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HMRC internal manual

Venture Capital Schemes Manual

VCT: VCT qualifying holdings: requests for advance assurances: circumstances where HMRC will not give an advance assurance

HMRC will not give an advance assurance if it is not satisfied that the company is likely to meet all the qualifying conditions (although assurance will not normally be refused solely on the grounds that the company may not employ the monies raised within the timescale required by section 293).

HMRC may decline to provide an opinion on an advance assurance application. This can be the case where:

  • 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 VCM55280 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 after the investment has been made. This may include the circumstances in which the company has been established or activities commenced, shares and any securities are 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 provide an advance assurance on the grounds that there may be ‘disqualifying arrangements’ are likely to include (without necessarily being restricted to) cases where any of 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 by the VCT describes the investment strategy in a way which suggests that the investments will not be high risk. This may include, for instance, statements to the effect that investment will be low-risk or lower risk than other tax-advantaged 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 tax-advantaged 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’.