No tax relief for investors in UK startups Legends of the Shiva Jyotirlingas Ltd, Legends of Shirdi Sai Baba and 8 more, UK Tribunal agrees

Shiva idol installed at the Nageshwar Jyotirlinga at Nageshwar, one of the 12 important pilgrim sites for Shiva devotees. One of the 10 entities formed, The Legends of the Shiva Jyotirlingas Ltd, would presumably have created religious content around the Jyotirlingas. (Photo by Minnie Mokshada via Wikimedia Commons 4.0)

An ambitious proposal to develop and produce a series of films and documentaries on 10 prominent religious sites in India and Nepal became the source of a dispute involving UK’s HMRC, the body responsible for the collection of taxes, and Anshul Doshi, the former COO of Prime Focus World, a market leader in visual effects and computer animation. The case centred on HMRC’s refusal to provide Seed Enterprise Investment Scheme (SEIS) compliance certificates which would have allowed tax relief to investors.

The first-tier tribunal (tax) ruled against Doshi in the case which saw references to some known individuals in Bollywood like Vashu Bhagnani, Harman Baweja, Namit Malhotra, and chairman of Dubai-based Eros International. The SEIS scheme offers income tax and capital gains tax relief to individual investors who buy new shares in companies established in the UK. These companies should be involved in prescribed “qualifying trade” and meet various other criteria. The SEIS is essentially designed to help riskier and early-stage UK companies.

The 10 entities seeking SEIS

Between July and October 2017, 10 entities were incorporated with Anshul Doshi acting as a common director. These companies were Legend of Golden Temple Ltd, The Legends of Sanchi Stupa Ltd, The Legends of the Shiva Jyotirlingas Ltd, The Legends of Shirdi Sai Baba, The Legends of the Sun Temple of Konark Ltd, The Legends of Tirupati Balaji Ltd, The Legends of Vaishno Devi Ltd, The Legends of Pashupatinath Temple, The Legends of Nathdwara, Shrinathji & Krishna Temples of India Ltd, The Legends of Lord Jagannath of Puri Ltd.

Each company sought seed funding of up to £150,000 (approximately Rs 1.5 crore) by offering 150,000 ordinary £1 shares to potential investors. The plan was to make religious films/documentaries on each of these important sites for which there was a huge market. Doshi had worked on Chaar Sahibzaade 2, which was produced and directed by Harman Baweja, but the animation and 3D effect was done by Prime Focus. The success of Chaar Sahibzaade, based on the life of the four sons of the 10th Sikh guru Gobind Singh, made Doshi aware of the huge potential of content based on famous religious sites.

The Legends of Pashupatinath Temple and Legend of Golden Temple Ltd were incorporated in July 2017. In September 2017, HMRC authorised The Legends of Pashupatinath Temple to issue a SEIS certificate. In October 2017, the remaining nine appellants were incorporated and in the same month advance assurance applications were made to HMRC wherein each of the companies intended to raise £150,000. In November 2017, the remaining nine were given authorisation to issue SEIS certificates to their investors. The objectives of all the companies were the same – develop a film in 2018, produce and distribute it in 2020, and to develop a further film in 2021. Later, there were also plans to make remote attendance to a virtual religious site a possibility.

Doshi, a qualified chartered accountant, and Bharat Hindocha, his friend and investor in three of the ten companies gave evidence before the Tribunal. Till April 2018, Doshi was the chief operating officer for Prime Focus World. Doshi was also involved in other companies, including being the sole director and shareholder of A & Co Film Rentals Ltd. In October 2017, Doshi was replaced as director of A & Co Film Rentals Ltd by Vineet Malhotra, a producer at Prime Focus, and second cousin of Namit Malhotra, the founder and CEO of Prime Focus.

The Investors

By January 2018, Doshi received assurances from potential investors which included Namit Malhotra, Vineet Malhotra, Hindocha and his acquaintances. However, funds had not been transferred from any of the investors to the companies, and there were oral agreements between Doshi and the investors who would provide the funds when required.  The tribunal noted that Doshi “did not consider it was sensible for the investment funds to be sitting in a bank account until required.”

Doshi told the court that companies could have earned billions of pounds worldwide, but the court observed that it was not “credible” that each of the projects could have income in billions of pounds. There was no intention to hire any staff, and the plan was to use the Prime Focus group of companies to undertake production work given Doshi’s close association with the company. Doshi also secured letters from Eros International in February 2018, stating an “in principle” investment of Rs 25 crore to Rs 50 crore based on certain conditions.

In March 2018, writer Vikram Tuli who was known to Doshi was engaged to write screenplay and dialogue for all the projects except The Legends of Vaishno Devi Ltd projects. Meanwhile, in April 2018, Doshi stood down as COO of Prime Focus World and became CEO of Aashni & Co. Ltd which was his wife’s fashion label. Meanwhile in January 2018, A & Co Film Rentals changed its name to Ramayana the Film Ltd and in May 2018, Bhagnani was appointed a director.

The dispute with HMRC

As per the procedure, SEIS compliance statements were furnished to HMRC which provided details of the amount raised by shares issued and a breakdown of the amount spent. A total of £1.4 million was raised by all the 10 companies, out of which £1,326,096 was spent by June 2019, which meant only around 5 percent of the amount raised was remaining. In January 2020, HMRC refused SEIS applications for all the 10 companies. Aggrieved by the decision, the 10 companies represented by Doshi approached the Tribunal.

HMRC told the Tribunal that there were three areas where all the 10 companies did not satisfy the conditions to allow them to issue certificates to their investors. These were Risk to Capital condition, Trading condition, Disqualifying arrangements. The risk to capital condition lays down that the company should be able to demonstrate that there is an objective for growth and the investment must be genuinely at risk and an overall loss could arise. These features are put in place to ensure that investments and trading are genuine and are meant to foster growth and development. This could take the form of increasing the number of employees or the turnover of the trade.

The tribunal concluded that there was no intention to take on staff by any of the 10 companies as the business model was to sub-contract all the work to contacts of Anshul Doshi. “We accept HMRC’s submission that the Prime Focus group of companies could easily have taken on the appellants’ project in-house,” the Tribunal concluded. The issue of 10 separate companies also arose and the Tribunal agreed with HMRC’s submission that it was a result of “artificial fragmentation” which was “motivated by the desire to obtain more SEIS relief than would have been possible had just one company been set up in place of the ten appellants or if the work had been undertaken by Prime Focus in-house.”

On the issue of trading conditions, the Tribunal concluded that none of the 10 companies had sufficient funds to pay Prime Focus group for some additional work that was requested by Doshi. “Without Mr Doshi’s connections and the willingness of the Prime Focus group to support” the companies, they would have been unable to commission the additional work. This was termed by the Tribunal as services supplied on goodwill and hence could not be considered as trading conducted on a commercial basis.

Doshi, however, countered saying that as he had created the look and feel of the characters, it should qualify as intellectual property which meant it met the requirement of the Trading condition. HMRC’s submission that no intellectual property was created as the proposed films were about religious sites whose legends were already well-known, passed muster with Tribunal Judge Jane Bailey who said that as Doshi had not shared any finished scripts, artwork or films, it was not possible to assess whether just a commissioned portrayal of legends can “amount to creation of intellectual property”.

HMRC told the Tribunal that the Prime Focus group of companies qualify as persons connected to Doshi as he was employed there when the shares were issued. The condition of Disqualifying arrangements is put in place to avoid money being paid to or for the benefit of a “relevant” person or persons. HMRC argued that the majority of the amounts spent by the companies were paid to entities associated with the Prime Focus group of companies, which meant payments were made to “relevant persons”, which was accepted by the Tribunal.

The matter was heard over three days in March 2023, and the Tribunal’s judgment came after eight months later in the last week of November 2023 (judgment was made available recently). Doshi has the right to apply for permission to appeal.