EIS and SEIS: Risk to capital

The Enterprise Investment Scheme (‘EIS’) has long been notorious for the traps that lie in wait for the unwary (and for the wary, too, come to that).  One of the more recently-introduced conditions for relief – which applies both to EIS and to its younger sibling the Seed Enterprise Investment Scheme (‘SEIS’) – is the ‘risk-to-capital’ condition.  It’s been before the Tribunal in a number of cases, most recently in Coconut Animated Island Ltd [2022] UKFTT 303 (TC) and Valyrian Bloodstock Ltd [2022] UKFTT 306 (TC).

Although the legislation styles it the ‘risk to capital’ condition, the condition actually comprises two distinct requirements (both of which must be fulfilled) which arguably have little in common.

The first – which is truly about risk to capital – is that investors genuinely risk losing their shirts: or, as the legislation puts it, that ‘there is a significant risk that there will be a loss of capital of an amount greater than the net investment return’.  Usually, it’s not too difficult to show this.

The second is that the company in question ‘has objectives to grow and develop its trade in the long-term’ – which is at best only indirectly about risk to capital: it is really about denying relief to ‘special purpose vehicles’ established to undertake a particular project of limited duration and then return capital to investors.  It’s this aspect that HMRC have been challenging of late.

Coconut Animated Island Ltd was formed to exploit the intellectual property rights in a set of characters designed to appeal to the incomprehensible tastes of preschool children.  The plan was to start with short ‘webisodes’ on an established YouTube channel, before moving on to longer episodes on more traditional broadcast media and ultimately the inevitable exploitation of infant pester power through licencing, merchandising and so on.

HMRC thought there were several grounds on which SEIS relief should be denied.  They succeeded on one of those grounds, which was enough for them to win the case (more on that another time) but failed on the ‘risk to capital’ point: the Tribunal considered that the company did indeed show the required growth and development objective.  That question was to be determined by the subjective intentions of the company (acting through its directors) at the time of the investment, having regard to all the circumstances.

The Tribunal thought there was, in the case before them, no reason to doubt the genuineness of the intention of the directors (though the earlier case of CHF Pip! PLC suggests that in extreme cases the expressed aspirations of the company might be so unrealistic as to amount to ‘a pious hope rather than evidence of a genuine intention to make a profit’).  And the absence of any objective to increase the number of employees was of no significance in an industry where subcontracting is a common method of operating.

Further, the Tribunal thought that HMRC were conceptually wrong in supposing it relevant that investors were hoping to realise a return within the short to medium term – most likely by selling the shares in the company.  That was to confuse the objectives of the investors with those of the company, which ‘had an independent existence which could last well beyond the time horizon which was of interest to its shareholders from time to time and, in this particular context, its original shareholders.  And, so far as [the company] is concerned, we are satisfied that the evidence shows that the aim was for it to grow and develop its trade in the long-term through the three stages identified’.

It’s instructive to contrast that case with Valyrian Bloodstock.  The business in that case was buying horses, apparently at 6 to 12 months old, and selling them on at age 3 or more – a practice known as ‘pinhooking’.  The company’s problem was that the marketing material seems to have promoted the business as an ‘investment syndicate’, making much of the fact that the company ‘will trade bloodstock for a three year term, qualifying as an EIS’.  The Prospectus indicated that ‘the business must undertake a qualifying business activity for at least three years – making this a three year investment’.  And the Tribunal found that ‘The intention could not be more clear. The syndicates were each a one off investment for a three year term and would be wound up after the last horse was sold in that term with the syndicate account distributed to the investors.’

With those findings, there could be only one outcome to the case: EIS relief was not due.

Finally, it’s important to appreciate both that fine points of distinction can make all the difference and also that such fine points may need to be explained to HMRC. In a recent case here HMRC, after initial refusal apparently based on the stance they took in Valyrian, conceded ‘on the Courthouse steps’ that SEIS relief was available to a company whose business is breeding bloodstock – which is undoubtedly a long-term business.

For more information, including specialist guidance from our tax team on the quirks of the EIS and SEIS rules, please get in touch with your usual BKL contact or use our enquiry form.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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