Seed EIS claims: X-Wind feels the draught after an innocent mistake

Mon 02 Oct 2017

An innocent paperwork error has proved shocking for a green electricity generator and its investors as HMRC refused to allow the company to correct its mistake. The importance of companies getting EIS and SEIS compliance statements right first time was confirmed by the recent Upper Tribunal (UT) decision of HMRC v X-Wind Power Ltd.

Newly formed, X-Wind raised modest amounts from eight investors and meant to provide them with SEIS compliance statements to enable them to claim 50% income tax relief, CGT exemption and CGT “permanent roll-over” on reinvestment of gains. However, the wrong form was used, i.e. EIS1 instead of SEIS1 and when the mistake was spotted HMRC refused to allow X-Wind to withdraw the EIS1 and submit an SEIS1 instead. This created the double problem that the original investors did not get the relief they were expecting and no new investors would be able to claim SEIS either because SEIS is not available to investors in a company that has already raised money under EIS. The company appealed but tax tribunals have upheld HMRC’s stance that:

• there is no statutory provision for an application that has been made and accepted as valid to be withdrawn and replaced, even on the grounds of mistake;
• once an EIS authorisation has been granted the company is legally barred from issuing any SEIS shares; and
• neither X-Wind nor any of the investors could claim any statutory relief for a mistake because overpayment relief only operates where there is a mistake in a claim, a compliance statement EIS1 is not a claim and X-Wind itself was not subject to any over-assessment of tax as a result.

Before the UT X-Wind also argued that:

• the original EIS1 was invalid, and so did not even need to be withdrawn, because it was made by mistake and as such was null and void; and
• the EIS1 was the same as a claim under Income Tax Act 2007 (ITA) s 257EE and the Taxes Management Act 1970 s 42(9) provides the right to make a supplementary “claim”.

The UT rejected both of these contentions.

On the first ground, the EIS1 itself was completed correctly, was nothing more than a form for providing information to HMRC to enable HMRC to issue EIS3s and so there was no legal ground for treating it as invalid.

The law allowing for supplementary claims could not apply because providing information to HMRC is not the same as making a claim. A claim must involve a relief, and quantify the amount of relief being obtained or specify who the taxpayer is who is to benefit from the claim.

The absence of any mechanism for a company to withdraw an incorrect EIS1 is absurd and unfair but that is the current state of the law.