Seed Enterprise Investment Scheme investors have no minimum barrier before they can claim tax relief on their stake in a start-up company, a tribunal has ruled.
HM Revenue & Customs had tried to deny tax relief to a few investors taking small stakes in Oxford University spin-out technology company Oxbotica.
Five investors bought shares in the company for stakes between £20 and £399 when the company sought to raise cash for SEIS qualifying business activity.
But HMRC refused their claims for tax relief, claiming the investments were too small to contribute to the company’s qualifying business activity.
“The SEIS form shows that 31,600 shares were issued to 3 investors on 30 September 2014 for £316, and it is my view that this amount would not be enough to be of meaningful use to the company in its business,” HMRC told the company.
No ‘meaningful’ investment claim
The tax authority also demanded to know how the money was spent.
Oxbotica appealed the decision to the First-Tier Tax Tribunal claiming SEIS legislation does not specify any minimum investment, just a maximum of £100,000 for an individual in a tax year, providing the money is for a qualifying business activity.
The appeal was accompanied by documents proving expenditure of the cash.
During the hearing, HMRC repeatedly alluded to self-published online guidance that insisted SEIS rules demanded any money raised as an investment should be ‘meaningful’ and that small stakes were not enough to run a business.
The tribunal judge Amanda Brown ruled in favour of Oxbotica and rejected the HMRC arguments, pointing out that when small amounts were pooled they did contribute to running a business.
No legal basis to argument
“Absent a statutory minimum investment requirement there was no basis for HMRC to contend that the sum raised was required to be ‘meaningful’. Equally, there is no statutory basis to contend that because debt funding is, or may be available, with or without an equity commitment, that SEIS cannot apply,” said the judge.
The judge also argued that the real reason behind the HMRC decision was suspected tax avoidance.
The ruling means SEIS investors can stake any amount up to and including the maximum limit in the scheme and can expect to benefit from any tax breaks offered.
The accuracy of HMRC guidance to taxpayers was also questioned, not for the first time in a court case and HMRC was criticised for making up rules rather than sticking to the law.