The High Court held that it was essential for the purposes of Enterprise Investment Scheme relief that on the date on which the shares were issued it was possible to determine whether a qualifying business activity was being carried on: and that was only possible if the relevant company could be identified at that point.

Facts

Just Greetings.com Ltd was incorporated in 1999 and initial finance was provided by shareholders from an issue of shares in February 2000 which raised approximately £600,000, £400,000 of which was then subject to claims by the shareholders for tax relief under the Enterprise Investment Scheme (EIS). In 2000 it began a trade of selling greetings cards online. The trade was unsuccessful and in January 2001 Just Greetings.com Ltd acquired the shares of another greetings card company, Valentine Marketing Ltd (VML). A form EIS1 was submitted to the Inland Revenue in respect of the shares which had been issued in February 2000. By a form EIS2 the Revenue authorised Just Greetings.com Ltd to issue EIS certificates to the subscribers of that share issue. In mid-2001, Just Greetings.com Ltd ceased trading and was thereafter a non-trading parent company. It changed its name to VMHL in October 2002. The Revenue notified VMHL that the tax relief to the shareholders would be withdrawn because the company was in breach of ICTA 1988, s. 289(1A) and s. 293(2)(a).

VMHL did not satisfy either branch of the definition of ‘qualifying company’ in s. 293(2) for the whole of the relevant period, but satisfied the first branch (a company existing to carry on a qualifying trade) during the first part of the period and the second branch (the holding company of a group) during the second part of the period. The general commissioners held that the word ‘or’ at the end of s. 293(2)(a) was being used inclusively (one or the other from time to time during the relevant period) and not exclusively (one or the other, but not both during the relevant period). Having answered that question in VMHL's favour, the commissioners held that it satisfied the requirements of s. 289(1A) because the definition of ‘the active company’ in subs. (1C) contained another inclusive ‘or’ which permitted the identity of ‘the active company’ to change during the relevant period. The Revenue submitted that the general commissioners’ analysis was patently wrong on the face of the legislation, because s. 289(1A) is concerned with the status of the active company during the relevant period, and there could be only one active company over the period, so that the trade must be carried on by either VMHL or VML to the exclusion of the other for the whole of the period. The Revenue's second point was that the identity of the active company and the identity of the qualifying company were fixed for all time at the date of issue of the shares.

Issue

Whether the decision to withdraw tax relief in respect of shares issued in February 2000 in VMHL was correct.

Decision

Pumfrey J (allowing the appeal) held that there was in the provisions no requirement, explicit or implicit, that the identity of the active company must be fixed for all time at the date of the issue.

However the necessary temporal restriction was found in the definition of ‘qualifying business activity’ in s. 289(2). That was defined not merely in terms of the trade itself (that was dealt with by the definition of ‘qualifying trade’) but by reference also to the identity of the person carrying on that trade.

It was essential that on the date on which the shares were issued it was possible to determine whether a qualifying business activity was being carried on: and that was only possible if the relevant company could be identified at that point. The relief was available in respect of money raised to be employed for the purpose of a qualifying business activity (s. 289(1)(c)) and that condition had to be satisfied at the date of issue of the shares. It could not be satisfied if the active company could not be identified. Thus VML could never become the active company within subs. (1C). It was not a subsidiary at the date of issue of the shares, and so its activity was not a qualifying business activity on that date, which was the date on which the question whether it would ever carry on a qualifying business activity had to be determined. In the result, the Revenue's construction was the correct one, and the appeal was allowed.

Chancery Division.
Judgment delivered 13 November 2006.