Ken Moody looks at a potential obstacle to successfully claiming tax relief under the enterprise investment scheme or seed enterprise investment scheme.
As some readers will appreciate, the complex rules for enterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS) investments can seem like an obstacle course, where if you trip you may stand to lose all relief. One such hurdle under both schemes concerns the use of monies raised within time limits.
Spend, spend, spend!
It is a requirement for EIS purposes that all the money raised must be ‘employed wholly for the purposes of the qualifying business activity’ within two years after the issue of the shares or, if later, two years from when the company or a 90% qualifying subsidiary begins to carry on the trade (ITA 2007, s 175). This is designed to accommodate the situation where the money raised by the share issue is for a trade which the company or subsidiary is preparing to carry on.
For SEIS purposes, all the money must be ‘spent’ within ‘Period B’, beginning with the issue of the shares and ending immediately before the third anniversary of the issue of the shares (ITA 2007, ss 257CC, s.257AC).
For both schemes, the requirement does not fail to be met if an amount which is ‘not significant’ is employed/spent for another purpose, or, for SEIS only, remains unspent at the end of Period B. This is not particularly helpful though, since ‘not significant’ is not defined; nor is there any HMRC guidance on what it means. The safer course is to ensure that all the money raised by the relevant share issue is employed/spent within the applicable time limit.
This immediately raises practical problems, e.g. where there is more than one share issue. It will be necessary to create an ‘audit trail’ for each issue to ensure the use of money raised by an earlier issue before a later one and within the time limit. Also, if the company generates income this must not get mixed up with monies raised from a share issue, or it may be impossible to demonstrate the use of those monies. It is noted by HM Revenue and Customs (HMRC) in its Venture Capital manual (at VCM12060) that where trading income is available it is not appropriate to assume that expenditure has been met firstly out of monies raised by the share issue.
SEIS shares must be issued before any EIS or VCT shares (ITA 2007, s 257DK) so separate share issues are needed, in that order, if capital is raised under both schemes. The total which may be raised under SEIS is only £150,000 and, in most cases, it will be spent quite quickly (the alternative requirements before a ‘compliance statement’ may be made are the spending of 70% of the money or trading for four months (ITA 2007, s 257ED(3)).
‘Payment’ or ‘employment’?
The ‘employment’ of funds requirement for EIS purposes is not the same as the ‘spending of the money raised’ requirement for SEIS. The distinction between ‘payment’ and ‘employment’ was considered in C Richards & Skye Inns Ltd v HMRC [2012] STC 174 where, very briefly, it was decided that the payment of dividends to investors was not the employment of monies raised for the purposes of the qualifying trade. In HMRC’s guidance (at VCM12060) it is noted that the tribunal in Richards recognised that money is most obviously employed when it is spent, but the concept of ‘employed’ is wider.
It is worth noting that for both schemes, the employment of monies in the acquisition of shares in a company does not in itself amount to the employment of money for the purposes of the trade (unless the investment is in a qualifying subsidiary that uses the money for the purposes of its trade).
