First-tier Tribunal had correctly held that the arrangements were disqualifying under Condition A in section 178A of the Income Tax Act 2007.
2. The Upper Tribunal followed Coconut Animated Island Ltd v HMRC [2024] UKUT 75 (TCC). Whether a person is a “party to” arrangements is determined contextually, by reference to the arrangements and the facts. A person is a party where there is sufficient involvement to make it appropriate to treat that person as participating in the arrangements’ purpose. The required degree of involvement may be wider than direct involvement in devising the arrangements.
3. The production services agreement was part of the arrangements. The group company was its counterparty and was central to the plan to produce the programme. It was therefore a relevant person. It was unnecessary for the First-tier Tribunal to define exhaustively the expression “party to” or to set out every aspect of the arrangements.
4. Payments under an arm’s-length commercial contract can be paid “to or for the benefit of” a relevant person. The statutory wording does not require an element of bounty or gratuitous intent. The payments to the production company were therefore within Condition A.
5. The explanatory notes to the Finance Bill 2012 did not support a narrower construction. They addressed the purpose of the arrangements and the investor’s purpose, not the meaning of “party to”. The remaining arguments concerning Condition B, the trading requirement and the risk-to-capital condition were not determined because they could not affect the outcome.

The two HMRC refusal decisions were upheld.

• First-tier Tribunal: The appeal against HMRC’s refusal to authorise compliance certificates was dismissed in [2023] UKFTT 00024 (TC).
• Upper Tribunal: The appeal was dismissed. The First-tier Tribunal decision and HMRC’s refusal decisions were upheld.