Introduction

The case of Flix Innovations Ltd v Revenue & Customs ([2016] UKUT 301) presents a pivotal interpretation of the Enterprise Investment Scheme (EIS) under the Income Tax Act 2007 (ITA 2007). Flix Innovations Limited ("the Company") sought to secure EIS relief for its ordinary shares but faced refusal from Her Majesty's Revenue and Customs (HMRC) on the grounds that these shares carried preferential rights to company assets upon winding up. The Company appealed the decision to the Upper Tribunal (Tax and Chancery Chamber), challenging the interpretation of section 173(2)(aa) of the ITA 2007, which disqualifies shares carrying any preferential rights from EIS relief.

Summary of the Judgment

The Upper Tribunal upheld the First-tier Tribunal's (FTT) decision to dismiss Flix Innovations Ltd's appeal. The central issue revolved around whether the ordinary shares issued by the Company carried a preferential right to assets upon winding up, as stipulated in section 173(2)(aa) ITA 2007. The Tribunal concluded that the statutory language "any preferential right" is to be interpreted strictly, thereby excluding the application of the de minimis principle. Consequently, since the ordinary shares did indeed carry a preferential right to the Company's assets, they were ineligible for EIS relief. The Company's arguments for a purposive interpretation, suggesting that the preferential rights were negligible, were rejected in favor of a literal interpretation of the statute.

Analysis

Precedents Cited

The judgment extensively referenced established principles of statutory interpretation, particularly focusing on the de minimis non curat lex (the law does not concern itself with trifles) and purposive construction. Key cases and authorities cited include:

• Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46
• HMRC v Trigg [2016] UKUT 165 (TCC)
• Berry v Revenue and Customs Commissioners [2011] STC 1057
• UBS AG & Anor v Revenue and Customs [2016] UKSC 13

These cases collectively reinforced the principle that, unless expressly stated, negligible or minor aspects should not override the clear statutory language. However, in the context of the EIS provisions, the Tribunal found that the detailed and prescriptive nature of the legislation indicated Parliament's intent to exclude any preferential rights, regardless of their magnitude.

Legal Reasoning

The Tribunal's legal reasoning hinged on the interpretation of the phrase "any present or future preferential right" within section 173(2)(aa) ITA 2007. It determined that the use of the word "any" imprints an absolute exclusion, leaving no room for the de minimis exception. The Tribunal emphasized that the EIS provisions are "closely articulated," and hence, any intention to disregard minor preferential rights would have been explicitly stated by Parliament.

Furthermore, the Tribunal discussed the principle of purposive construction, affirming that it does not permit altering the statutory language based on perceived broader policy objectives. In line with judgments such as UBS AG & Anor v Revenue and Customs, the Tribunal maintained that the literal interpretation of the statutory language must prevail unless ambiguity or contextual factors necessitate otherwise.

Impact

This judgment has significant implications for businesses seeking EIS relief. It underscores the necessity for companies to ensure that their share structures are meticulously aligned with EIS requirements, particularly concerning the absence of any preferential rights. The strict interpretation of "any" serves as a cautionary directive, emphasizing that even minimal preferential rights can disqualify shares from EIS relief. Future cases will likely reference this decision when assessing the eligibility of shares for EIS, reinforcing the importance of precise compliance with statutory language.

Complex Concepts Simplified

Enterprise Investment Scheme (EIS): A UK government scheme designed to help smaller, higher-risk companies raise finance by offering tax relief to investors who purchase new shares in those companies.

Preferential Right: A preferential right to assets means that certain shareholders have priority over others in receiving company assets if the company is wound up or liquidated.

Section 173(2)(aa) ITA 2007: A provision that disqualifies shares from EIS relief if they carry any present or future preferential rights to a company's assets upon winding up.

De Minimis Principle: A legal principle meaning "the law does not concern itself with trifles." In this context, it suggests that insignificant preferential rights might be disregarded.

Purposive Construction: An approach to statutory interpretation where the court interprets the law based on the purpose and intent behind the legislation, rather than a literal reading of the words.

Conclusion

The Upper Tribunal's decision in Flix Innovations Ltd v Revenue & Customs reaffirms the paramount importance of adhering to the precise statutory language when seeking EIS relief. By strictly interpreting "any preferential right" to exclude the application of the de minimis principle, the Tribunal ensures that the integrity of the EIS is maintained, preventing erosion through minor preferential arrangements. This case serves as a crucial reminder for companies and legal practitioners to meticulously structure share classes and be vigilant about the implications of any preferential rights granted, ensuring full compliance with EIS requirements.