A few cases have gone to tribunal; what does this mean?
The risk to capital condition, seen in both schemes, requires any fundraising company to provide evidence that the main objective of the raise is to ensure the long-term growth of a sustainable business (not a short-term project) and that sufficient risk is involved in investment.
Following several cases reaching tribunal regarding this condition, the below two particularly subjective areas have seen informative judgements:
Long-term growth requirement
Some companies have struggled to demonstrate their intended long-term viability beyond an initial short-term product or idea, especially if their marketing and fundraising documents focus on short-term success, causing them to fail the requirement. However, in a recent case, the tribunal held that starting with an initial product did not mean a company would necessarily fail the long-term growth requirement and it was perfectly reasonable for marketing to focus on the initial idea or product.
Companies must demonstrate that they will use any money raised for the business's long-term growth. A company recently lost at a tribunal as HMRC successfully argued they had not spent the money on the company’s infrastructure to facilitate growth and allow it to become a viable long-term business, causing them to fail the condition. Part of HMRC’s reasoning relied on the lack of a business plan and projections meaning they could not evidence their long-term intentions to trade beyond three years.