Tax relief for metaverse business fails to materialise

03 January 2024

The idea of visiting digital versions of various famous temples in the metaverse might appeal to those who recently found a virtual reality headset in their Christmas stocking. However, following a recent tax case, it may be some time before such visits start to materialise.

In the First-tier Tribunal case of Legend of Golden Temple and others vs HMRC, ten different companies were represented by their sole director, Anshul Doshi. Each company sought to appeal HMRC’s decision that tax relief under the Seed Enterprise Investment Scheme (SEIS) was not available on investments made into the companies.

SEIS offers valuable tax breaks that can help early stage companies attract investment and funding. For example, individuals who make a qualifying SEIS investment can receive income tax relief of 50% of the amount invested and a subsequent disposal of the investment could be exempt from capital gains tax.

Given the tax reliefs at stake are so generous, it is no surprise that there are various requirements that must be satisfied to benefit from them. These conditions can be complex but the intention behind them is to ensure that the tax breaks offered by SEIS are targeted and only benefit the intended recipients.

Mr Doshi described himself to the court as a media and retail industry entrepreneur, with senior roles in large media businesses and a variety of other ventures in property and fashion. Through his work, Mr Doshi identified that many UK religious sites sold a booklet or DVD with history of that site and that there was a potential market for religious sites in India and Nepal to provide audiovisual content for its devotees and visitors. 

The precise nature of the audiovisual content that the companies sought to create was a point of contention in the case. It was found by the court that ‘the nature of the material to be developed, and the ten appellants’ intentions, changed significantly over the period 2017 to 2023’. It was found that part of these changes included plans to operate in the metaverse, allowing for individuals to visit virtual versions of religious sites. Of the ten religious sites originally identified by Mr Doshi, it was estimated by a witness in the case that each had devotees in excess of 10 million people.

Mr Doshi was noted in the judgment as being an ‘enthusiastic and creative person’ but ‘did not deal with every minor detail’. Unfortunately, the details behind an application for SEIS can be very important, as was seen in this case with a number of areas in which the criteria were not met and the tax relief therefore shown to be unavailable.  

These included practical challenges with amounts being paid by investors to incorrect accounts, claimed to be banking errors, but effectively resulted in insufficient amounts being paid for the shares originally issued. There were various other technical points on which the availability of SEIS was challenged by HMRC. One important finding of the court was that there was a ‘desire to obtain more SEIS relief than would have been possible had just one company been set up in place of the ten appellants’. In other words, the proposed activities of the ten companies could have been undertaken by just one of them, and was deemed to be ‘artificial fragmentation’.

Ultimately the case highlights that loose plans when attracting investment for a startup can prove costly. The devil may not be recognised by the religions practised in the temples in this case but it remains in the detail for successful SEIS claims.