In Foojit v HMRC [2021] UKUT 14 (TCC) (25 January 2021), the Upper Tribunal (UT) found that enterprise investment scheme (EIS) relief was not available due to the mechanics of paying out preferential dividends in the company’s articles of association.
Foojit had raised finance by issuing A and B shares. It had expected the issue of the B shares to qualify for EIS tax reliefs. However, when Foojit submitted its compliance statement (EIS 1) to HMRC, HMRC refused to issue the authorisation to Foojit to issue the necessary forms for investors to claim relief.
It was common ground that the B shares carried a preferential right to a dividend, the question was whether that preferential right fell within ITA 2007 s 173(2A)(a), i.e. whether the amount payable or the date on which the dividends were payable depended ‘to any extent, on a decision of the company, the holder of the share or any other person’.
The FTT dismissed the company’s appeal against HMRC’s refusal, concluding that the preferential dividend depended on the decision to declare a dividend, and so HMRC’s refusal had been correct.
Foojit appealed to the UT, arguing that the articles of association of Foojit provide for the dividends to be payable mandatorily, without the need for any declaration by the directors or the company in general meeting, once the accounts show that there are sufficient profits for dividends to be paid.
HMRC argued that the articles simply provide for the B shares to have a priority entitlement to dividends if declared so that, if (and only if) the company resolves to pay a dividend, the first 44% of profits must be paid by way of dividend on the B shares.
The UT agreed with HMRC. The decision was based on the interpretation of the articles of association, specifically the interaction between:
the article that set out the B share rights to preferential dividends (B share article) in the specific new articles introduced at the time of the share issue, with the expectation that they would establish appropriate rights for EIS relief to be available; and
the article that provided the general procedures of the company for declaring dividends (dividend article) in the model articles, which had been in place since incorporation of the company, but which were specifically retained as forming a joint set of articles with the specific new articles.
The UT found that:
the two sets of articles had to be looked at as a whole, and the new specific articles did not take precedence;
the dividend article set out the two (only) ways in which a dividend could be paid: an ordinary resolution of shareholders; and, for interim dividends only, a directors’ resolution;
the B share article did not contain any express terms dealing with the date on which the dividends would be payable; and
therefore, the articles provided that all dividends, whether the preferential B share or ordinary dividends, could only become ‘payable’ following the routes in the dividend article, which, unambiguously, involve ‘decisions’ of the company, its shareholders and directors.
Why it matters: This case highlights the importance of very careful drafting of the articles of association of a company that intends to raise EIS qualifying finance (or in relation to the seed enterprise investment scheme or venture capital trusts, where the wording is identical; see ITA 2007 ss 257CA and 285). Ultimately, the failure in the drafting here came down to the operative provisions relating to declaring dividends: the whole set of articles should be reviewed, not just the new ones being added for the purposes of the EIS investment.
Foojit had obtained advance assurance from HMRC prior to the issue of the shares. It is not detailed in either decision why HMRC had concluded it could resile from that position, but the case highlights that advance assurance does not guarantee EIS relief.
Barrister Philip Ridgway (Temple Tax Chambers) said the decision was of interest for two reasons. ‘First, it demonstrates the dangers of increasingly complex share rights. As advisers advise on FICs, growth shares, flowering shares, exotic preference shares etc., there is an increasing danger that they will not achieve what was intended when the articles are ultimately submitted for scrutiny.’
‘Second, as is apparent from the FTT decision, HMRC gave advance assurance and then refused grant authorisation on the submission of the EIS 1 on the grounds that the B shares carried an excluded preferential right,’ Ridgway added. ‘Given recent cases where HMRC has gone back on clearances, or has refused clearance on an incorrect ground, is the system still fit for purpose?’
In Foojit v HMRC [2021] UKUT 14 (TCC) (25 January 2021), the Upper Tribunal (UT) found that enterprise investment scheme (EIS) relief was not available due to the mechanics of paying out preferential dividends in the company’s articles of association.
Foojit had raised finance by issuing A and B shares. It had expected the issue of the B shares to qualify for EIS tax reliefs. However, when Foojit submitted its compliance statement (EIS 1) to HMRC, HMRC refused to issue the authorisation to Foojit to issue the necessary forms for investors to claim relief.
It was common ground that the B shares carried a preferential right to a dividend, the question was whether that preferential right fell within ITA 2007 s 173(2A)(a), i.e. whether the amount payable or the date on which the dividends were payable depended ‘to any extent, on a decision of the company, the holder of the share or any other person’.
The FTT dismissed the company’s appeal against HMRC’s refusal, concluding that the preferential dividend depended on the decision to declare a dividend, and so HMRC’s refusal had been correct.
Foojit appealed to the UT, arguing that the articles of association of Foojit provide for the dividends to be payable mandatorily, without the need for any declaration by the directors or the company in general meeting, once the accounts show that there are sufficient profits for dividends to be paid.
HMRC argued that the articles simply provide for the B shares to have a priority entitlement to dividends if declared so that, if (and only if) the company resolves to pay a dividend, the first 44% of profits must be paid by way of dividend on the B shares.
The UT agreed with HMRC. The decision was based on the interpretation of the articles of association, specifically the interaction between:
the article that set out the B share rights to preferential dividends (B share article) in the specific new articles introduced at the time of the share issue, with the expectation that they would establish appropriate rights for EIS relief to be available; and
the article that provided the general procedures of the company for declaring dividends (dividend article) in the model articles, which had been in place since incorporation of the company, but which were specifically retained as forming a joint set of articles with the specific new articles.
The UT found that:
the two sets of articles had to be looked at as a whole, and the new specific articles did not take precedence;
the dividend article set out the two (only) ways in which a dividend could be paid: an ordinary resolution of shareholders; and, for interim dividends only, a directors’ resolution;
the B share article did not contain any express terms dealing with the date on which the dividends would be payable; and
therefore, the articles provided that all dividends, whether the preferential B share or ordinary dividends, could only become ‘payable’ following the routes in the dividend article, which, unambiguously, involve ‘decisions’ of the company, its shareholders and directors.
Why it matters: This case highlights the importance of very careful drafting of the articles of association of a company that intends to raise EIS qualifying finance (or in relation to the seed enterprise investment scheme or venture capital trusts, where the wording is identical; see ITA 2007 ss 257CA and 285). Ultimately, the failure in the drafting here came down to the operative provisions relating to declaring dividends: the whole set of articles should be reviewed, not just the new ones being added for the purposes of the EIS investment.
Foojit had obtained advance assurance from HMRC prior to the issue of the shares. It is not detailed in either decision why HMRC had concluded it could resile from that position, but the case highlights that advance assurance does not guarantee EIS relief.
Barrister Philip Ridgway (Temple Tax Chambers) said the decision was of interest for two reasons. ‘First, it demonstrates the dangers of increasingly complex share rights. As advisers advise on FICs, growth shares, flowering shares, exotic preference shares etc., there is an increasing danger that they will not achieve what was intended when the articles are ultimately submitted for scrutiny.’
‘Second, as is apparent from the FTT decision, HMRC gave advance assurance and then refused grant authorisation on the submission of the EIS 1 on the grounds that the B shares carried an excluded preferential right,’ Ridgway added. ‘Given recent cases where HMRC has gone back on clearances, or has refused clearance on an incorrect ground, is the system still fit for purpose?’
