Valyrian Bloodstock Limited v The Commissioners for HMRC

Before turning to other matters, whilst we agree with Mr Williams that that quotation from Fashion is apt, we do not accept Mr Williams’ argument that Fashion is of other assistance in this appeal. It concerned an issue as to whether the correct form had been utilised. That is of no relevance here. We are not bound by, but do not disagree with the views of that Tribunal as to the intentions of Parliament in regard to EIS.

There is no dispute between the parties that the EIS and other venture capital schemes are intended to encourage individuals to invest in certain small, higher risk, early-stage trading companies that would otherwise struggle to access the funding needed to enable them to grow and develop, as they have little or no track record.

Tax relief is offered as an incentive to invest directly in these companies because of the higher risk such investments pose to investors’ capital. EIS is therefore aimed at investors who are prepared to lose some, or all, of their capital in making a higher risk investment.

HMRC have conceded that the appellant’s business model was high risk. Accordingly, it is not in dispute that section 157(1)(b) ITA is satisfied.

Whilst there is no doubt that Mr Brown is the guiding mind of the appellant, we disagree entirely with Mr Williams’ assertion in paragraph 12 of his Skeleton Argument that “Mr Brown is on trial here.”. What is in issue here is quite simply whether or not the appellant meets the criteria in the EIS legislation.

Both parties have correctly stressed that, when considering the requirements in section 157(1)(a) ITA, the Tribunal must consider all of the circumstances obtaining at the time of issue of the shares. It is the wording in that section, so of course, that is what we have done.

The oral evidence, and the very recent witness statements, of the investors can be summarised as being to the effect that they would have been guided by Mr Brown but, had the appellant been profitable, then the appellant would have continued to have traded beyond three years.

As can be seen from our findings, apart from the website, there is very little documentary evidence that we can identify as having been in existence in March and June 2019.

Mr Brown was taken to a document headed “Valyrian Bloodstock Limited 2019” which was an exhibit to Dr Paul Darer’s witness statement which he said had been a “handout”. In that witness statement Dr Darer stated “I saw a comprehensive prospectus some of which is no longer available but part I know I saw…” and he had exhibited this document. Since his shares were issued on 28 March 2019 that suggests that he saw it before then.

We will refer to it as the “Consultancy Agreement” since that is what Mr Brown said that it was.

It was also an exhibit to Mr Greatorex’s witness statement and his shares were issued on 29 March 2019. Mr Greatorex said that the presentation made to him and other investors at a meeting in his offices in January 2019, (Mr Lindley said 2018), included references to a prospectus “much of which is no longer available” but he produced the Consultancy Agreement and a two page document.

Mr Lindley also exhibited that two page document and two pages of figures for Whitwick. In Closing Submissions, Mr Williams said that that two page document was a prospectus which, as a result of criticism by HMRC, had been produced by the appellant with the witness statements. Hereinafter we refer to it as the “Prospectus”.

The response from Thomas Quinn of 3 January 2020 had said that there was no prospectus.

In summary, Mr Brown, whose witness statement was dated November 2021, produced none of these documents, all of the investors produced the Prospectus, Mr Greatorex and Dr Darer produced the Consultancy Agreement and Mr Lindley produced the Prospectus and two pages of figures for Whitwick.

Before we turn to the “Consultancy Agreement” and the Prospectus, we comment on the evidence from the witnesses.

There is no mention of any prospectus in Mr Brown’s witness statement. He said that the appellant had been structured in an “identical manner” to Whitwick. All we know about how Whitwick was promoted is from the website.

His oral evidence was to the effect that he had not produced a professional bound prospectus. He had simply produced a print-out about EIS from HMRC’s website, information about sales and he thought that he might possibly have included a different prospectus.

Mr Lindley was emphatic that he had seen documentation for Olney Bloodstock. That probably is the case as that name is on the two pages of figures that he produced but that information comprised January 2019 valuations of the Whitwick horses and forecast sale values.

Mr Brown’s evidence was that he had met with the investors for the appellant at offices owned by Mr Greatorex. He had brought along those documents with him and had explained in detail the plans for the appellant.

Mr Lindley said that he had been at that meeting, which he thought had been in the latter part of 2018 but the only other attendees apart from Mr Greatorex had been Mr Brown and Mr Beard from Thomas Quinn. Mr Brown and Mr Beard had done a presentation and there had been a lot of detail offered.

Dr Darer said in oral evidence that he had not been at that meeting. He said that he had become an investor on the recommendation of Mr Greatorex who had told him about it in February or March 2019. He had relied on Messrs Greatorex and Lindley for information. However, we observe that his witness statement stated that he had been told about the appellant by an acquaintance who had set up an initial meeting on 10 January 2019 with Mr Brown. That was not explored in evidence.

Dr Darer said explicitly in oral evidence that what he described as part of the Prospectus, being the Consultancy Agreement and the Prospectus, had been a handout. Since the font in part of the fourth paragraph of the Prospectus he exhibited is different to that in the versions exhibited by Messrs Greatorex and Lindley, it seems possible that there was some other exchange of information.

By contrast, Mr Graetorex said that the meeting in his offices was attended by five or six people and that Mr Brown had talked the parties through buying horses at 6 to 12 months old and selling at three years plus. He said that apart from a presentation by Mr Brown, there had been a handout of two or three pages long explaining how the system would work.

In his witness statement, he said that the presentation gave a clear picture of how a sustainable business could be built in the sector.

As can be seen, the witnesses do not have clear recollections of what happened when. We do not criticise them for that as it is not surprising given the elapse of time. It is for that reason that we agree with Judge Brooks in Hargreaves andJudge Brown in Cry Me and have looked carefully at the contemporary documentary evidence including the website.

There are a number of problems with the Consultancy Agreement namely:-

The opening two paragraphs of the Prospectus read:

“Valyrian Bloodstock Limited has been incorporated to act as an alternative investment vehicle, qualifying as an Enterprise Investment Scheme, therefore offering valuable tax relief to prospective investors.

The business must undertake a qualifying business activity for at least three years - making this a three year investment.”

It goes on to say that “Within the three year term it is the aim of the business to purchase young bloodstock, for resale at a later date.” and to explain that selection of the bloodstock would be in the hands of J D Moore and Nick Brown. Confusingly, it states that they will work as consultants for Whitwick. Brief career highlights are given for both and it states that Nick Brown will oversee the day to day administration of the appellant.

Obviously, HMRC rely on the fact that the appellant was described as being a three year investment. It is arguable that by saying that bloodstock would be purchased within the three year term to be sold at a later date, it is suggested that the duration of the investment would be longer than three years. However, we find that that is less than clear. Mr Greatorex clearly understood that depending on the age of the horse there would be a two or three year cycle and that is supported by the correspondence with HMRC (see paragraph 29 above). All of the horses had been purchased within the first nine months of the appellant’s existence. It was recognised that the balance of the funds available to the appellant would be required for the costs associated with rearing the horses so there would be no further investment unless or until the horses were sold.

It is of note that the email of 13 March 2020 from Thomas Quinn said only that “there may be reinvestment” (emphasis added). Even in the knowledge at that time that HMRC did not accept that the EIS criteria were met, there is no positive argument that there had been an intention to trade on an ongoing basis after the three years expired.

Of course that email was issued after the time of issuing the shares but Thomas Quinn were very involved at that time, and before, so if there had been any evidence it would be expected that they could or would have produced it. As we point out at paragraph 44 above, Mr Beard was very involved at all relevant dates.

The first time a continuing trade was addressed in any detail, and there was not a lot, was in the letter of appeal from Thomas Quinn dated 1 October 2020 (see paragraph 34 above) and that was only to say that hopefully the cycle could be repeated but even that was caveated by the argument that the loss of one horse would render that unlikely.

The website is contemporaneous evidence and, in our view, it does not assist the appellant. In particular, as HMRC point out, the appellant was being marketed, as was Boleyn, as being a similar model to Whitwick and, as we have quoted at paragraphs 41 and 42 above, it was made explicit that it would trade for three years. For the avoidance of doubt, we have not taken into consideration the fact that Whitwick was indeed wound up after three years; what is relevant is the expressed intent not to trade for longer than three years.

We find that the whole tenor of the website is that there was no intention to grow and develop the individual syndicates but rather that money was being raised in, what was sold as being, a tax efficient manner to grow the broader business which was “investment”. That is made explicit in the Pinhooking Article (see paragraph 39 above). 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.

Looking at that wording we simply do not accept Mr Williams’ argument that it is “obvious” that when referring to “three years” Mr Brown was referring to the qualifying period for EIS tax relief and it just happened to coincide with the optimum age for the sale of any foal.

We were not persuaded by Mr Brown’s argument that “I’m not a website writer”, as, of course he is, and that the website entries were really just an advertisement and should be viewed in that light and not taken literally. Like Mr Williams, he argued that they should be viewed as merely a sales pitch to entice potential investors to talk to him. We understand why he would say that, with the benefit of hindsight, and undoubtedly, the website was his way of attracting investors. What interests us, however, is what he was actually selling in 2019.

Mr Brown freely conceded, when asked who was the decision-maker in the appellant, that effectively it was him in that he advised the investors. The fact is that once the horses were purchased they were kept until they were old enough to be sold, and then they would be sold if Mr Brown considered that the price offered was appropriate.

Unlike the investors in Inferno Films Limited v HMRC (Footnote: ⁴)(“Inferno”) who were described by Judge Poole at paragraph 7 as providing that appellant with expertise and experience, the investors in the appellant were passive investors who relied on Mr Brown for his expertise and experience.

Mr Williams relied on Inferno for the proposition that a lack of employees and extended use of sub-contracts do not preclude EIS relief. Mr Williams pointed out that Judge Poole had quoted paragraph 85 of CHF Pip! plc v HMRC (Footnote: ⁵) (“Pip”) where Judge Popplewell had said “So as a matter of principle it is my view that a company can trade by outsourcing its activities to a third party”.

However, Judge Popplewell explained why he had come to that conclusion in the particular circumstances of Pip. He accepted, as we do, that section 157 ITA requires consideration of the extent to which activities of the company are sub-contracted. He went on to say at paragraph 86 that section 157 ITA shows that “Parliament accepts that subcontracting is a permissible way of conducting trading activities (whilst recognising the extent of that subcontracting may have an impact on the risk to capital condition).”

It is the caveat in parenthesis that is important because, whilst we agree that a company can trade by outsourcing activities, nevertheless the nature of that outsourcing and the context in which it is done, are highly relevant. In Pip, Judge Popplewell observed that, quite apart from having the product produced by the outsourcing, being the animation, it was “notable” that all important intellectual property rights were reserved to Pip.

He went on to find at paragraph 88 that there was no trade in the intellectual property; Pip used it through the medium of the animation to generate profits by licensing the animation and generating sales of related toys.

That is very different to the facts in this case where it concerns only the purchase and sale of bloodstock when old enough.

Section 157A(3) ITA contains a non-exhaustive list of indicative circumstances to which both HMRC and the Tribunal may have regard. We have cited those provisions at paragraph 58 above and it can be seen from paragraph 32 that HMRC had clearly had those circumstances in mind. Although Mr Williams has focussed on a lack of employees and the use of sub-contracting, that must be considered in the broader context.

That is what Judge Popplewell did in Pip as did the Tribunals in Inferno and Cry Me.

Judge Poole accepted the arguments advanced for the appellant in Inferno and, in particular, that there was “ample evidence before the Tribunal” to show that that appellant did not simply intend “to shut up shop” and distribute any profits after the “single project” venture had been completed. He found that it had a “mission” to develop film-making and a number of ideas for its next project down that path and it was on that basis that the investors had subscribed for their shares. He concluded that that was apparent from both contemporaneous documents, read as a whole, and from the evidence. He was satisfied that that appellant had been doing its best to transform those objectives into reality. His Findings in Fact make that clear.

Mr Williams conceded that the Tribunal in Cry Me had said at paragraph 122 that that case was not as clear as Inferno but he argued that in both Inferno and Cry Me the Tribunals had decided that EIS should not be denied because of a lack of employees and the extended use of sub-contracts. He argued that the evidence given by Mr Brown and the investors was that the appellant’s intention had always been to continue to reinvest in more bloodstock. Effect should be given to Parliament’s intention to encourage business start-ups with the granting of EIS tax relief.

We do not dispute that that was Parliament’s intention but it is subject to the clearly articulated conditions in the legislation.

There is more to Cry Me than paragraph 122.

As the Tribunal in Cry Me pointed out at paragraph 121, there had been in Inferno a much clearer articulation by the taxpayer of an intention to use any profits from the first production as an investment than there was in Cry Me. There was indeed a clear articulation as we have pointed out in paragraph 113 above. There was documentary evidence. In particular, there was an investment memorandum which included speculative financial return figures but which clearly stated that it was intended “to fund future growth from further film projects”. A list of “potential future films” giving short details was produced.

In Cry Me, the Tribunal had accepted at paragraph 97 that the 2018 Offering Memorandum specifically stated that the intention was to be an income generation vehicle for the “SCF slate [of films] going forward”. The Tribunal found at paragraph 112 that “Taken alone, that statement would indicate that by June 2018 there was a broader intent for continuity and wider purpose for the Appellant’s trade”.

The Tribunal went on to find at paragraph 115 that on balance, and taking account of all of the evidence, it was reasonable to conclude that, to the extent that further scripts were developed to a point where the production process could be initiated, there was an intention to increase turnover. It was in that context that the Tribunal found that the absence of intention to increase employees and/or the use of sub-contractors was not a “particular concern”.

In paragraph 119 of Cry Me the Tribunal concluded that the financial forecasts which were available to them, were articulation of anticipated profitability of a film once produced.

In summary, both Cry Me and Inferno turned on their own particular facts and those facts are not replicated in this instance.

The investors recently articulated their subjective intention, if so advised by Mr Brown, to continue to trade beyond the three years but that is not supported by the objectively available evidence.

We accept that the investment is used to acquire bloodstock and to pay for the upkeep of those horses and the costs relating to their purchase and sale. We have seen no indication that revenue would increase and indeed the breakdown of costs shows that the appellant intended to spend all of the funds raised on the purchase of the horses and their upkeep. There is no longer term cash flow forecast. The appellant has neither provided financial forecasts nor a business plan to demonstrate growth and development of the company.

The burden of proof lies with the appellant. Looking at the totality of the evidence and, in particular, at the documentary evidence at the time of the issue of the shares, there is nothing to suggest that this would be anything other than a three year investment and there was no evidence to grow and develop the appellant. Rather, the evidence points to growing and developing a number of syndicates.

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

As we note at paragraph 34 above, Thomas Quinn argued that the bloodstock was developed over a two year cycle. Unsurprisingly HMRC argue that that indicates that the only assets of the appellant were being held with a view to capital appreciation.

Mr Lewis argues that:-

Mr Williams relied on Dr Darer’s evidence for the proposition that the appellant’s intention was to buy and sell bloodstock and retain that stock for only as long as was necessary to make a profit. He also relied on Mr Lindley stating that he expected that there would be dividends and that it was a long-term business.

As we have indicated, we have reservations about the investors’ evidence which is subjective and provided years after the event and for the specific purpose of refuting HMRC’s arguments.

Whilst we accept that their views are honestly held, the contemporaneous documents and the correspondence with HMRC in the following year suggest that those views are not reliable. Hence, our approach to the evidence as set out in paragraph 11 above.

Mr Williams also relies on an extract from a website entry dated 19 August 2019 which reads:

“we have recently bought a colt foal by Masked Marvel – out of a Siyouni mare, who is another lovely big foal that I could have sold to a trainer already! Give me a call on …”.

He argues that that is not the description of a business falling within section 193(5) ITA.

As far as that website entry is concerned:

Mr Lewis’ arguments are all unequivocally supported by the facts.

Mr Williams made much of the statutory purpose of EIS as encouraging investment in high-risk ventures. Like Mr Dingli, as reported at paragraph 95 of Cry Me, the view was expressed that this was a sector that needed EIS involvement, particularly post Covid, and to refuse the appeal would be to effectively condemn the industry.

Mr Brown’s evidence was that raising finance for a venture such as the appellant “…is pretty much dead in the water without EIS approval”. That is compelling reasoning for the proliferation of syndicates.

Looked at objectively, we find that it was an investment opportunity in a “wrapper” that was perceived as being tax efficient.

For all these reasons, we dismiss the appeal.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.