Use of money: no business acquisitions
ITA07/S175 (for EIS)
ITA07/S280D and 293 (for VCTs)
The money raised from EIS and VCT investors must be used for qualifying business activities that will lead to the organic growth and development of the company.
Money cannot be used for the acquisition of a business or part of a business or other company.
A company may use money to buy plant and machinery from another business to use in its own trade so long as there are no wider acquisitions of the assets of a trade.
A company may not use money to buy intangible assets that have already been used in a trade, or goodwill.
However a company may use money to buy intangible assets that have been created by another business, so long as the intangible asset has not been used in the course of that business. A company may also use money to commission the creation of intangible assets.
A company cannot use money from a relevant investment alongside other funding to buy the separate parts of a business such that, overall, it acquires an established business or part of a business.
Company A has been manufacturing and selling coats for three years. It wants to expand its product range to increase its customer base and needs some specialist equipment for waterproofing its products. The company uses relevant investments to buy second-hand equipment from company B, which has been manufacturing waterproof clothing but is going into liquidation. The company would meet the use of money condition.
The details are similar to the previous example. However, as well as buying the plant and machinery from company B in liquidation, company A also wants to buy company B’s brand name, which is well known among the customer base. The brand name brings with it an existing customer base and an established market. The acquisition of the brand name means company A would not meet the use of money condition.
The details are similar to the previous example. Company A wants to buy the plant and machinery and the brand name of company B. It arranges for funding from a bank to buy the brand name and wants to use money from relevant investments to buy the plant and machinery. However, money from relevant investments cannot be combined with other money to buy a business, or part of a business. The company would not meet the use of money condition.
Company C wants to set up a new gastro pub in a high street to cater for a high end clientele. It finds an old pub, which is about to close, in the right location. The old pub focussed on drinks sales, providing a limited range of beers, and the only food available amounted to sandwiches and snacks such as crisps. Company C intends to buy the lease of the old pub, after it has ceased to trade, and completely refurbish the premises, including state of the art kitchen facilities. The company wants to acquire the premises of the old pub, not its name, customer base or goodwill as company C is expecting to supply a completely different clientele. If company C raises the money through relevant investments, it will meet the use of money condition.
Company D is set up to develop IT applications. Its employees are able to develop most specialist IT applications except for one. Company D decides that it will be more efficient to pay an outside specialist developer to deliver one part of that application. The outside developer creates intellectual property (coding) which is bought and retained by company D.
With the ownership of that intellectual property, company D is able to market its products to a wide range of customers. If company D raises the money through relevant investments, it will meet the use of money condition.
The facts are the same as for the previous example except that the software that company D needs to buy in has already been developed by company E.
If company E developed the software for its own purposes and used the software in its own trade then company D will not meet the use of money condition because the intellectual property has been used for a previous trade.
Where a company buys a licence to use software in its business operations, for example a word processing package, then this would meet the use of money condition if the licence was bought using relevant investments.
Company F is set up to provide consultancy services to the oil industry. The founding directors, Jane and Susan, had been carrying out consultancy businesses separately, Jane through a sole proprietor business and Susan through a partnership with another individual, Ed. They want company F to buy out Ed’s share of the partnership.
Company F cannot use money raised from relevant investments to finance this acquisition.
If company F acquires Ed’s share of the partnership using private money it may not be able to raise money through relevant investments in future depending on how long the partnership had been trading. See the section on the permitted maximum age condition for more detail.