HMRC internal manual

Venture Capital Schemes Manual

VCM13040 - EIS: income tax relief: the issuing company: financial health requirement

ITA07/S180B

The issuing company must meet the financial health requirement at the beginning of Period B - that is, at the date the shares are issued. (See VCM10540 for an explanation of Period B.)

A company does not meet the financial health requirement if the company is in difficulty.

The definition of a company in difficulty is given by EU guidelines. ITA07\S180B refers to the guidelines published in 2004. However, these guidelines were superseded in 2014 by the “Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty” (2014/C 249/01). It is the 2014 definition of a company ‘in difficulty’ that now applies for the purposes of the EIS and the other venture capital schemes, subject to the modifications in the 2014 General Block Exemption Regulation (GBER) which allow more generous timescales for risk finance investments.

In general, HMRC will regard any company as being ‘in difficulty’ when it meets the criteria for insolvency under the Insolvency Act 1986, such as:

  • the company is unable to pay its debts as they fall due
  • the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (the “balance sheet test”).

Additionally, where more than seven years have passed since a company’s first commercial sale, it will also be regarded as being in difficulty if more than half of its subscribed share capital has disappeared as a result of accumulated losses.