HMRC Guidance on Advance Subscription Agreement: What You Need to Know

If you are thinking of starting a new venture or expanding your business, you may need to raise capital by issuing shares. One way to do this is through an Advance Subscription Agreement (ASA). This is a contract between an investor and a company whereby the investor agrees to subscribe for shares in the future at a fixed price.

While ASAs can be useful for startups and small businesses, it is important to understand the tax implications and compliance requirements. The UK tax authority, HM Revenue and Customs (HMRC), has published guidance on ASAs to help businesses and investors navigate the rules.

Here are the key points from the HMRC guidance on ASAs:

1. ASAs are not shares

While ASAs give investors the right to subscribe for shares at a later date, they are not shares themselves. Therefore, the tax treatment of ASAs is different from that of shares. For example, the income tax rules on dividends do not apply to ASAs.

2. ASAs may be subject to income tax

Depending on the terms of the ASA, the investor may be liable to income tax on the amount paid for the right to subscribe for shares. This is because the payment may be considered a loan or a form of income. However, if the ASA meets certain conditions, it may be exempt from income tax.

3. ASAs may trigger capital gains tax

When the investor exercises their right to subscribe for shares, they will acquire a capital asset. This could result in a capital gain if the value of the shares is higher than the subscription price. The investor may be liable to capital gains tax on the gain.

4. ASAs must be compliant with company law

ASAs must comply with the Companies Act 2006 and the company`s articles of association. This includes the requirement to issue shares within 28 days of payment and to register the share transfer with Companies House.

5. ASAs may affect the company`s valuation

ASAs can affect the valuation of the company, as they commit the company to issuing shares at a fixed price in the future. This may impact future fundraising rounds or potential buyers.

In summary, ASAs can be a useful tool for businesses seeking to raise capital. However, it is important to seek professional advice and to be aware of the tax and legal implications. The HMRC guidance on ASAs provides a helpful starting point for understanding the rules.