VCM12070 - The investment process: purpose for which money raised
ICTA/S289 (1)(b), (c) & (d) and (1A) – (1E); ITA/S174; ITA/S175; ITA/S183; ITA/S293 & ITA/S294
TCGA92/SCH5B/PARA1 (2)(f) & (g); FA00/SCH15/PARA36; ITA/S293
The EIS
For the EIS, an individual is only eligible for relief if the
money raised by the issue of the shares, is employed, within a
certain time, wholly for the purpose of a 'qualifying business
activity' (see
VCM20020) for which it was raised. But
if an insignificant part of the money is employed for some other
purpose, this is to be disregarded.
The requirements concerning the employment of the money
raised differ depending on whether the shares were issued before or
on/after 17 March 2004.
EIS: share issues before 17 March 2004
If the shares were issued before 17 March 2004 the conditions
relating to the employment of money raised also apply
to all other shares in the same share issue (not
just those in relation to which relief is sought) - see
VCM12060.
For these shares where the company (or a subsidiary) uses the
money raised to acquire an existing trade, the qualifying business
activity for which the money is employed is one of ‘preparing
to carry on' that trade. The same applies where the company (or a
subsidiary) employs the money in acquiring the share capital of a
trading company with the object of enabling it to procure the
transfer of the trade to itself, and the trade is duly transferred.
This transfer is sometimes referred to as a ‘hive up’
of the trade. However:
- where the ‘target company' also owns non-trading assets, the use of the money to acquire the share capital will not be employment wholly for the purpose of a qualifying business activity, whether or not those non-trading assets are also transferred; and
- any unnecessary delay in effecting the transfer of the trade will cast doubt on the company's claim to be an 'active' company (see VCM12100) throughout the relevant period.
This ‘hive up’ was necessary because of the rule - repealed for shares issued on or after 17 March 2004 - that the ‘active company - the company that is carrying on or preparing to carry on the qualifying business activity - had to remain the same throughout the relevant period (see VCM12100 for the active company rule).
EIS: share issues on or after 17 March 2004
FA04 removed the ‘active company’ rule. For shares issued on or after 17 March 2004 the requirement is that the activities for which the money was raised must be carried on by the company that raised the money or any qualifying 90% subsidiary of that company, but that company need not remain the same company (see VCM12100).
Costs of share issue
Money used to meet the expenses of issuing the shares, which may be very substantial in the case of shares offered by way of a public prospectus, should be regarded as employed in the same way as the remainder of the money raised; for example, money used by a holding company with a trading subsidiary to meet its own costs in issuing shares can normally be accepted as employed for the purpose of the subsidiary's trade. Where the company obtains a listing, for example on the Alternative Investment Market, at the same time as it issues the shares, the use of money to meet the expenses of flotation should normally be regarded as acceptable.
Meaning of ‘employed’
For the meaning of 'employed', and the identification of money employed, see VCM12080.
CVS and VCT scheme
For the CVS and the VCT scheme, the rules about the employment of the money raised are very similar (see VCM50030 and VCM62150 respectively). The concept of a qualifying business activity is not used although in the VCT scheme there is a reference to a qualifying activity. The money must be employed for the purpose of a trade, for the purpose of preparing to carry on a trade, or for the purpose of research and development leading to a trade. For each of these schemes activities can be carried on by either the company that issued the shares or a qualifying 90% subsidiary of that company - see VCM12100.
EIS: purpose of issue
The EIS alone also requires that the shares must be issued in order to raise money for the purpose of a qualifying business activity (see VCM20020).
