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The keeping of horses not a trade for EIS relief

Author: Julie Butler FCA, Butler & Co

Published: 20 Jul 2023

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There have been a number of tribunal cases where appeals have failed as a result of there not being a recognisable trade, e.g. Babylon Farm Ltd v HMRC [2021] UKUT 224 (TCC) regarding the sale of hay for horses.

In Valyrian Bloodstock Limited v HMRC [2022] TC08578, the First-tier Tribunal (FTT) denied Enterprise Investment Scheme (EIS) relief to a business that bought and kept horses. It was considered that the risk to capital condition was not met: there was no qualifying trade and no long-term objective to grow and develop a trade. The stated reasons to support the FTT’s denial of the trade have a similar theme to a number of other tribunal decisions, e.g. there was no business plan and no evidence to show the appropriate activity.

An investment company – ineligible for relief

The FTT agreed with HMRC that Valyrian Bloodstock was an investment company, so ineligible for the EIS relief that was being claimed. The profits came from appreciation in stock and capital was not sufficiently at risk to meet the criteria for the EIS relief.

The facts were that HMRC had refused to certify share issues by the company as EIS shares. Valyrian Bloodstock bought and sold potential racehorses and outsourced the task of raising and progressing them to a third party. There were no employees and Valyrian subcontracted all services. In arriving at their decision, the FTT considered the operations of the company. The tribunal considered that in order to qualify for EIS relief the capital needed to be at risk, and there had to be a plan for longer term development of the company.

Very sketchy financial information

Valyrian Bloodstock was incorporated in February 2019 with Nick Brown as the sole director. Its activities were the raising of horses and the purchase and sale of bloodstock. In addition to Nick Brown, who held one share, four investors were allotted shares. In November 2019, Valyrian Bloodstock emailed to HMRC four EIS1 forms with supporting documentation. It had not applied for advance assurance that it met the conditions for EIS relief so HMRC asked for additional information, which Valyrian Bloodstock provided. The documents explained that the horses would be kept at a third-party stud for a cost of £8,670 per horse per year. The FTT was disappointed with the ‘very sketchy financial information’ provided by Valyrian Bloodstock, which it also found ‘inaccurate’. Valyrian Bloodstock had no long-term financial forecasts nor did it have a business plan.

HMRC refused to issue the EIS certificates because the risk to capital condition had not been met and Valyrian Bloodstock also failed to meet the trading requirement. Further, Valyrian was not run by entrepreneurs – the investors were individuals using a tax-advantaged scheme with little entrepreneurial involvement. Ironically, historically HMRC seem to distrust the ownership of horses in various forms as a viable trade for tax reliefs generally, so caution should be considered on such submission to ensure that evidence is in place.

Consideration of the circumstances at the time the shares were issued

The FTT stated that it was necessary to consider all the circumstances at the time the shares were issued. The evidence was not clear but the tribunal noted that HMRC appeared to ‘rely on’ the fact that Valyrian Bloodstock was described as a three-year investment. It was arguable that, by saying that bloodstock would be purchased within the three-year term to be sold at a later date, the duration of the investment would be longer than three years. However, there was no positive argument that there had been an ‘intention to trade on an ongoing basis after the three years expired’.

Lifespan of three years

Valyrian Bloodstock indicated in its publicity for investors that it only intended to last for three years. The company had not sought advance clearance and had also not prepared any business plans or cashflow forecasts to support its case. With any form of equine operation it is essential to have such forecasts. The FTT therefore found for HMRC that it was correct to deny EIS status.

In summary:

  • It was necessary to look at the circumstances at the time the shares were issued, together with contemporaneous evidence. Whilst there was some indication in the correspondence from the company that a continuing trade was intended, this was dated nearly 18 months after the share issues.
  • The business model was high risk but there was no evidence that it was anything other than a three-year investment and had no evidence to demonstrate the growth and development of the company
  • Valyrian Bloodstock was instead an investment opportunity in a ‘wrapper’ that was perceived as being tax efficient. The horses were held for capital appreciation rather than as trading stock.

There is a lot to be learnt from this case about the need to evidence trade and to demonstrate growth as well as longevity for the EIS application.

Demonstrating growth and development

The FTT stated that Valyrian Bloodstock had provided no evidence to demonstrate growth and development of the company. Indeed, looking at all of the evidence, in particular, ‘the documentary evidence at the time of the issue of the shares’, the FTT considered there was nothing to suggest that this would be anything other than a three-year investment. Rather, the evidence pointed to growing and developing a number of syndicates. One of the EIS cases that was scrutinised in arriving at this decision was Cry Me a River Ltd v HMRC which looked at the capital to risk ratio met and whether a trade qualifies. The Cry Me a River case was successful – the Tribunal determined that HMRC were wrong to refuse the issue of compliance certificates. Cry Me had the financial forecasts which were an articulation of the anticipated profitability of a film once produced. No such figures existed in Valyrian.

Overall, Valyrian Bloodstock ‘made much of the statutory purpose of EIS as encouraging investment in high-risk ventures’ but, looked at objectively, the business was an ‘investment wrapper’ perceived as tax efficient. EIS can provide beneficial tax relief but abuse of the conditions will come under scrutiny by HMRC and it is an area that they are very pernickety about.

Looking to the tribunal judgement, Para 41 sets out a reading from a blog. The first was a blog on Monday 15 May 2017 which stated:

“Recently I have been working on an investment vehicle…We have formed a company bloodstock for a three-year term, qualifying as an EIS, and therefore very tax efficient.”

That company was described as having two of ten shares still left on offer. That company was Whitwick Bloodstock Limited (“Whitwick”). Mr Brown was the sole director.

Para 42 sets out another extract from a blog:

The blog for Wednesday 12 July 2017 said that there was only one share left and reiterated that “…our Bloodstock investment vehicle…and will trade for three years.” 

Such HMRC scrutiny shows how HMRC will look at all the facts surrounding sceptical EIS cases.

Para 125 explains:

“HMRC argue that the legislation is intended to exclude assets which may be being held for capital appreciation rather than as genuine trading stock and that is broadly correct.”

The FTT agreed with HMRC that Valyrian Bloodstock was an investment company, so ineligible for the relief. The profits came from appreciation in stock, and capital was not sufficiently at risk to meet the criteria for the scheme. The FTT therefore found for HMRC that it was correct to deny EIS status. Valyrian did not meet the qualifying trade requirements.

There is a lot to learn from this case, especially with regard to equine EIS claims:

  • Obtaining advance clearance can be beneficial
  • The need to produce business plans and cashflow forecasts to prove a trade are essential
  • Cynical applications with no substance will be closely scrutinised, especially when the company is an investment 
  • Badges of trade, employees and strong financial documents to support the risk argument would be helpful
  • From the outset there must be proof of capital to risk ratio
  • There must be evidence of growth and development of the trade and that the company was run by entrepreneurs not investors

Supplied by Julie Butler FCA, Founding Director of Butler & Co Alresford Limited, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH. Tel: 01962 735544. Email: j.butler@butler-co.co.uk, website: www.butler-co.co.uk

Julie Butler FCA is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, Butler’s Equine Tax Planning (3rd edition) (Law Brief Publishing) and Stanley: Taxation of Farmers and Landowners (LexisNexis), and editor of Farm Tax Brief.

*The views expressed are the author's and not ICAEW's.