EIS: income tax relief: company and investor procedures: advance assurance requests: circumstances where HMRC will not give an advance assurance
HMRC will not give an advance assurance where the relevant shares have already been issued. In that situation the company should submit its compliance statement (form EIS1) in accordance with the statutory procedure (see VCM14090).
HMRC will not give advance assurance if it is not satisfied that the company is likely to meet all the qualifying conditions (although we will not normally refuse to give assurance solely on the grounds that the company may not spend the monies raised within the timescale required by ITA07/S175 – see VCM12060).
HMRC may decline to provide an opinion on an advance assurance application. This can be the case where:
- it appears the shares may have been issued or subscribed for, for the purposes of tax avoidance. See VCM11040 and VCM12090 as to what is considered to be ‘tax avoidance’ in the context of the venture capital schemes
- we consider the investment is the result of aggressive tax planning by pushing the boundaries of the law
- we consider the investment would be outside the principles or objectives of the scheme as set out in this guidance or elsewhere, for example where the terms of an investment would mitigate risk by ensuring that equity is repaid
- a proposed investment exploits a loophole in the law that is contrary to the intentions set out in this guidance or elsewhere, including in the State aid guidelines
- the ‘risk to capital’ requirement or the ‘disqualifying arrangements’ requirement is not met. Please refer to VCM8500 and VCM12100 respectively for more details of these requirements.
Refusal to grant an advance assurance does not indicate that HMRC has already reached a view about how the legislation will apply. Rather than attempting to form a view in advance of the company carrying out its intentions, HMRC may want to examine the facts at the time the company provides its compliance statement (EIS1). This may include the circumstances in which funds have been raised, the company established or activities commenced, shares issued and directors appointed; along with the detail of transactions entered into by the company and any associated transactions entered into by third parties which might reasonably be considered to be part of a planned set of arrangements.
Each case will be considered on its own merits, but factors pointing to a decision not to grant advance assurance on the grounds that there may be ‘disqualifying arrangements’ are likely to include (without necessarily being restricted to) cases where the following apply:
- immediately after the proposed investment, the majority of shares, voting rights, rights to assets in a winding up or rights to sale proceeds will be held by any combination of VCTs and/or EIS or SEIS shareholders but voting rights in the EIS or SEIS shares have been delegated to a person or persons who would have an interest in the company entering into ‘disqualifying arrangements’ and/or decisions about the company’s activities will be made by such persons
- the majority of the activities required to fulfil obligations to customers will be carried out by persons other than employees of the relevant trading company, or will be carried on by employees of the company but other than in their capacity as such, where it seems likely that these arrangements exist as part of ‘disqualifying arrangements’
- the transactions to be entered into by the company will involve the company paying all or most of the monies raised by the share issue to a party to whom it has subcontracted work or from whom it has commissioned work in advance of that work being done, whilst the company will not be paid by its customer until work has been completed, where it seems likely that these arrangements exist as part of ‘disqualifying arrangements’
- the transactions to be entered into by the company will involve the company providing its customer with services or goods, where that provision will involve the company incurring costs which will not be recouped from its customer within a period of 90 days of the goods or services being provided where it seems likely that these arrangements exist as part of ‘disqualifying arrangements’
- the company’s activities involve the purchase and re-sale of intangible assets, where vendor or purchaser are parties who would be likely to benefit from, or have an interest in, the company being involved in ‘disqualifying arrangements’
- the prospectus, information memorandum, brochure or similar offer document describes the investment opportunity in a way which suggests that the investment is not high risk. This may include, for instance, statements to the effect that the investment is low-risk or lower risk than other EIS or SEIS investments or that there is a high likelihood of the investor’s capital being preserved. In the context of the ‘disqualifying arrangements’ legislation, HMRC will want to consider the reasons why the investment might be less exposed to risk than other EIS investments.
If there are no grounds for believing that there may be ‘disqualifying arrangements’, the presence of one or more of these indicators will not mean that no assurance will be given. For instance, the fact that the company subcontracts work as part of its normal trading activities will not prevent HMRC giving an assurance if the subcontracting agreement is not part of ‘disqualifying arrangements’.