VCM60360 - Venture Capital Schemes Manual: venture capital schemes: the Social Investment Tax Relief: advance assurance requests: circumstances where HMRC will not give an advance assurance: disqualifying 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, qualifying debt investment, 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, SEIS or SITR shareholders but voting rights in the EIS, SEIS or SITR 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 social enterprise’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 social enterprise, or will be carried on by employees of the enterprise 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 social enterprise will involve the enterprise paying all or most of the monies raised or qualifying debt investment 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 enterprise 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 social enterprise 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 social enterprise’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, SEIS or SITR 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 SITR 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 enterprise 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’.