TT265: Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT)
HMRC Provide draft guidance on the “risk-to-capital” condition
On 4 December 2017 HMRC published draft guidance in relation to the new risk-to-capital condition included in the Finance (No2) bill 2017-2019. This new condition will apply to shares issued after royal assent to the Finance (No 2) bill. Also, from 4 December 2017, HMRC will not provide advance assurance if, having taken all factors into account, they are of the opinion the investment will fail the risk-to-capital condition.
The essence of the new condition is to target venture capital reliefs to companies that cannot get funding elsewhere (because they are high risk), are managed by the founders, have the potential to grow in the long term and are not structured to provide preservation of capital to investors thereby making the shares low risk investments.
There are two parts to the new condition and both parts must be satisfied for an investment to pass the condition:-
- The company in which the investment is made must have objectives to grow and develop over the long term; and
- The investment must carry a significant risk that the investor will lose more capital than they gain as a return (including any tax relief).
Therefore, a special purpose vehicle (SPV) that is set up to deliver a project that will generate money when complete is unlikely to pass “a” above (the objective to grow and develop over the long term). A parent company that uses SPV’s to develop and grow the group’s trade may qualify. It seems that any company or group that does not have objectives to develop and grow well beyond the 3 year qualifying period will no longer qualify for these reliefs.
The second part of the condition is that the SEIS/ EIS investment must pose a significant risk of loss of capital of an amount greater than the net return. The risk is assessed by considering:-
- The risk of losing the money invested; and
- The net investment return for the SEIS/ EIS investors.
The net investment return includes the amount of upfront income tax relief the investors may be eligible to claim.
In considering whether both parts of the condition (a.and b.above) are met HMRC will take into account all relevant factors including the following:-
- The extent to which the company’s objectives include increasing the number of its employees or the turnover of its trade;
- The nature of the company’s sources of income, including the extent to which there is a significant risk of the company not receiving some or all of the income;
- The extent to which the company has or is likely to have assets, or is or could become a party to arrangements for acquiring assets, that could be used to secure financing from any person;
- The extent to which the activities of the company are sub-contracted to persons who are not connected with it;
- The nature of the company’s ownership structure or management structure, including the extent to which others participate in or devise the structure;
- How any opportunity for investment in the company is marketed; and
- The extent to which arrangements are in place under which opportunities for investments in the company are or may be marketed with, or otherwise associated with, opportunities for investments in other companies or entities.
The above is a major change to the SEIS, EIS, and VCT schemes. HMRC anticipates that in many cases, shares that would have qualified in the past will no longer do so. The subjective nature of the condition means that extra care needs to be taken in drafting applications for advance assurance. In future, if an application is rejected there is no right of appeal.
If you would like further information regarding the application of these arrangements or in connection with venture capital reliefs in general then please contact your usual Barnes Roffe partner or Paul Hughes on 01322 620 203 or firstname.lastname@example.orgTalk to Barnes Roffe today