HMAG30050 - Registration and approval: approval in principle
To fund capital investment (for example, the money needed to fund permanent fixed assets such as premises and equipment) businesses will normally seek a loan and/or issue stock. Lenders and investors will usually seek reassurance that the business they are lending money to, or investing in, is genuine. They need to be sure that they will either get a return for their investment or if lending money that the business will be able to trade to meet the terms of their borrowing agreement etc.
It is for this reason that new businesses, where capital investment is needed, may seek an approval in principle agreement from HMRC to satisfy investors and/or lenders.
Requests for approval in principle
When considering a request for approval in principle careful consideration must be given to what is known about the business, for example, by looking at details including the business’s business plan, details on Case flow, VAT (Value Added Tax) records and information online about the business.
It is necessary to establish who will have authority and responsibility for directing and controlling the activities of the business or its day-to-day management. It is also necessary to establish if there will be any significant beneficiaries of the business who are not directors, partners or similar etc. Once those with a controlling or beneficiary interest in the business have been identified, a fit and proper test should be carried out on these. Where the business is an existing one consideration should be given to the business’s annual accounts etc.
Where it is established that the persons are fit and proper and that there is a genuine business need for both the approval and an agreement in principle for the approval, we should identify which aspects of the business we have been unable to test, for example because plant and machinery or the premises has not been acquired yet.
Drafting approval in principle letters
Approval in principle letters should clearly show that the approval is conditional, subject to the business being able to meet the requirements and conditions set in the relevant public notice, and that no changes are made to the persons declared as having a day to day controlling or beneficiary interest in the business.
An approval in principle letter should normally be valid for the time necessary for the business to acquire the assets needed to start trading. As a guide this should normally be for 6 months but can be for a longer period if there is a good reason, for example, to allow the construction of trading premises.