UT/2023/000055 - [2025] UKUT 00028 (TCC)

Ms Brown also argues it is significant the UT overlooked Explanatory Notes she says are relevant to the legislative provisions. The explanatory notes relied on were to Clause 39 Schedule 7 the Finance Bill 2012 (Footnote: ²) which, when enacted, inserted the relevant provisions on disqualifying arrangements in s178A in ITA 2007. These stated:

“Amendment [x] removes reference to the purpose of any person who is party to the arrangements in question, and replaces it with reference to the purpose of the arrangements. This is to prevent the legislation catching “innocent” arrangements merely by virtue of the fact that an investor in EIS shares will almost always have the purpose of ensuring that tax relief is available and that the company can carry on its business. The re-wording is to make it clear that the intention is to disqualify investment in companies which would be unlikely to exist in the first place, or would be unlikely to carry on the proposed activities, were it not for the disqualifying purpose which is the subject of the test.”

Ms Brown submits this shows the clear intention of the legislation was to reduce the scope of exclusion from the relief by seeking to prevent innocent arrangements from being caught.

We reject that argument. The clear purpose of the change elaborated on in the explanatory notes was to stop the situation where arrangements would be breached because an investor in the shares had the requisite purpose. The explanation for the change assumes the purpose of arrangements might include the investor’s purpose in securing tax relief; it does not say anything one way or the other on who is to be regarded as “party to” the arrangements. It does not follow that just because this change was made to a Bill provision with the stated aim that innocent arrangements were not caught (because of a risk of breach by the investor’s purpose) that would then mean the words of the enacted provision should be construed narrowly. These explanatory notes, or the fact they were not mentioned in the UT’s judgment in Coconut in no way undermine the UT’s analysis there.

A further factor in favour of a narrow approach to construction arose, Ms Brown argued, from the feature of the EIS and SEIS regimes whereby it was the company issuing the shares (in respect of which authorisation for compliance certificates was sought) who had appeal rights in relation to fulfilment of the scheme conditions rather than the investors seeking tax relief. Ms Brown suggested that meant there was a higher risk disputes over the applicability of the scheme conditions went un-litigated and argued there was a consequent lack of “checks and balances” to HMRC’s operation of the share scheme provisions. That, in her submission, as well as the “draconian” nature of the conditions pointed against construing the relevant anti-avoidance provision more broadly. We reject this submission which was no more than assertion. There was no indication the situation of appeal rights with the issuing company constituted a lack of checks and balances, still less that Parliament had acknowledged that and had thereby intended for that (or else the operation of the effect of any of the other conditions) to be compensated for when interpreting s178A.