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HMRC internal manual

Venture Capital Schemes Manual

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HM Revenue & Customs
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EIS: income tax relief: general requirements: purpose of the issue requirement

ITA07/S174

Raising money

Shares must be issued to raise money for the purpose of a qualifying business activity (see VCM12110).

The issue of shares in consideration for the liquidation of a loan, or by the ‘conversion’ of loan stock, does not raise money for the company. The ‘conversion’ of loan notes was considered in Optos plc v Revenue & Customs Commissioners (SpC 560)and Domain Dynamics (Holdings) Ltd v Revenue & Customs Commissioners (SpC 701).

If the issue of shares does in fact raise money it can normally be accepted that that was the purpose of their issue. But that is not always the purpose. In particular it may not be the purpose where the shares are issued because the investor exercises a right to acquire more shares, otherwise than in the course of a wider fund-raising share issue by the company in which the investor has the right to opt to participate.

Forthright (Wales) Ltd v Davies (76TC134) determined that the payment of dividends is not a purpose of a qualifying business activity. It found that EIS relief was not due on shares issued to raise money for dividend payments.

See also VCM12090 as regards shares which are issued for non-commercial purposes and for purposes of tax avoidance.