VCM34060 - SEIS: income tax relief: issuing company: financial health requirement
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 VCM31140 for an explanation of Period B.)
A company does not meet the financial health requirement if it would be reasonable to assume that it would be regarded as a company ‘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 However, these guidelines were superseded in 2014 by the “Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty” (2014/C 249/01).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.
The guidelines set out that an undertaking is considered to be in difficulty when, without intervention by the State, it will almost certainly be condemned to going out of business in the short or medium term and define the circumstances where this is considered to be the case.
Applying these definitions, HMRC will in general 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 a company is raising funds outside of its initial investing period, 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. Whilst a company’s most recent accounts will be the starting point in determining this position, due consideration will also be given to any reasonable adjustments that could be made to the accounts figure reflecting the particular circumstances of the company at the date of the relevant share issue. For example, where a company can show irrevocable future investments (non-tax incentivised), or any R&D costs expensed in the accounts which could have been capitalised under “UK GAAP”.
Ultimately, whether it is reasonable to assume a company should be regarded as in difficulty will require an assessment of the company’s particular financial circumstances including the ability of the company to maintain its activity in the short or medium term.