VCM33040 - SEIS: income tax relief: general requirements: spending of the money raised requirement
ITA07/S257CC
The tax relief is intended to incentivise investment in companies and support them in raising investment to fund their qualifying business activities. The money raised from the share issue must be spent by the end of period B (see VCM31140), for the purpose of the qualifying business activity (see VCM33050) for which it was raised. The money raised is therefore expected to be used for that purpose.
This is to ensure 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.
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.
If an insignificant part of the money is spent for some other purpose, or an insignificant part is not spent, this is to be disregarded.
Spending money to acquire shares in another company
The legislation specifies that spending money on the acquisition of shares or stock in a company does not of itself amount to spending 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 percent subsidiary (see VCM34040) 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).
Cost of share issue
Money used to meet the expenses of issuing shares will generally be regarded as spent for the purposes of the qualifying business activity for which the money was raised.
The expenses of issuing shares can vary depending on the nature of complexity of the fundraising but should remain ancillary to the purpose for which the money raised.
In many cases such expenses are expected to be relatively modest. HMRC will consider factors such as the nature of the services provided, the basis on which any fees are calculated and the purpose for which the expenditure was incurred.
Whether the spending of money raised requirement is met does not depend solely on the description given to a payment. The greater the extent to which the money raised is applied to fees, commissions, intermediary charges or similar payments, the more important it will be to consider the factors above in determining whether the spending of money raised requirement is met.
HMRC will therefore consider carefully how money raised is applied. Companies should be able to demonstrate clearly how the money raised is intended to be used. Such payments should be clearly identifiable from the documents supporting the fundraising, including business plans, financial forecasts and other fundraising documentation.