Ruth Hughes and Tomos Rees appear for HMRC in Coconut Animated Island Limited v HMRC.

Ruth Hughes and Tomos Rees appear for HMRC in Coconut Animated Island Limited v HMRC.

On 25 March 2024, the Upper Tribunal handed down judgment in Coconut Animated Island Limited v HMRC [2024] UKUT 00075 (TCC). Ruth Hughes and Tomos Rees acted for HMRC in its successful response to the appeal.

The FTT had held that HMRC was right to refuse authorisation for Coconut Animated Island Limited (‘Coconut’) to issue compliance certificates for the Seed Enterprise Investment Scheme in respect of certain shares issued by Coconut.

The basis for the FTT’s decision was that Coconut did not meet the ‘general requirements’ within Part 5 of the Income Tax Act 2007 (‘ITA 2007’) as the shares were issued as part of ‘disqualifying arrangements’ within section 257CF ITA 2007. The reason for the conclusion was because the whole or the majority of the amount raised by the share issues had been paid to CHF Entertainment Limited (‘CHFE’), which was a ‘relevant person’ as it was a ‘party to the arrangements’.

Coconut appealed on the basis that neither CHFE nor any other member of the group of companies was a ‘party to the arrangements’, as that phrase was analogous to a party to a contract and did not include persons who were merely involved in arrangements. Further, subcontracting services to CHFE pursuant to a production services agreement was not part of the ‘arrangements’ as the agreement had been entered into on an arm’s length basis.

The Upper Tribunal dismissed the appeal and held that:

• The concept of an ‘arrangement’ involved a ‘degree of unity or coordination’ and the arrangements must have had a ‘particular purpose’ or ‘plan’. In this case, there clearly was a plan and the agreement with CHFE was a part of the plan. There were, therefore, arrangements at the time of the share issues. There was nothing in the context of the legislation excluding commercial contracts from its scope.
• CHFE was a party to the arrangements. A party had to have sufficient involvement in the arrangements that it was appropriate to treat them as participating in the purpose of the arrangements. In this case, CHFE was heavily involved in the arrangements and was a party to the agreement with Coconut. Its involvement was designed from the outset.

The decision can be found here.