SEIS: company and investor procedures: company procedures: advance assurance requests: declining
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 SEIS1) in accordance with the statutory procedure (see VCM35090).
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 section 257CC - see VCM33040).
In some cases HMRC may not be able to provide an assurance. This may particularly be the case where it appears the shares may have been issued or subscribed for, for the purposes of tax avoidance. See VCM32060 and VCM33070 as to what is considered to be “tax avoidance” in the context of the venture capital schemes. It may also be the case where we think there may be ‘disqualifying arrangements’. Please refer to VCM33080 for a description of what this means. This is because it is not always possible to determine what the purposes of any transactions or arrangements are until effect is given to those purposes.
Refusal to grant advance assurance does not indicate that HMRC has already reached a view about how the legislation will apply. However in such cases rather than attempting to form a view in advance of the company carrying out its intentions, we will want to examine at the time the company provides its compliance statement (SEIS1) 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, we 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’.