Coconut Animated Island Limited v The Commissioners for HMRC

the CCC was “at the heart of the CHF Media Fund and…key to its success”. The eight members of the CCC were all employees of the CHF Group and included Mr Wilkins – who was chief executive officer of the CHF Group – Ms Nicola Johnston – who was head of the corporate finance arm of CHFE – and Mr Fenna – who was the creative director of CHFE, as we have noted above;

the job of CHFE’s employees and independent contractors was “to not only produce and develop the shows or concepts but also to come up with ideas to be considered for development by the CCC”. In addition, “[on] occasion, if the concept is strong enough, the CCC will consider proposals from external sources”;

the investors would hold their shares through a nominee which was a member of the CHF Group. That company would hold legal title to the shares whilst the investors would be the beneficial owners of the shares. An investor would provide his or her subscription monies to the administrator of the fund and then the manager of the fund, based on the recommendation of CHF Enterprises, having consulted the CCC, would decide on the investee company in which the particular investor’s subscription monies could most usefully be deployed;

to ensure that investee companies’ concepts and shows had the best chance of success, each investee company “[would] have access to the full range of CHF’s extensive in-house expertise and support”. In addition, an investee company might engage an external production company to develop and produce the concept or show;

fees and charges which were payable by an investee company to the CHF Group included development and production fees, licensing and merchandising fees and distribution fees. These were all payable at a market rate;

the risks faced by investee companies included the fact that they would be “highly dependent on the skills of [the CHF Group] and the departure of any of [the CHF Group’s] key directors, consultants or employees or other people involved in the development of the investee companies could have a material adverse effect on the business of the investee companies”;

each investee company would have at least one director, Ms Hawkins, who was wholly independent of the CHF Group and whose role would be to act as the “investors’ champion”;

the CHF Fund would have its own independent manager but the manager’s decisions were based on advice received from CHF Enterprises, having consulted the CCC. The fees of the manager would be discharged by the investee companies and, to the extent not so discharged, would be recouped by the CHF Fund on exit prior to any dividends’ being paid to investors;

the CHF Group would defray various initial expenses in establishing the CHF Fund and would be entitled to receive various fundraising fees from the CHF Fund on an ongoing basis; and

it was anticipated that the optimum holding period for each investee company would be between three and five years from the date of first release or first broadcast. No specific exit route could be prescribed at the outset but, at the relevant time, an exit likely to provide the highest return for investors would be devised, with input from the independent director. The intention was for the CHF Group to be able to leverage against its shareholding in the relevant investee company to acquire the shares of the investors and then for the relevant investee company to be sold to management or a third party or to be liquidated.

showed the characters which were intended to populate Coconut Bay in a little more detail than had been the case in the Proposal;

explained the particular characteristics of each character;

explained in greater detail than the Proposal how the plot of each show was intended to work and which objects could be featured in the shows; and

identified the Appellant as the owner of the intellectual property rights in the concept.

explained the marketing plan, which was:

contained revenue projections which showed:

contained a budget of £150,000, of which by far the greatest item was £50,944 for “Design/Production Team” and allowed £5,864 for ‘Pre-production”, £35,556 for “Production”, £8,140 for “Voice Recording, cuts and Picture edits”, £6,450 for “Post production sound and Music”, £21,391 for “Production overheads” and £21,655 for “Marketing, Social Media and Commercial”; and

finally, invited any prospective investor who wanted further information to contact Ms Johnston, who was described as “Head of Finance”, on her CHF Group email address.

the Services Agreement superseded any earlier written or oral arrangement between the parties and contained the entire agreement and understanding of the parties in relation to the subject matter of the Services Agreement;

with effect from the “Commencement Date” – which was defined as 16 August 2017 – Mr Fenna was appointed as director of the Appellant until the Services Agreement was terminated in accordance with its terms;

the duties of Mr Fenna were to include:

the above services were:

after the initial development phase, Mr Fenna’s services would be renegotiated “dependent on circumstances not yet foreseen”; and

Mr Fenna undertook, inter alia:

the Commencement Date in the Draft PSA was said to be “[ ] 2017”, whereas the “Commencement Date” in the PSA was said to be “July 2018”;

in schedule 2 to the Draft PSA, the “Production” was defined as five webisodes of two minutes each with Credits stipulated as “(1) minute open and closed credits x 2” and was required to be produced in the English language whereas, in the PSA, the “Production” was defined as seven webisodes of two minutes each, no provision was made for “Credits” and there was no requirement for the use of the English language;

schedule 3 to the draft PSA specified that “[the] current production and delivery schedule is planned as 5 x 2 minute episodes, with a planned start date of November 2017, end date of 15^th June 2018”, whereas schedule 3 to the PSA provided “Deliverables are 7 x 2 minute webisodes. Planned start date of July 2018”;

the budget in schedule 4 to the Draft PSA was for an aggregate amount of £150,000 and the aggregate, the line items specified in the breakdown of the aggregate and the figures for those line items exactly matched the budget set out in the Investor Brochure, whereas the budget in schedule 4 to the PSA was for an aggregate amount of £98,578.43 and the line items specified in the breakdown of the aggregate and the figures for those line items were completely different from those set out in schedule 4 to the Draft PSA;

the registered address of CHFE in the two documents was different; and

the notices in the Draft PSA were required to be sent to Mr Simon Hall (in the case of CHFE) and Mr Wilkins (in the case of the Appellant) whereas the notices in the PSA were required to be sent to Mrs Helen Brown (in the case of CHFE) and Mr Fenna (in the case of the Appellant).

a letter of 9 September 2018 from Mr Fenna on behalf of the Appellant to Ms Elizabeth Arnold of the Respondents in which Mr Fenna set out three reasons why he believed that the Appellant satisfied the “risk-to-capital condition” requirement in Section 257AA(za) (the “September 2018 Letter”). In that letter, Mr Fenna said that, between September 2017 and March 2018, he “had redesigned the characters, the backgrounds and had written scripts and all those activities had taken place since the [Appellant] had been assigned the IP”;

accounts for the Appellant in respect of its financial year ending 31 May 2018 (the “2018 Accounts”). These showed that, as at 31 May 2018, the Appellant had incurred £84,581 on the development and production of its intangible assets;

accounts for the Appellant in respect of its financial year ending 31 May 2019 (the “2019 Accounts”). These showed that, as at 31 May 2019, the Appellant had incurred a further £49,479 on the development and production of its intangible assets, and had therefore incurred £134,060 in aggregate on the development and production of its intangible assets;

accounts for the Appellant in respect of its financial year ending 31 May 2020 (the “2020 Accounts”). These showed that, as at 31 May 2020, the Appellant had incurred a further £5,937 on the development and production of its intangible assets, and had therefore incurred £139,997 in aggregate on the development and production of its intangible assets;

various invoices which had been sent to the Appellant in 2018 – namely:

a brochure from Kuber Ventures, an entity describing itself as “[Opening] the door to EIS investment” (the “Kuber Brochure”) which outlined the structure and nature of the CHF Fund for prospective investors in the fund;

screen grabs from Okee TV which suggested that the episode of Coconut Bay entitled “Coconut Bay – Ball” first aired on Okee TV on 9 April 2021 and that the episode of Coconut Bay entitled “Coconut Bay - Brush” first aired on Okee TV on 15 January 2022; and

a confirmation statement sent to Companies House in relation to the Appellant on 15 May 2019, which showed that, as at that date:

he was the creator of the intellectual property known as Coconut Bay. He had worked in the animation industry for over 40 years after completing a degree in film-making and had had the original idea for Coconut Bay while working as a self-employed animator in the late 1990s. The concept which he had presented to the CCC was largely the same concept which he had developed in the late 1990s, with some minor modifications to bring the concept up to date. However, he had not pitched the idea to anyone until he did so to the CCC in April 2017, at which time he had been working full-time as an independent contractor for CHFE for some three years and had recently become an employee and the creative director of CHFE. However, he had never held any shares in any company in the CHF Group;

the original funding model for productions when he had started his career had been for broadcasters to fund productions but that had changed over time to a co-funding model, in which external investors were invited to finance productions. Various jurisdictions around the world such as France and Canada had created advantageous tax regimes in order to encourage investment of that nature. The introduction in the UK of the EIS and the SEIS enabled investors in the UK to participate in financings of that ilk;

the risky nature of productions meant that any money raised for a production had to be used efficiently. There was generally a long lead-time before a concept or show took off and therefore it made no sense for a company, such as the Appellant, which was seeking to exploit its intellectual property rights, to take on many employees. It was better for such a company to obtain the design, animation, writing and content from sub-contractors. CHFE had a team of employees and sub-contractors which made it an ideal sub-contractor for the Appellant in relation to Coconut Bay. That explained why most of the Appellant’s budget had been paid to CHFE. He did not think that CHFE would have made a significant profit from the budget in the PSA. The amounts set out in the PSA were not much more than what he expected to have been the relevant costs for CHFE;

his work for CHFE over the period in which the relevant shares in the Appellant had been issued had been full-time. He had been the series director for a show called “Daisy and Ollie”. Thus, the work which he had done for the Appellant had largely been in his spare time outside working hours. Notwithstanding the suggestion in the IM that it was part of his job specification to come up with ideas for the CCC to consider (see paragraph 14(2) above), it was never part of his contract with CHFE as an independent contractor or as an employee to do so. Moreover, whilst it was true that most of the ideas that were pitched to the CCC came from employees of, and independent contractors who worked for, CHFE, that was not exclusively the case. The CCC also considered suggestions which were put to it from persons who had no connection with the CHF Group, as the IM had said;

he had left all administrative matters in relation to the Appellant – such as the formation of the Appellant, the contractual documents and the figures in the forecast in the Investor Brochure – to others such as Mr Wilkins, Ms Johnston and Ms Hawkins. His sole focus was on the creative aspects of the Appellant’s trade;

the deal which he had reached with the CHF Fund in relation to Coconut Bay was that he would get 10% of the net profits of the Appellant going forward. He considered that that was a good outcome as he was aware of other cases where the original designer of the concept or show had retained a much lower percentage of the future profits. Moreover, he thought that his 10% profit share could prove to be extremely valuable. As he was content with his 10% profit share, he did not mind that the arrangements meant that the CHF Group would be obtaining a 49% share in the remaining 90% of the Appellant’s net profits;

it was never intended that the Appellant would acquire the intellectual property rights to any concept or show other than Coconut Bay. The model in the industry was for there to be a single investee company for each concept or show;

when he said in the September 2018 Letter that he “had redesigned the characters, the backgrounds and had written scripts” since the intellectual property had been assigned to the Appellant in August 2017, he meant that other people had done so under his direction. For instance, he had hired Mr Knowles to bring a more contemporary feel to the show. As the extract from the September 2018 Letter suggested, Mr Knowles was not the only person whom he had asked to do work on the Appellant’s behalf prior to 6 June 2018 when he had been formally appointed as a director of the Appellant. He had also engaged other sub-contractors on the Appellant’s behalf, such as Ms Golubeva of Sheil Land Associates Limited, who worked on the script and, most importantly, CHFE, who provided various production services. This was the reason why the various invoices specified in paragraph 20(5) above had been issued to the Appellant and why the 2018 Accounts showed a figure for costs incurred in developing and producing intangible assets of £84,581;

he accepted that there were deficiencies in the documentation during that period, in that:

however, what was intended in that regard could clearly be seen in the fact that:

He said that, during that period, he had simply assumed that he was authorised to enter into contracts on behalf of the Appellant and that there was a production services agreement in place between the Appellant and CHFE on the terms of the Draft PSA. He ascribed the deficiencies in the documentation to a degree of chaos that existed within the CHF Group over the relevant period as a result of a change in management which was then taking place within the group;

since he had pitched the concept to the CCC, the concept had continued to evolve. For instance, whereas initially the Proposal had suggested that the characters were going to speak their own language, they now spoke in English. In addition, the characters had changed so as to be less gender-specific and the number of locations on the island had been expanded. In addition fifty-two scripts had been written. In all of this, the Appellant had relied heavily on CHFE to produce the animations and to advance the concept. The designs which Mr Knowles had worked on were developed further by the head of background design at CHFE pursuant to the PSA. In effect, until its liquidation, CHFE had been responsible for everything apart from the sound and the script. By the time of CHFE’s liquidation, most of the production work had been completed but the post-production work had been carried out for the Appellant by Flix Facilities in Manchester;

when the Appellant had entered into the Acquisitions Agreement on 20 February 2019, it had not at that time pitched the show to anyone apart from CHF TVL. However, the Appellant had done so subsequently and the screen grabs referred to in paragraph 20(7) above showed that the show had aired on Okee TV. He was not sure when those shows had first been aired on Okee TV. The “first aired” dates given in the screen grabs did not necessarily indicate that the relevant shows had not been aired before then. The show was targeted at the two to three-year old market and was therefore continually being refreshed and it was Okee TV’s practice to re-launch shows; and

the Appellant continued to trade, albeit at a much-reduced level from that originally anticipated because of the lack of funding with which to progress its goals. The plan had been to raise further funds through the EIS but the EIS was subject to similar conditions to the SEIS. Thus, the Respondents’ refusal to provide authority for compliance certificates in relation to the SEIS effectively meant that the Appellant was precluded from obtaining EIS funding.

at the time when the relevant B ordinary shares were issued, the Appellant “[had] objectives to grow and develop its trade in the long-term” (the “risk-to-capital issue”);

the whole or greater part (in terms of value) of each intangible asset of the Appellant in respect of which royalties and licence fees were received by Appellant was “created” by the Appellant (the “IP issue”); and

the relevant B ordinary shares were issued, or any money raised by the issue was spent, in consequence or anticipation of, or otherwise in connection with, “disqualifying arrangements” (the “disqualifying arrangements issue”).

in order for the Appellant to succeed in the appeal, it needs to show that the answers to the first two questions are in the affirmative and the answer to the third question is in the negative; and

in relation to each question, the burden of proof is on the Appellant.

Mr Fenna considered that, with effect from 16 August 2017, he was a director of the Appellant and entitled both to carry out work for the Appellant himself and to engage third party contractors on behalf of the Appellant in order to progress the Appellant’s trade. In that respect, Mr Fenna was perfectly well aware that he was wearing two hats at the relevant time – as the creative director of CHFE and as (what he thought was) a director of the Appellant – and he was clear in his own mind where his duties lay as regards each of those engagements; and

Mr Fenna’s understanding of the position was the same as that of Mr Wilkins and Ms Hawkins.

in the AA Letter of 6 September 2017, Mr Wilkins informed the Respondents that the Appellant was going to engage Mr Fenna “to partake in the creative development of the Coconut Bay concept and to work with other team members towards producing a first series”. There is no suggestion in that statement that there was to be a delay of nine months before Mr Fenna was going to be so engaged; and

in addition, although we accept that the terms of the Services Agreement were not yet in effect at the time when the various contractual obligations were incurred by Mr Fenna, those terms do evidence the Appellant’s intention that Mr Fenna had the authority to do so because they made provision for the earlier “Commencement Date” for his appointment as a director.

the PSA had a later commencement date than the Draft PSA;

the number of “webisodes” had gone up from five to seven by the time that the PSA was executed;

the budget under the Draft PSA had reduced by the time of the PSA (because part of the budget set out in the Draft PSA had already been spent, as evidenced in the 2018 Accounts);

the reference for the need for the English language had been removed; and

CHFE’s registered office and the notice details for both parties had changed.

this issue requires us to determine whether, in the light of all the circumstances existing at the time of issue of the relevant shares, it would be reasonable to conclude that the Appellant had objectives to grow and develop its trade in the long-term;

the circumstances set out in Section 257AAA(3) are just some of the circumstances which we may take into account for this purpose. The list is inclusive and not exhaustive;

it follows that, by definition, none of the circumstances set out in Section 257AAA(3) is determinative, in and of itself; and

in addition, some of the specified circumstances are more relevant to the second limb of the risk-to-capital condition – whether there was a significant risk of a loss of capital of an amount greater than the net investment return – as opposed to the first limb which we are here addressing.

the way in which Section 257AAA was worded meant that what was required was an objective determination – “it would be reasonable to conclude” – of the Appellant’s subjective intentions – “objectives”. There was no need to show that the relevant objectives had actually been met;

in this case, it was merely necessary to show that the Appellant’s intention at the time when the shares were issued was to grow and develop its trade in the long-term. The phrase “long-term” was not defined and it might well be different for different types of business;

the business model of:

was entirely credible, as Judge Popplewell had accepted in Pip at paragraph [72];

the revenue projections set out in the Investor Brochure were wholly consistent with the three-stage process described in paragraph 42(3) above in that:

moreover, those projections were entirely realistic at the time when they were made. The fact that they had not materialised was due to the ongoing challenge by the Respondents to the status of the shares issued by the Appellant as qualifying for the SEIS. This meant that the Appellant had been unable to access funding under the EIS, which was a fundamental part of its business plan;

even though the original projections had not been met, the Appellant was still carrying on its trade and producing “webisodes” despite the liquidation of CHFE in 2019. In addition, Mr Fenna had testified that significant time had been spent on developing the concept and scripts;

the fact that the Appellant had brought the appeal was further evidence of its desire to grow and develop its trade in the long-term. This was because relief under the SEIS was of no direct benefit to the Appellant itself. Instead, the reason why it was important for the Appellant that its issues of shares qualified for the SEIS (and, correspondingly, the EIS) was that that would give the Appellant access to funding with which to progress its trade;

turning to the various circumstances set out in Section 257AAA(3):

the revenue projections set out in the Investor Brochure were wholly unrealistic – in a similar way to the revenue projections made in Pip – and should therefore not be taken as evidence of an objective to grow and develop the trade in the long-term. Moreover, those revenue projections extended for only five years and showed the advertising revenue reducing in year four as compared to year three and again in year five as compared to year four. This was hardly consistent with the proposition that the Appellant intended to grow and develop its trade in the long-term;

in reaching its conclusion in CMAR that the “risk-to-capital condition” requirement was met, the First-tier Tribunal had placed great store on the fact that the appellant in that case was not simply a single project special purpose vehicle but there was instead an intention to expand its trade to encompass other films as and when they became ready to be produced (see CMAR at paragraphs [115] to [123]). That was not the case for the Appellant, whose trade was solely confined to a single project;

in evidential terms, very little reliance could be placed on matters that had occurred in the period following the issues of the shares which were relevant to these proceedings. This was because the question to be addressed related to the objectives of the Appellant at that specific time. Thus, the fact that:

shed very little, if any, light on the objectives of the Appellant at the relevant time;

the three words/phrases “objective”, “grow and develop” and “long-term” were not defined and therefore bore their ordinary meaning. An “objective” was more than simply a “hope”. In order for something to qualify as a person’s “objective”, the relevant person needed to have intended actively and strategically to pursue that thing as a target. “Grow and develop” meant expanding and evolving over time and generally involved increasing revenue and market share by obtaining additional capital or taking on additional employees. “Long-term” meant a period of more than five years. An intention to engage in profitable activity was not the same as an intention to grow and develop in the long-term;

in the absence of any testimony from a director or employee of the Appellant at the relevant time, there was just the testimony of Mr Fenna and the documentary evidence. Looking at that evidence:

turning to the various circumstances set out in Section 257AAA(3):

first, it was not appropriate to say that each of the investee companies of the CHF Fund was in competition with others for funding. Although they all traded in concepts or shows, each investee company had its own bespoke market. For instance, the Appellant’s market was in the two to three-year old pre-school range. That was not true of all the other investee companies;

secondly, whilst Mr Priestley had questioned the basis for the CHF Group’s holding a 49% interest in the voting rights and economic equity in the Appellant, he had provided no explanation as to why, if Mr Fenna really had been acting as an employee of the CHF Group in suggesting the Coconut Bay concept to the CCC, the group had not acquired a greater share in the voting rights and economic equity in the Appellant;

thirdly, Mr Priestley’s focus on the terms and timing of the investors’ exit was misconceived. The relevant issue in this case was the objectives of the Appellant and not the objectives of the investors; and

finally, the relationship between the Appellant and the CHF Group was a two-way process in which both parties benefited. The Appellant benefited from its access to the expertise of CHFE’s employees and independent contractors and its access to funding through the CHF Fund, whilst the CHF Group benefited from providing production services to the Appellant and also from its shareholding in the Appellant. If the Appellant prospered, so too did the CHF Group. This was not a case of Mr Fenna’s having sub-contracted to CHFE the entire conduct of the Appellant’s trade. The strategic control of the Appellant’s trade remained firmly vested in Mr Fenna.

we do not find Section 257AAA(3) to be a particularly easy provision to apply. In the first place, the word “may” in the preamble suggests that the section is intended to operate permissively and not compulsorily, and yet Section 257AAA(1) requires that “all the circumstances existing at the time of the issue of the shares” are to be taken into account. This suggests that, notwithstanding the use of the word “may” in the preamble in Section 257AAA(3), the circumstances set out in Section 257AAA(3) are not just examples of “all the circumstances existing at the time of issue of the shares”. They are clearly considered to have special significance and need to be considered in each case where Section 257AAA is potentially in point;

having said that, we do not find it easy to ascertain the relevance of some of the circumstances described in Section 257AAA(3) to the two limbs of the “risk-to-capital condition” requirement set out in Section 257AAA(1). In part, this may be because the circumstances described in Section 257AAA(3) are stated to be doing service in relation to both limbs of the requirement without distinguishing between them and the two limbs of the requirement seem to us to be dealing with very different issues. However, it is also the case that it is hard to identify the relevance of some of the circumstances to the issue which is being addressed from the way that the circumstances are expressed.

For instance, it is easy to understand how the circumstance described in paragraph (a) – the objectives of increasing employees or turnover – has relevance to the question of whether the relevant company has the objective of growing or developing its trade in the long-term. The same could equally be said about the circumstances described in paragraphs (b) and (c). With something of a stretch, it might also be said that the circumstances described in paragraphs (f) and (g) are conceivably relevant as they both go to the question of the ability of the relevant company to raise funds for the purposes of the trade. However, it is not easy to see how the circumstances described in paragraphs (d) and (e) have a bearing on the question of whether or not the relevant company has the objectives of growing and developing its trade in the long-term. In fact, this was amply demonstrated at the hearing when Ms Brown expressed the view that a connection between the relevant company and one of its sub-contractors would be unhelpful to concluding that the relevant company had the required objectives whereas Mr Priestley considered that any such connection would be positively helpful;

so far as we can determine, the circumstances described in paragraphs (d) and (e) are aimed at identifying cases where the fact that the relevant company conducts its trade through a connected sub-contractor or the manner in which the relevant company has been established or has been managed or held is indicative of its having a purpose of benefiting the business or trade of some other company or group as opposed to its own trade in the long-term. If that interpretation is correct, then Ms Brown is right that a connection between the Appellant and CHFE in this case would be an adverse indicator and not a positive one in terms of the relevant test;

whether or not we are correct in our interpretation of the relevance of the circumstance described in paragraph (d), it is necessary for us to identify whether CHFE, the Appellant’s most significant sub-contractor, should be regarded as a person “connected” with the Appellant for the purposes of paragraph (d). Part 5A of the ITA does not itself include a definition of the word “connected” and there is no equivalent in that part to the disapplication of Section 993 which is set out in Section 257(2) for the purposes of the EIS. It therefore follows that the general definition of the word “connected” set out in Section 993 applies for the purposes of Part 5A of the ITA. This means that:

This conclusion raises a difficult question in the present case because, whilst CHF MGL held only 49% of the voting rights and economic equity in the Appellant, and beneficial ownership of the remaining 51% of the voting rights and economic equity in the Appellant was vested in Ms Hawkins and the investors, legal title to the greater part of the 50% of the shares in the Appellant which were beneficially held by the investors was vested in a member of the CHF Group (CHF Nominees) as nominee for the investors.

Section 451(3) of the CTA 2010 provides that, for the purposes of Section 450 of the CTA 2020, the “rights and powers” held by a nominee “are to be attributed” to the beneficial owners. What the section does not say expressly is:

In the light of the conclusion which we have reached in relation to the risk-to-capital issue below, we do not propose to explore these questions in any detail in this decision but we would note that:

the evidence of Mr Fenna at the hearing was that the intention of the Appellant at the relevant time was to grow and develop its trade in the long-term in the manner described by Mr Wilkins in the AA Letter;

the three-stage process described by Mr Wilkins in the AA Letter - of starting with “webisodes” on YouTube, then moving to longer episodes on more traditional broadcasting channels and then finally looking to monetise the concept still further through licensing and merchandising - seems to us to be an entirely credible commercial model. In that regard, we would distinguish the facts in this case from the facts in CMAR, where, in reaching its conclusion that the “risk-to-capital condition” requirement was satisfied by the appellant, the First-tier Tribunal placed considerable store on the fact that the appellant was likely to acquire rights to produce further films in the future – see CMAR at paragraph [115] – thereby suggesting that, in the absence of the appellant’s having that intention, the appellant might have failed this requirement. Producing films is a very different activity from the activity of exploiting intellectual property rights. In this case, there was a realistic possibility of significant future revenues from licensing and merchandising the Coconut Bay characters and concept if the concept proved to be attractive to the target market and thus there was no need for the Appellant to have had an intention to acquire rights to other concepts or shows in order to establish that it had objectives of growing and developing its trade in the long-term;

the form of the revenue projections in the Investor Brochure was entirely consistent with the model referred to in paragraph 48(2) above in the way that the broadcasting revenue was shown as starting slightly later than the advertising revenue and then the licensing and merchandising revenue was shown as starting after that;

although we were not presented with any evidence in relation to how realistic the relevant figures were, we consider that the person involved in the production of those figures, Ms Johnston, would have believed them to be realistic. This is because the figures were included in the Investor Brochure, a document which was sent to prospective investors in order to induce them to invest in the Appellant. In the circumstances, there is absolutely no reason to suppose that Ms Johnston would have fabricated the figures without any basis for reaching them. In this regard, we would add that it is important to bear in mind that what we are required to determine in this case is what it would be reasonable to conclude were the Appellant’s subjectively-held objectives at the relevant time. A genuine belief on the part of the Appellant that the figures were realistic suffices for that purpose, even if the figures might have been wildly optimistic, when viewed in objective terms. Thus, even if we were to conclude that the figures were wildly optimistic, that would merely be a factor to take into account in determining whether the stated objectives were genuinely-held. It would not, in and of itself, prove that the stated objectives were not genuinely-held;

turning to the circumstances expressly set out in Section 257AAA(3):

the IP issue turns on whether the royalties and licence fees which, at the time when the relevant shares were issued, were expected to be received by the Appellant were going to be attributable to the exploitation of “relevant intangible assets”, as defined in Section 195(4); and

in turn, this requires an answer to the question of whether those royalties and licence fees were going to be attributable to “intangible assets”, as defined in Section 195(6), the whole or greater part in terms of value of which had been created by the Appellant.

which fall to be treated as intangible assets in accordance with generally-accepted accountancy practice (because of the definition of “intangible asset” in Section 195(6)); and

which, or the greater part of the value of which, has been “created” by the relevant company.

we have been shown the 2018 Accounts, the 2019 Accounts and the 2020 Accounts. Each of those accounts was prepared in accordance with generally-accepted accountancy practice and showed that a significant part of the aggregate assets which were held by the Appellant at the end of each of those financial years was categorised as “intangible assets”; and

it is common ground that the value of the intellectual property which was acquired by the Appellant pursuant to the IP Assignment Agreement was negligible at the point of acquisition and none of the evidence which we have been shown suggests that that common view is likely to be wrong.

an intangible asset can come to be held by a company in one of only two ways - either because it is “created” or because it is “acquired” – see, for example, Sections 713(1), 715(4), and 880 et seq. of the CTA 2009; and

there is a dichotomy between expenditure which is incurred on “production” and expenditure which is incurred on “acquisition” – see, for example, Sections 811 and 812 of the CTA 2009.

each of the issues of shares in this case, and the spending of money raised by those issues of shares, took place in consequence or anticipation of, or otherwise in connection with, “arrangements”. This was inevitable, given the wide definition of “arrangements” in Section 257HJ;

the main purpose, or one of the main purposes, of those arrangements was to secure that:

that activity was the activity for the purposes of which the issue of the relevant shares raised money.

the exit strategy described in the IM in relation to investee companies in general was not part of the “arrangements”. The strategy as so described was merely a general strategy in relation to investee companies held through the CHF Fund. It did not necessarily apply to the Appellant itself and had not in fact been adopted in relation to the Appellant itself. In addition, there were no contractual arrangements in place for those exit arrangements to apply in the case of the Appellant; and

the sub-contracting of production services to CHFE was not part of the “arrangements”. That was a provision of services by CHFE in return for payments pursuant to agreements which had been entered into on arm’s length, industry-standard terms, in exactly the same way as the provision of services by each of the Appellant’s other sub-contractors. Thus, the payments made to CHFE by the Appellant were made pursuant to the relevant production services agreement – whether the oral agreement on the terms of the Draft PSA or the PSA. They had not been made pursuant to any “arrangement” to funnel funds to CHFE.

the disqualifying arrangements issue needed to be considered only if we were to find in favour of the Appellant in relation to the first two issues;

the definition of the word “arrangements” in Section 257HJ was extremely wide and, in this case, the “arrangements” in question included everything which was described in the IM in relation to investee companies in general. Thus, the “arrangements” encompassed:

members of the CHF Group were heavily involved in each of the above steps. In particular:

the above meant that each member of the CHF Group was a “relevant person” for the purposes of Section 257CF.

those funds had been paid to CHFE in return for its provision of production services; and

the payments had been made pursuant to contractual arrangements between the Appellant and CHFE which were on arm’s length, industry-standard terms – as to which no evidence had been advanced –

the IM and the evidence of Mr Fenna made it clear that the employees and independent contractors of CHFE were expected to come up with ideas of concepts and shows for investee companies to be held by the CHF Fund;

the Coconut Bay concept had been conceived by Mr Fenna, who was one of those employees. In this context, it made no difference that Mr Fenna had first conceived of the concept long before he had started to work for the CHF Group. The critical issue is that he was employed by the CHF Group at the time that he proposed the concept to the CCC and the Appellant had then been formed to carry on the activity;

the CHF Group’s business was the production of shows and the CHF Fund was the medium by which those shows were financed;

the driving force behind the structure used in relation to the Appellant, as with the other investee companies, was to enable the Appellant to derive SEIS and EIS funding. Were that not to have been the case, the activities of the Appellant would have been conducted within the CHF Group;

CHFE did most of the work in relation to the Appellant’s trade in any event, through its employees and its network of independent contractors; and

the CHF Group provided a significant distribution channel for the Appellant’s shows, pursuant to the Acquisitions Agreement between the Appellant and CHF TVL.

there was no evidence that the entity which was in the equivalent position in that case to the CHF Group in this case intended to produce films itself. Instead, it was always the intention that, once films had been developed to a stage when they were ready to be produced, the rights relating to the film would be assigned or licensed to a special purpose production company;

each of, on the one hand, the development of intellectual property rights and, on the other hand, production was capable of constituting a “qualifying business activity” in its own right and the development of intellectual property rights required skills and resources which were distinct from the skills and resources required for production. Therefore it did not see anything inappropriate or unnatural in separating out the two activities;

the Respondents had not invoked the disqualifying arrangements argument in giving their authority to issue compliance certificates in relation to earlier issues of shares by the appellant company; and

the entity which was in the equivalent position in that case to the CHF Group in this case had not itself previously issued shares with the benefit of SEIS. This made it difficult to see how the main purpose of the arrangements was to obtain SEIS relief in excess of that to which that entity might otherwise have been entitled

the relevant shares in this case were issued and the money raised by the issues was spent in consequence or anticipation of, or otherwise in connection with, “disqualifying arrangements”;

the general requirements in respect of the relevant shares are not met because there were “disqualifying arrangements” for the purposes of Section 257C(f); and

the investors who subscribed for the relevant shares were not entitled to SEIS relief in respect of those shares because the condition in Section 257AA(c) was not met.

the incorporation of the Appellant;

the acquisition by the Appellant of the intellectual property of Mr Fenna;

the raising of funds by the Appellant by the issue of B ordinary shares to the investors in the CHF Fund in order for the Appellant to be in a position to carry on its “qualifying trade”; and

the Appellant’s commissioning the development of various intangible assets and using the funds so raised to discharge the invoices of those whom it had commissioned to carry out that development, as that was essential to the carrying on of that “qualifying trade”.

the exit strategy outlined in the IM in relation to investee companies in general. This is because, although that exit strategy has yet to be deployed in relation to the Appellant specifically, it is part of the model pursuant to which all of the investee companies were held and, as such, we would see it as being an integral part of the overall “arrangements” in relation to the Appellant as well; and

the licensing of the Coconut Bay programme to CHF TVL pursuant to the Acquisitions Agreement because that was an integral part of the “qualifying trade” carried on by the Appellant.

the Appellant was incorporated as a result of a successful presentation by Mr Fenna to the CCC, the body described by the IM as being “at the heart of the CHF Media Fund and…key to its success” and composed entirely of employees of the CHF Group, including the chief executive officer of the group, Mr Wilkins;

the concept of Coconut Bay came from Mr Fenna, who was the creative director of CHFE at the time when the Proposal was put to the CCC and, in the words of the IM, like the other employees and independent contractors of CHFE, Mr Fenna was one of the people “whose job it is not only to produce and develop the shows or concepts but also to come up with ideas to be considered for development by the CCC”;

49% of the equity in the Appellant was held by CHF MGL;

all of the investors in the Appellant invested through the CHF Fund – that was the case even for investors in the Appellant who came to invest as a result of advice from financial intermediaries such as Kuber Ventures - and it was the CHF Fund which decided on the deployment of the investors’ funds as between the various investee companies. Although the CHF Fund had its own independent manager, the IM made it clear that:

the CHF Group paid various initial expenses in establishing the CHF Fund and became entitled to receive various fundraising fees from the CHF Fund on an ongoing basis;

the greater part of the shares in the Appellant which were held by the investors were held through a nominee which was a member of the CHF Group (CHF Nominees);

the first director of the Appellant was Mr Wilkins, the chief executive officer of the CHF Group, the second director of the Appellant was Ms Hawkins, who, although not employed by the CHF Group, was nominated by the CHF Fund to act as the investors’ champion in relation to the Appellant and the other investee companies, and the third director of the Appellant was Mr Fenna, the creative director of CHFE;

the IM emphasised that:

and, in the case of the Appellant specifically, the Appellant had access to the employees and independent contractors of CHFE, paid most of its budget to CHFE under the production services agreements and faced a significant commercial exposure to CHFE;

the revenue projections and budget in relation to the Appellant in the Investor Brochure were prepared by Ms Johnston, the head of the corporate finance arm of CHF Enterprises and a member of the CCC;

the anticipated exit strategy in relation to each investee company outlined in the IM involved, in the first instance, the acquisition by the CHF Group of the shares held by investors in that investee company, using its own shares in the investee company as leverage; and

the Appellant licensed the Coconut Bay programme to CHF TVL pursuant to the Acquisitions Agreement and CHF TVL was entitled to retain 50% of the gross receipts from its use of the programme.

given the extensive involvement of the members of the CHF Group in the “arrangements” and the fact that the structure was clearly designed to enable the Appellant to access the reliefs under the SEIS and the EIS, it is tempting to reach the conclusion that, had the “arrangements” not existed, the component activities of the Appellant’s “qualifying trade” would have been carried on within the CHF Group;

a factor which points in the direction of that conclusion is that the trades of each of the various investee companies which were held through the CHF Fund, including the Appellant, were heavily dependent on the services of CHFE. This might be taken to suggest that, in the absence of the availability of the tax reliefs, the most natural approach would have been for those investee companies to have been incorporated and held as members of the CHF Group;

on the other hand, it seems to us that Condition B is not asking whether, in the absence of the “arrangements”, the component activities of the Appellant’s “qualifying trade” would have been carried on within the CHF Group. Instead, it is asking whether, in the absence of the “arrangements”, the component activities of the Appellant’s “qualifying trade” would have been carried on as part of another business by a member of the CHF Group. In that context, we can see some force in the submission, based on the reasoning of the First-tier Tribunal in CMAR at paragraph [132], that that does not follow if the development and exploitation of intellectual property rights, as distinct from carrying on a trade of production, was not generally part of the activities of the CHF Group. If no member of the CHF Group actually carried on the trade of developing and exploiting intellectual property rights – and we should say that we were not provided with any evidence on this question either way – then that might be taken to suggest that, in the absence of the “arrangements”, the component activities of the Appellant’s “qualifying trade” would not have been carried on as part of the business of a member of the CHF Group;

more significantly even than that, we have approached this question, so far, on the basis of the assumption that, in the absence of the “arrangements”, the component activities of the Appellant’s “qualifying trade” would still have been carried on in some way, whether by the Appellant itself or by some other company. However, we can see some force in the submission that that is not a justifiable assumption to make based on the facts in this case and the language in Section 257CF(4). The section does not instruct the reader to assume that the component activities would have been carried on in some way and then ask the reader to determine whether it is reasonable to expect those component activities to have been carried on as part of another business by a relevant person or relevant persons. Instead, it leaves open the possibility that, in the absence of the “arrangements”, it would be reasonable to expect the component activities not to have been carried on at all;

in this case, there is persuasive evidence to the effect that the tax incentives offered by the Government in the form of relief under the SEIS and the EIS were essential to the ability of the Appellant to be able to fund the component activities of its “qualifying trade” and that, in the absence of those reliefs, it would have been extremely difficult, if not impossible, for the Appellant or any other person to fund those activities. This suggests that, had the “arrangements” not existed, it would have been reasonable to expect the component activities of the Appellant’s “qualifying trade” not to have been carried on at all, whether by the Appellant or by a member of the CHF Group or by anyone else; and

although we find this to be a difficult question to answer, and it would have been helpful to have had further evidence in relation to both:

we are inclined to conclude on the basis of the evidence that we have seen and the points made in paragraphs 95(3) to 95(5) above that Condition B was not met on these facts.