HMRC Consultation Document on Tax advantaged Venture Capital Schemes
08 July 2011
As part of the Government's stated aim to develop the UK into the best place in Europe to finance and grow a small business, HMRC are looking into ways in which they can provide tax advantages to assist the Government in this plan.
On 6 July 2011, HMRC published a consultation document in which they have outlined proposals to ensure that Enterprise Investment Schemes (EIS) and Venture Capital Trust (VCT) schemes remain effective while supporting increased investment into small companies.
The proposals should be welcome news for investors as the changes will provide tax advantages and simplify the EIS and VCT schemes.
Brief outline of Proposals
The consultation is organised into 3 categories which HMRC have invited comments:
1) additional support for "seed investment";
2) simplification of the current schemes; and
3) refocusing of the schemes to ensure they remain appropriately targeted.
1) Supporting seed investment
The consultation proposes to look at two issues in relation to start-up investment for small companies: i) to gain a clearer understanding and evidence on the exact nature and scale of the problem, and ii) to assess whether and how best the tax system might effectively support an increase in seed investment.
In considering how best to support a business at the "seed-stage", the Government is proposing to develop a new stand-alone scheme targeted more narrowly at the seed level and business angels, the Business Angel Seed Investment Scheme (BASIS). The Scheme would be based on the current EIS but with slight changes to target the scheme more directly at business angels to incentivise their investing. One difference from EIS will be that any individual investor in a qualifying company must have at least 70% of their investment in the form of equity or quasi-equity. Transition would be possible from BASIS to EIS once a company has started trading.
2) Simplification of current scheme
The Government proposes replicating the changes to the definition of "qualifying shares" in EIS, to the definition of "eligible shares" for VCT scheme. This will mean a relaxation of restrictions on preferential rights to income and assets, allowing companies which receive investment via both schemes, the advantage of not having to work with different definitions of "qualifying shares".
The Government is also considering removing a "connection" rule which would allow current investors to provide emergency funding for a company without disqualifying for EIS relief. However, the "connection" rule in respect of loans which carry the right of conversion into share capital or other instruments will still be applicable.
The Government has also asked for comments on proposals of simplification on areas of EIS that are perceived to be complex, such as issues arising on mergers of EIS companies.
3) Improving the focus of EIS and VCT schemes
The Government has concerns about the VCT and EIS schemes used by companies that are purely set up for the purpose of obtaining tax relief under these schemes. The Government has therefore suggested proposals to deal with this "abuse" of the schemes, for example, one proposal is to establish a test which considers a number of characteristics commonly displayed by such companies. The test will not be applied to companies which employ and continue to employ 4 or more full time working employees or equivalent.
Similarly, the consultation suggests that the Government intends restricting the scope of EIS and VCT relief where monies are used by a company "preparing to trade" to acquire an existing trade or trading subsidiary, at the time that existing trade or trading company is brought into the group.
This will have consequences for corporate structures which take into consideration EIS relief planning.
The Government is also asking for additional supporting evidence from stakeholders on the use and impact of the current schemes.
The consultation period is due to end on 28 September 2011. Following this, legislation to implement any proposals to be taken forward in Finance Bill 2012.
We will of course produce a similar client briefing updating you of any amended proposal changes, and their implementation date, as appropriate.
This consultation document shows the Government's willingness to encourage investors in the UK to invest in small businesses. The proposed BASIS is a real sign that HMRC are looking to provide tax incentives to get small businesses off the ground. There is not much detail yet on how the proposals will work exactly, but the Government appears to be asking the right questions in the consultation and committed to provided tax incentives in this area.
If you have any further questions, please contact either John Barnett, firstname.lastname@example.org or Natalie Stoter, email@example.com of the Corporate Tax team at Burges Salmon.