Enterprise Investment Scheme (EIS) relief was introduced by HMRC to encourage individuals to invest in certain "higher risk" companies, by giving tax reliefs in respect of those investments. Broadly, the reliefs available to eligible investments are as follows:
- A reduction of income tax equal to 30% of the amount invested in the EIS company or (if lower) £1 million (£2 million for ‘knowledge intensive companies’).
- A capital gains tax (CGT) deferral when you sell an asset and reinvest the proceeds in the EIS company, by ‘freezing’ the lower of the gain, the amount reinvested and the amount claimed (if different).
- A CGT relief on any gains earned if the EIS company shares are sold after three years of issue.
For EIS relief to apply, many specific conditions have to be met. One of those requirements is that the EIS company must carry on a trade on a commercial basis and with a view to realistic profits (the Trading Condition).
In CHF Pip! Plc v The Commissioners for Her Majesty's Revenue and Customs [2021] UKFTT 383, the investors failed to secure full EIS relief on the shares because the Trading Condition was not satisfied. Overly optimistic internal forecasts could not be justified. However, the tax tribunal concluded that a company that outsourced all its activities could still be "trading" in principle.
HMRC argued unsuccessfully that the company was not trading because CHF Pip! had engaged another company to exploit its intellectual property.
The judge concluded, "it is, as a matter of principle, possible to carry on a trade even if all… activities have been outsourced". They went on to say that a company could carry on trading activities without having to employ individuals directly, and could trade (in this case, its IP) via sub-contractors.
Factually, it will be important for a company outsourcing activities to show that it, and not the outsourcer, retains the ability to take decisions and oversight of the outsourcer. Subject to that, this case is (non-binding) case law that there is no tax reason why a trading company cannot decide that the best way to carry on its trade is to outsource key activities.