The ‘Risk to Capital’ condition
HMRC says investee companies must intend to grow and develop their trade long-term and have a ‘significant risk’ of capital loss. This means they must be genuine businesses intending to grow, not constructed vehicles seeking to limit investor risk.
‘Significant risk’ is not explicitly defined and is reviewed case-by-case by HMRC.
To assess the tests, regard must be had to all circumstances, but the legislation particularly references:
- Company’s intent to increase its number of employees, turnover or customer base.
- Nature of the sources of income, including risk of not receiving it.
- The extent to which the company has assets that could be used to secure financing.
- Extent to which activities are subcontracted to unconnected parties.
- The ownership structure.
- How the investment is marketed.
- The extent to which the investment is marketed or linked to other investments.
Although this sounds incredibly specific, many businesses meet these requirements. For example, Deepbridge reviews an average of 1,500 qualifying companies annually, not including the number of rejected requests at the first stage.
That being said, you can see how imperative it is to use an investment specialist like Deepbridge, who you can rely on to ensure the company qualifies and continues to qualify against these specific criteria. HMRC indicates that it will carry out post-investment checks on companies to see if the risk to capital condition was met and review if the money raised has been used per the information provided in their compliance statement.
Following these checks, HMRC can withdraw relief if the conditions are not met, and advance assurance cannot be relied upon if full facts are not provided to HMRC. Your chosen provider must know the investee companies and understand how funds are utilised continuously.
Keep in the loop
Register here to receive information, including invitations to exclusive Deepbridge events, links to our new podcasts and important industry updates.
