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HMRC internal manual

Venture Capital Schemes Manual

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EIS: income tax relief: general requirements: use of the money raised requirement

ITA07/S175

An individual is only eligible for relief if the money raised by the issue of the shares, is employed, within a certain time, wholly for the purpose of a ‘qualifying business activity’ (see VCM12110) for which it was raised. But if an insignificant part of the money is employed for some other purpose, this is to be disregarded.

Meaning of ‘employed’

The legislation requires that the money raised by a share issue is ‘employed’ within a certain time. This ensures that companies do not raise more money than they actually need in order to allow investors to obtain tax relief. In most cases companies will have a business plan which makes it clear why the monies are needed, and how the company intends to use them for the business within the necessary timescale.

What constitutes ‘employment’ of money was considered in the case of C Richards and Skye Inns Ltd v HMRC [2011] UKUT B25 (TCC). The Tribunal recognised that money is most obviously ‘employed’ when it is spent, but that the concept of ‘employed’ extends more widely.

The company’s other sources of income may be a relevant factor in determining whether the monies raised by the relevant share issue have been spent. This will particularly be the case where trading income is available to meet the company’s day to day running costs. In general it is not appropriate to assume that expenditure has been met first and foremost out of the monies raised by the share issue.

The Tribunal also held that monies may be ‘employed’ for the purposes of a qualifying business activity if the company has earmarked them in the relevant period for some specific purpose and is keeping them in reserve for that purpose (which does not have to be a purpose calling for expenditure in that period). Whether moneys have been set aside with sufficient precision for a specific purpose so that they can be said to have been ‘employed’ for the purpose of a qualifying activity at the time they are set aside, will be a matter to be determined on the particular facts of an individual case.

The company will not fail the ‘employment of money’ test if an insignificant amount is employed for another purpose.

Costs of share issue

Money used to meet the expenses of issuing the shares, which may be very substantial in the case of shares offered by way of a public prospectus, should be regarded as employed in the same way as the remainder of the money raised; for example, money used by a holding company with a trading subsidiary to meet its own costs in issuing shares can normally be accepted as employed for the purpose of the subsidiary’s trade. Where the company obtains a listing, for example on the Alternative Investment Market, at the same time as it issues the shares, the use of money to meet the expenses of flotation should normally be regarded as acceptable.

Acquisition of shares in another company

For shares issued on or after 6 April 2012, employing money on the acquisition of shares or stock in a company does not of itself amount to employing the money for the purposes of a qualifying business activity.

This does not prevent the money being used to acquire shares in a subsidiary company, providing that after the share issue the subsidiary is a qualifying 90% subsidiary (see ITA07/S190) and that subsidiary then goes on to use the money for a qualifying business activity carried on by it (which will exclude the acquisition of shares or stock in another company).

Time limit

The time limit within which the money raised by the issue of the shares, and of all other shares of the same class issued on the same day, must be employed within

* 2 years from the issue of the shares;
* if the activity consists of preparing to carry on a trade, 2 years from the issue of the shares or, if later, 2 years from when the company begins to carry on the trade. 

For shares issued before 22 April 2009, at least 80% of the money raised must be employed within 12 months after the date of issue, except where the activity consists of preparing to carry on a trade, in which case the time limit is 12 months after the date when the trade begins; any money remaining must be employed within the following 12 months.

Where a company submits form EIS1 before either of the time limits for employment of the money has expired, and not enough money has as yet been employed to satisfy the statutory conditions, it is required to make a declaration on the form that the conditions will be complied with.