The Upper Tribunal in the case of Richards & Skye Inns Ltd v HMRC FTC/37/2010 dismissed an appeal by Mr Richards and Skye Inns Ltd against a decision of the First-Tier Tribunal (FTT) that the relevant funds had not been "employed" in the business for EIS purposes.

In this case, the relevant sum was invested by Mr Richards in Skye Inns Ltd in December 2001. At this time, section 289 of the Income and Corporation Taxes Act 1988 required that 80% of EIS investment funds had to be employed in a qualifying trade within 12 months; the remaining 20% had to be so employed within the following 12 months. This test has since been relaxed under the Finance Act 2009 to provide that 100% of the EIS funds must be employed in the qualifying trade within 2 years. The tribunal accepted that the funds did not necessarily have to be expended within the specified period to be 'employed' provided they have been earmarked.

The relevant funds had been held in an instant access deposit account after Skye Inns Ltd's purchase of an additional public house fell through. Skye Inns Ltd traded at an overall loss and some funds from this account were transferred from time to time to cover those losses and certain capital expenditure. The appellant argued that although trading receipts had been received during this period, all expenditure should be treated as coming first out of the EIS funds and only once these funds were deemed to be fully depleted, from trading receipts on the basis that the EIS funds had been received first. The FTT disagreed and found that such "first-in first-out" analysis could not be applied.

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