This is intended for guidance only, and does not attempt comprehensive or detailed coverage of all the rules of the Corporate Venturing Scheme (CVS). The guidance reflects HM Revenue & Customs (HMRC) understanding of the law in force at the time of publication. The statements in the guidance do not affect any right of appeal about any tax liability.
HMRC advance clearance of an issue of shares by a company means that, on the basis of information provided by the company, HMRC consider, at the time the shares are issued, requirements relating to the company and the shares will be met for the time being. Such clearance does not guarantee the safety or success of any investments made - neither does it guarantee that an investing company will obtain any tax relief, that is, because the company itself will also have to satisfy certain requirements. Potential users of the CVS should seek professional advice before issuing shares or making investments.
The term ‘corporate venturing’ covers a range of mutually beneficial relationships between companies. The relationships range from those between companies within the same group, through those between unrelated companies, to collective investment by companies in other companies through a fund. The companies involved may be of any size, but such relationships are commonly formed between a larger company and a smaller independent one, usually in a related line of business.
The larger company may invest in the smaller company, and so provide an alternative or supplementary source of finance. It may, instead or as well as:
In addition to any financial return it receives from an investment the larger company may gain a competitive advantage by:
Forming corporate venturing relationships can be a way for large companies to develop and broaden their business without acquiring other companies, and a way for small companies to grow faster than they otherwise would. A typical outcome would be the development of a new product or process, perhaps involving an exclusive licensing deal between the two companies.
Corporate venturing is well established as a growth strategy in the United States. In the UK it is currently more limited, being found mainly in areas such as biotechnology, telecommunications and information technology. The Corporate Venturing Scheme (CVS) is intended to encourage corporate venturing involving equity investment in the UK.
The CVS is aimed at companies considering direct investment, in the form of a minority shareholding, in small independent higher-risk trading companies or groups of such companies. It provides tax incentives for corporate equity investment in the same types of companies as those qualifying under the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) scheme. The incentives are available in respect of qualifying shares issued between 1 April 2000 and 31 March 2010. The aims of the CVS are to:
The tax reliefs available are
There are rules applying to:
A number of the rules must be satisfied throughout the ‘qualification period’ related to the shares. The qualification period related to the shares is a period starting with their issue and ending
If a company is carrying on research and development from which
a qualifying trade will be derived or will benefit, this activity
will be treated as carrying on a qualifying trade.
The investing company must not be party to any arrangements for purchasing shares in another company which are conditional on the purchase of shares in the investing company, and throughout the qualification period must
When the shares are issued the issuing company
Throughout the qualification period the issuing company must not be a member of a group of companies, unless it is the parent company of the group, and must not be under the control of another company.
At least 20 per cent of the issuing company’s ordinary share capital must be held by individuals other than directors or employees (or their relatives) of an investing company, or any company connected with it.
An issuing company which is not a group member must exist wholly for the purpose of carrying on one or more qualifying trades (broadly, all but certain lower-risk trades) and either be carrying on a qualifying trade or be preparing to do so.
Where the issuing company is the parent company of a group, the business of the group as a whole must consist wholly, or to a substantial extent, of qualifying activities. At least one company of the group must exist wholly for the purpose of carrying on one or more qualifying trades, and either be carrying on a qualifying trade or be preparing to do so.
The subscription for shares must be wholly in cash, for full-risk ordinary shares, which are fully paid-up at the time they are issued.
At least 80 per cent of the money raised from issuing the shares must be used for the purposes of a qualifying trade, or for research and development intended to lead to or benefit a qualifying trade, no later than:
Where it is to be used for a trade, all the money raised must be used by no later than 12 months after that time.
There are also restrictions on the issuing arrangements for
the shares, so that they do not include arrangements that provide
protection to investors against the normal commercial risks
attached to investing in the issuing company.
A company, which is considering raising money through the CVS, can get advance clearance from HMRC that, at the time the shares are issued, the conditions of the CVS (except those that apply to the investing company) will be, or are for the time being, met in relation to the proposed issue of shares.
Once the shares have been issued to the investing company, the issuing company provides HMRC with a statement on form CVS 1 confirming that the conditions of the CVS (other than those applying to the investing company) are, for the time being, met in relation to the shares. If HMRC is satisfied with the statement, HMRC will then authorise the issuing company to provide the investing company with a certificate, so that the investing company can claim investment relief (and, where applicable, deferral relief).
To be able to provide this ‘compliance statement’
the issuing company must have been carrying on the trade (or,
where appropriate, research and development) for which the funds
were raised for at least four months.
An investing company subscribing for shares in an issuing company may claim investment relief providing certain conditions relating to both companies, and to the shares, are met. Relief is allowed against Corporation Tax at up to 20 per cent of the amount subscribed.
Where investment relief is obtained, the investing company’s Corporation Tax liability for the accounting period in which the shares were issued is reduced by whichever is the smaller of:
There is no minimum amount and no absolute limit on the amount of investment relief a company can obtain on subscriptions for shares of qualifying companies. But, the amount that may be invested in any one company is indirectly restricted by conditions relating to both:
Although investment relief can be claimed once the shares have been issued, its retention is conditional on the shares being held by the investing company throughout the ‘qualification period‘ and on the other conditions of the CVS being met. Most of these conditions apply throughout the qualification period.
No. Investment relief is available only for the accounting period (for Corporation Tax purposes) in which the shares are issued.
The investing company may claim investment relief in respect of some, or all, of the qualifying investments it has made in the accounting period.
Investment relief can be claimed for each qualifying investment up to the amount of the Corporation Tax liability. But, if the Corporation Tax liability for an accounting period is exhausted, the total relief actually obtained will be attributed to each of the share issues in question in proportion to the amounts subscribed.
If during an accounting period, an investing company subscribes £30,000 for 3,000 shares in company A and £90,000 for 6,000 shares in company B, then the maximum investment relief available is £24,000 (20% of £30,000 + £90,000).
If the investing company’s Corporation Tax liability for the accounting period is £18,000 before taking account of any investment relief, then only three-quarters of the available investment relief can be used.
So, the amount attributable to the shares in A is
£ 30,000 x £18,000/£120,000= £4,500
The amount attributable to the shares in B is
£ 90,000 x £18,000/£120,000 = £13,500
It would also be possible for the investing company to claim investment relief only in respect of the shares in company B, so all the investment relief would be attributable to those shares. But, this would prevent shares in company A from qualifying for CVS loss relief and deferral relief, because there would be no investment relief attributable to the shares in company A immediately before any future disposal.
No. The reliefs are available only where there has been an investment in new ordinary shares of the issuing company, where ‘ordinary share capital’ means all the issued share capital of the company other than shares with a fixed rate dividend. The investing company may hold other investments in the issuing company, providing this does not lead to any conditions for relief being breached, but these will not attract CVS reliefs.
Using cash raised from the share issue to make purchases from the investing company will not generally affect the availability of investment relief. If the money has been raised for the purpose of the issuing company’s trade, the payment is reasonable for the products or services provided, and the products or services are for use in the trade the investment is funding, investment relief will generally be available.
No, the investing company must subscribe for the shares wholly in cash, which must be paid to the issuing company before the shares are issued.
An investing company may include a claim for investment relief as part of its tax return for the accounting period during which the shares were issued. For more details see ‘Using the Corporate Venturing Scheme’.
Investment relief is given as a reduction in terms of tax after
any small company’s marginal relief but before
any double taxation relief that is due.
Corporation Tax on chargeable gains arising from the disposal of shares by an investing company may be deferred if:
To defer a gain the investing company must have:
The gain is deferred until there is a ‘chargeable event’, that is, until the shares in the other company are disposed of, or an event occurs (such as, a receipt of value or certain share reorganisations), which causes any of the investment relief attributable to the shares to be withdrawn.
The same gain may be deferred more than once using deferral relief. If a gain is revived because the shares are sold, a subscription for other qualifying shares may be used to defer the gain until the newly acquired shares are themselves subject to a chargeable event.
The investing company must make a claim after receiving a compliance certificate relating to the second investment specifying, for each gain it wishes to defer, how much of the subscription for new shares is to be set against an equal amount of the gain. The gain is treated as though it had not arisen at the time of the event, to the extent that it is matched with an amount subscribed. It is, in effect, put into suspense until the shares whose subscriptions have been matched are the subject of a chargeable event. When this occurs, a gain equal to part or all of the deferred gain is treated as accruing to the company at the time of that chargeable event.
If the qualifying shares are issued before the gain to be deferred arises, they must be held by the investing company when the gain arises and still have investment relief attributable to them. Any reduction in investment relief before the gain arises is not treated as a chargeable event when calculating the amount of the gain that can be deferred.
It does not matter if the investment relief on the shares is withdrawn in full on account of the disposal which results in the gain to be deferred (for instance, because the shares have not been held for the qualification period).
No. Only shares issued on or after 1 April 2000 can qualify for reliefs under the CVS.
Yes. They are taxable in the normal way.
The company may make its claim either in its company tax return for the relevant accounting period, or by way of an amendment to that return, if that is possible. Otherwise it may make a claim under the rules provided by Schedule 1A TMA 1970, as provided for by Part VII of Schedule 18 of the 1998 Finance Act. Any amount subscribed for the further shares, which has not already been set against a chargeable gain, can be set against that amount of the original gain. The total claimed cannot exceed the amount of the original gain.
No. There is no provisional claim procedure. A claim can only
be submitted once the investing company has made the investment
and received a compliance certificate in respect of that investment.
If the disposal of shares, which meet the conditions for investment relief, results in an allowable capital loss, that loss can be set against a chargeable gain, or carried forward to set against future chargeable gains, in the normal way. Alternatively, the investing company may be able to claim that the loss should be set against its income for the accounting period in which the disposal was made, with any excess carried back to periods ending in the 12 months before that period (‘loss relief’).
The main conditions for loss relief are that:
The amount of the loss is reduced by the amount of any investment relief retained.
An investing company subscribes £100,000 for 100,000 shares (obtaining investment relief of £20,000).
It retains the shares for four years before disposing of them all for £55,000.
The allowable loss is calculated as follows:
Disposal proceeds £55,000
less £80,000 (consideration given for shares less investment
relief given and not withdrawn)
so the allowable loss is £25,000.
Loss relief is not available if the disposal falls within
the rules on company reconstructions and amalgamations, unless
the exchange of shares under the arrangements is carried out
for genuine commercial reasons and does not form part of a scheme
or arrangement for tax avoidance. If a loss has been increased
because the value of the shares has been reduced in circumstances
where the investing company, or any other person, receives a
benefit (and not just a tax-free benefit), the amount of loss
relief available is correspondingly reduced.
It cannot be carried forward as loss relief against income. But, any allowable capital loss that cannot be allowed as loss relief in the accounting period in which it arose, or the previous 12 months, can be set against chargeable gains or carried forward to set against future chargeable gains in the normal way.
The allowable loss is calculated in line with the normal capital gains rules for a disposal of part of a holding, but the amount of the loss is reduced by the amount of investment relief attributable to the shares disposed of. The section ‘Circumstances in which investment relief may be withdrawn or reduced’ explains the rules if only some of the shares in the holding were shares to which investment relief was attributable.
A company cannot make a claim for loss relief unless both:
The company may make a claim for any loss meeting the conditions for loss relief to be set against its income within two years after the end of the accounting period in which the loss arises.
If, for an accounting period, a company claims loss relief in respect of two or more disposals, relief for a loss arising from an earlier disposal is given before that arising from a later disposal.
If loss relief is claimed, it must be given before any other
deductions from, or set-offs against, the investing company’s
profits of any description, and before any deduction for amounts
treated as reducing those profits.
To qualify for the CVS, the investing company must not be party to any reciprocal arrangements for the purchase of shares in any other company. In addition, throughout the qualification period related to the relevant shares it must
These rules ensure that investment relief is given only to companies making minority investments in independent companies, and not to companies and groups already making equity investments as part of their financial business.
Throughout the qualification period, the investing company must not possess, directly or indirectly, or be entitled to acquire, more than 30 per cent of either:
The 30 per cent limit is applied to the combined shareholdings of the investing company and any other companies connected with it or associated with any of them. If the shareholding exceeds the limit, the investment does not qualify for any investment relief, and any relief already given will be withdrawn.
Investment relief is not available if the subscription for shares is part of any arrangement involving another person subscribing for shares in a ‘related company’ (except where the arrangements consist of an issuing company subscribing for shares in any of its qualifying subsidiaries). A ‘related company’ means any company in which any person who is a party to the arrangements has a material interest.
An investing company does not qualify for investment relief if, at any time during the qualification period for the relevant shares, it controls the issuing company. An investing company controls an issuing company if it alone, or together with one or more other persons connected with it, can exercise direct or indirect control over the company’s affairs. This may include possession of, or entitlement to acquire, more than 50 per cent of:
For this purpose HMRC ignore:
‘Relevant preference shares’ are shares that have qualities more akin to debt than to equity. More precisely, they are shares which:
If the investing company is not a member of a group, it must exist (disregarding any incidental purposes) wholly for the purpose of carrying on one or more non-financial trades. A ‘non-financial trade’ is one which, in addition to being conducted on a commercial basis and with a view to making profits, does not consist wholly, or to a substantial extent, of certain financial activities (described below). Holding and managing property used by the company, and holding shares to which investment relief is attributable, if this is not a substantial part of the company’s business, are disregarded.
If the company is a member of a group, that group must be a non-financial trading group. A group is a ‘non-financial trading group’ unless the business of the group taken together consists wholly, or to a substantial extent, of trades other than non-financial trades or of businesses that are not trades. The company itself must either be the parent company of the group, or else exist (disregarding any incidental purposes) wholly for carrying on one or more non-financial trades, or businesses other than trades.
In considering whether the requirement is met, HMRC disregard:
Financial activities, for the purpose of this requirement, include:
No. The company may be of any size, and may be larger, smaller, or a similar size to the issuing company.
No. The investing company may be quoted or unquoted.
No. The CVS is limited to direct investment by companies that meet the investing company requirements.
The holding of investments will not have any bearing on a company’s status as a trading company for taper relief purposes unless, together with other non-trading purposes, it is capable of having a substantial effect on the extent of the company’s activities.
Whether activities of any kind amount to a substantial part of a company’s trade, or of the business of a group, is a question that can be decided in any particular case only by reference to the relevant facts and circumstances. Generally, HMRC consider that activities are ‘a substantial part’ where they amount to more than 20 per cent of the trade or business.
Yes. Shares subscribed for, issued to, held by or disposed of, by a nominee will be treated as subscribed for, issued to, held by or disposed of by the person the nominee is acting for.
Yes, provided the director, or employee, disposes of any current interest in the investing company (and any company connected with it) before the issue of shares by the issuing company, and has no right to acquire any such interest in the future.
Only if the terms of the agreement give it control over the issuing company.
The rules of the CVS, limiting the proportion of an issuing
company that may be owned by corporate investors, will permit
consortium relief to be claimed in some circumstances.
The issuing company - the company in which the investment is made - must be a trading company or the parent company of a trading group and at the time the relevant shares are issued it must meet conditions relating to both its:
Throughout the qualification period related to the shares, it must also meet conditions relating to its:
The issuing company can apply to HMRC for advance clearance that it meets these requirements (see Advance Clearance).
At the time when the shares are issued they, or any other of the company’s shares, debentures or other securities, may not be:
There must not be any arrangements for the shares to be listed or dealt in at that time.
‘Recognised stock exchanges’ have been as such by HMRC. Further information on recognition and a list of recognised exchanges can be found on the website at IR Recognised stock exchange.
‘Designated’ means designated for the purposes of the Enterprise Investment Scheme and CVS by HMRC. At the time of publication, no exchanges are designated for these purposes and no means of dealing in shares are designated. So, companies listed on an exchange other than a recognised stock exchange can qualify for further investment under the CVS.
If a company meets the unquoted status requirement when shares eligible for investment relief are issued, it will not cease to meet it because of the subsequent designation of a stock exchange as a recognised stock exchange, or if an exchange becomes a designated exchange.
The ‘gross assets’ of the issuing company must not exceed £7 million immediately before the issue of the shares and £8 million immediately afterwards. If the issuing company is the parent company of a trading group, this limit applies to the group as a whole. For shares issued before 6 April 2006 the limits are £15 million before and £16 million after. More details of this requirement are given in our Statement of Practice 2/00 (see under Further information).
The issuing company must not be
No arrangements must exist that could result in the company becoming a 51 per cent subsidiary or otherwise being controlled (excluding arrangements for the exchange of shares, or shares and securities, resulting in the acquisition of the company by a new holding company General).
‘Control’ in this context means the power of a company to secure the issuing company’s affairs are conducted in accordance with that company’s wishes, whether through share ownership, or voting power, or because of any powers conferred by Articles of Association or any other document.
The conditions regarding control of the issuing company must be met at the time the shares are subscribed for and must continue to be met throughout the qualification period. If they cease to be met at any time during this period all investment relief given on the shares will be withdrawn.
‘Independent individuals’ must own at least 20 per cent of the issuing company’s ordinary share capital. An independent individual is a person who is not
If someone who is an ‘independent individual’ dies while owning the shares, the shares will be regarded as owned by an independent individual while they remain part of their estate.
The issuing company, and any qualifying subsidiaries or associates, must not be a member of a partnership:
The issuing company, or any of its qualifying subsidiaries, cannot be a party to a joint venture:
A ‘joint venture’ is a trading venture carried on by two or more persons under arrangements that fall short of creating a partnership.
The requirements which must be met in relation to subsidiaries of the issuing company were changed by the Finance Act 2004 with effect for shares issued on or after 17 March 2004. The requirements are outlined below.
All of an issuing company’s subsidiaries must be ‘qualifying subsidiaries’, that is, the issuing company, or one of its subsidiaries, must
No other person can have control of the subsidiary (‘control’ has the same meaning as for the ‘independence requirement’ control).
No arrangements can exist that could prevent these conditions from being met.
The following conditions must be met, and no arrangements must exist that could prevent any of them from being met.
All of the issuing company’s subsidiaries must be 51 per cent subsidiaries of the company.
No person other than the issuing company or another of its subsidiaries must have control of any subsidiary of the issuing company (‘control’ has the same meaning as for the ‘independence requirement’ control).
If the qualifying trade (or research and development) for which money raised by the issue of the shares is used is not carried on by the issuing company, the company which uses the money must be a qualifying 90 per cent subsidiary of the issuing company.
Any property managing subsidiary of the issuing company must also be a qualifying 90 per cent subsidiary of the issuing company. A property managing subsidiary is any subsidiary whose business consists wholly or mainly of holding or managing land or property deriving its value from land.
For a company to be a ‘qualifying 90 per cent subsidiary’ of the issuing company, the issuing company itself must-
A ‘qualifying trade’
is a trade carried on wholly or mainly in the UK on a commercial,
profit making basis, and does not to any substantial extent
consist of carrying on certain excluded trading activities,
listed in Excluded.
Carrying on research and development from which a qualifying
trade will be derived, or will benefit, is treated as carrying
on a qualifying trade, but preparing to carry on research and
development does not count as preparing to carry on a qualifying
trade. The derived or benefiting trade must be carried on by
the same company, or by another company in the same group. ‘Research
and development’ means activities that are treated as
research and development in accordance
with normal accounting practice, excluding oil and gas exploration
or appraisal.
Throughout the qualification period a company, which is not a member of a trading group, must exist (apart from any incidental purposes) wholly for the purpose of carrying on one or more ‘qualifying trades’. It must also be:
In considering whether a single company exists for the purpose of carrying on a qualifying trade, holding and managing property used by the company, and holding shares to which investment relief is attributable (if this is not a substantial part of the company’s business) are disregarded.
Where the company is the parent of a group, then the business of the group must not consist wholly, or to a substantial extent, of carrying on non-qualifying activities. At least one company in the group must meet the same conditions as those described for the single company (above). The ‘business of the group’ means all the activities of the companies in the group taken together.
In determining whether a group company exists for the required purpose, HMRC disregard the following intra-group activities:
A trade will not qualify if one or more ‘excluded activities’ together amount to a substantial part of it. Excluded trading activities are
These conditions are the same as those for the Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT) scheme and for Enterprise Management Incentives.
Two exceptions to the excluded activities are
Yes. An issuing company must be ‘unquoted’, meaning its shares, stocks, debentures or other securities are not listed on the official list of a stock exchange, but they may be traded on the AIM of the London Stock Exchange, or dealt in on OFEX.
It depends on the facts. The terms of the arrangement must not cause the joint venture company to become treated as a subsidiary of the issuing company, and the shares must be held for the purpose of benefiting the company’s trade rather than for the purpose of investment.
Our Statements of Practice SP2/00 explains how this is calculated. For more details on Statements of Practice see ‘Further information’.
HMRC decide whether the particular activities amount to a substantial part of a company’s trade, or the business of a group, based on the facts and circumstances of each case. But, consider that activities amounting to more than 20 per cent of the trade will form a substantial part of that trade or business.
If a company is in administration or receivership, it is not regarded as ceasing to meet the ‘trading activities’ requirements because of actions taken as a consequence of this. This is also the case if it is wound up or dissolved without winding up. (Subject to the actions being taken for commercial reasons, not as part of a scheme or arrangement for the avoidance of tax.)
Yes, a company receiving royalties and licence fees from computer software that it has, or other companies in its group have, developed can qualify if they meet the other rules of the CVS.
The exception applies, and so the activity is not an excluded activity, where the type of know-how would be treated as an intangible asset under normal accounting practice. The exception is not restricted to industrial know-how.
It will depend on the facts. If the licence fees or royalties received by a company are attributable to its software, rather than to that of the third party, and where the company created at least half of its software (in terms of value) it can qualify for the CVS.
Our Statements of Practice 3/00 explains how the location of activity rule applies. For more details on Statements of Practice see ‘Further information’.
No, the CVS has no residence or incorporation conditions.
To be eligible for investment relief, an investment must meet requirements relating to:
The issuing company can apply to HMRC for advance clearance that these requirements are met (see ‘Using the Corporate Venturing Scheme’.
The shares must be
The money raised by the issue of shares must be used (except for any insignificant amounts used for other purposes) for either
At least 80 per cent of the money raised must be used wholly for the purposes of the relevant trade no later than:
All the money raised for a trade which is being carried on when the shares are issued must have been used by no later than 12 months after that time.
An investing company cannot qualify for the CVS if, in connection with the arrangements for the issue of the shares (the ‘issuing arrangements’), there are also arrangements:
‘Issuing arrangements’ includes arrangements under which the shares are issued to the investing company, and those made before the issue or in connection with it. If any information on pre-arranged exits is made available to prospective subscribers, arrangements made on or after the issue of the shares, but before the end of the qualification period, in accordance with that information are also covered.
Issuing arrangements do not include:
The shares must be issued for commercial purposes and not as part of a scheme or arrangement whose main purpose, or one of whose main purposes, is to avoid tax.
This will depend on the particular circumstances. Generally, the rule is unlikely to apply if a simple statement is made that the company’s directors will be seeking flotation or a trade sale in due course, with no arrangements for this under way.
This will depend on the particular circumstances, but normal
warranties and indemnities are unlikely to infringe the rules.
The amount of investment relief obtained by a company in respect of an issue of shares is allocated evenly between all the shares, so that each of the relevant shares has the same amount of investment relief attributed to it. For example, an investing company subscribing £100,000 for 100,000 shares may obtain investment relief of £20,000 with 20 pence (20 per cent) relief being attributable to each share.
If an investing company disposes of any shares on which it has received investment relief during the qualification period, the investment relief attributable to each of the shares disposed of will be withdrawn or reduced, depending on the circumstances.
If the amount of relief given is more than 20 per cent of the amount received on the disposal of the shares, it will be reduced by 20 per cent of the amount received if the disposal is
In any other case the investment relief will be fully withdrawn.
If the disposal does not fall within the categories described above, for example, if the shares are a gift, then again the investment relief attributable to the shares is fully withdrawn.
There are special rules to cater for:
Shares on which investment relief has been obtained that are disposed of within the qualification period will be treated as disposed of on a first-in, first-out basis. If more than one holding of shares has been acquired on the same day, and investment relief is attributable to some of the shares but not to others, for example, second-hand shares, any shares disposed of will be treated as having been disposed of in this order
If investment relief has been obtained and is either not due, or has to be reduced or withdrawn in full for any other reason, HMRC will withdraw it. HMRC will make an assessment to Corporation Tax under Case VI of Schedule D for the accounting period in which the relief was obtained.
HMRC cannot make an assessment for reducing investment relief or withdrawing it in full, or give a notice that in HMRC opinion relief falls to be reduced or withdrawn in full, more than six years after whichever is the later of either:
These limits do not apply where there has been fraud or negligence.
An issuing company may allot bonus shares to its shareholders under a share reorganisation. No relief is available in respect of these shares. But, if they are ‘corresponding bonus shares’ they may be treated, for CVS purposes, as part of the original holding that qualified for investment relief. Bonus shares are ‘corresponding bonus shares’ if:
If this is the case, any investment relief attributed to the original holding is spread evenly over the enlarged holding of original shares and these ‘corresponding bonus shares’.
On a disposal of part of this holding, where investment relief is reduced or withdrawn in full, the amount of investment relief attributable to each of the shares is reduced proportionately.
A company buys 10,000 qualifying shares for £10,000. The full amount of relief was given - £2,000 (20% x £10,000) and none has been withdrawn. Two years later there is a bonus issue and the investing company receives an additional 5,000 shares, which meet the requirements for corresponding bonus shares, giving a total qualifying holding of 15,000 shares.
The investing company then disposes of half (7,500) of the shares. The disposal is within the three year qualifying period starting when the 10,000 shares were bought, so the relief on the shares sold is withdrawn.
Half of the holding has been sold, so the amount of relief to be withdrawn is half of that given - £1,000.
The CVS provides for the reduction or withdrawal in full of investment relief if, during a period beginning one year before the relevant shares are issued and ending when the qualification period for the shares ends, certain types of transaction occur. The period is known as the ‘period of restriction’, and the types of transaction are those involving:
This section describes:
Where the total amount returned to the investor is insignificant (either less than £1,000 or, if greater, an amount which is insignificant in relation to the amount subscribed by the investing company for the shares), then there will not be any withdrawal of investment relief. But, where arrangements existed to receive value during the period of restriction before the issue of the shares, the insignificant criteria are not applied.
The main ways the investing company might ‘receive value’ from the issuing company, and the amounts of value received are shown below.
| If the issuing company | The amount of value received is |
|---|---|
| a. repays, redeems or repurchases any of its shares or securities belonging to the investing company (or makes any payment for giving up the right to any of them) | either the amount received or the market value of the shares or securities, whichever is greater |
| b. repays a debt owed to the investing company incurred before the date of issue of the shares, as part of the arrangements for, or in connection with, the purchase of the shares | either the amount received or the market value of the debt, whichever is greater |
| c. makes a payment to the investing company for giving up the right to payment of a debt | either the amount received or the market value of the debt, whichever is greater |
| d. waives any liability of the investing company to it or discharges, or undertakes to discharge, any liability of the investing company to a third person | the amount of the liability |
| e. lends or advances any money to the investing company, which has not been repaid in full before the shares are issued (other than an ordinary trade debt) | the amount of the loan or advance, less the amount of any repayment made before the issue of the shares |
| f. provides a benefit or facility for the directors or employees of the investing company or any of their associates | the cost to the issuing company of providing the benefit or facility less any consideration given for it |
| g. disposes of an asset to the investing company for less than its market value | the difference between the market value of the asset and any consideration given for it |
| h. acquires an asset from the investing company for more than its market value | the difference between the market value of the asset and any consideration given for it |
| i. makes a payment to the investing company other
than a ‘qualifying payment’, that is - reasonable payment for goods, services or facilities - payment of interest on money on normal terms - payment of a dividend on normal terms - payment of market value for an asset - payment of reasonable rent for a property - reasonable payment in discharge of a debt. |
the amount of the payment |
References to the issuing company or to the investing company includes references to any person who at any time in the ‘period of restriction’ relating to the relevant shares is connected with the company, whether or not they are at the material time.
If there is a ‘receipt of value’, investment relief
obtained in respect of those shares will be reduced, if the amount of investment
relief is greater than 20 per cent of the amount of value received, by that
amount,
or withdrawn, if the investment relief attributable to the relevant
shares is less than 20 per cent of the amount received.
If value, which is not an insignificant amount, has been received
by the investing company or by a person connected with the company,
perhaps inadvertently, then investment relief must normally
be reduced or withdrawn in full. But, if whoever received the
value, whether the investing company or the connected person
(the original recipient), pays an equivalent amount back (replacement
value) to the issuing company or other person from whom the
value was received (the original supplier), then there is no
loss of relief.
The investment relief attributable to the relevant shares will be reduced or fully withdrawn, if, at any time during the relevant period of restriction, the issuing company (or any subsidiary) repays, redeems or repurchases any of its share capital other than that owned by:
There is one exception, where either the market value of the repaid shares or the amount received by the shareholder, whichever is the greater, is insignificant in relation to the market value of the remaining share capital of the issuing company (or the subsidiary).
If the exception does not apply, then the amount of relief withdrawn is 20 per cent of the amount of the payment, or, if this is more than the amount of relief given, the relief is withdrawn in full. If more than one investing company has received relief, or the investing company obtains investment relief, which was less than 20 per cent of the amount subscribed, an appropriate proportion of relief is withdrawn.
Redemptions made within 12 months of a share capital of nominal value being issued, for the purposes of complying with section 117 of the Companies Act (public company not to do business unless requirements as to the share capital complied with) will not cause investment relief to be reduced.
Any investment relief attributable to the shares to which the option relates will be withdrawn in full, if, during a qualification period for an issue of shares:
The total amount of value received is shared between each issue of shares in the same proportion as the amount subscribed, divided by the total amount subscribed for all the relevant issues of shares. The amount of investment relief withdrawn is 20 per cent of the value received (or all the relief, if this is less than 20 per cent of the amount received).
An investing company subscribes for two holdings of shares in the same issuing company on different dates. It subscribes £50,000 for the first holding and £30,000 for the second holding. The maximum amount of investment relief (£10,000 and £6,000) is obtained on the holdings. The investing company then receives £20,000 worth of value from the issuing company within the period of restriction for both issues.
The amount of value received apportioned to the first holding is
£20,000 x £50,000/(£50,000 + £30,000)
= £12,500
so the relief given is reduced by £2,500 (20% of £12,500).
The amount of value received apportioned to the second holding is
£20,000 x £30,000/(£50,000 + £30,000)
= £7,500
so the relief given is reduced by £1,500 (20% of £7,500).
The amount of value received is reduced by the amount of investment relief received, divided by 20 per cent of the amount invested (the maximum potential relief). The same proportion of the relief is withdrawn.
A company invests £100,000. It is entitled to relief of up to £20,000, but its Corporation Tax liability is £15,000, so it can only obtain relief of £15,000.
It receives value of £10,000 from the investing company. For the purpose of computing the amount of investment relief to be withdrawn, the amount of value received is
£10,000 (the amount received) x £15,000 (the relief given)/£20,000 (the maximum amount of relief that could be obtained) = £7,500
The amount of relief to be withdrawn is
£7,500 x 20% = £1,500.
If, during the ‘period of restriction’, arrangements exist for the investing company to receive any value from the issuing company, all value received will be treated as a receipt of significant value for this purpose.
No, an amount of insignificant value is disregarded.
An issuing company may be party to a reorganisation, or to a scheme of reconstruction or amalgamation (such as a take-over or corporate merger). If this results in the shares or securities of another company being issued in exchange for, or in respect of, the issuing company’s own shares or securities, shares to which investment relief is attributable are treated as having been disposed of at the time of the reconstruction or amalgamation.
However, in certain circumstances where new shares are issued as a replacement for existing shares, special rules allow the new shares to be treated as if they were the original shares, so that the CVS reliefs are preserved.
The rules are complex, and issuing companies intending to undergo this type of reorganisation or reconstruction will normally wish to seek specialist professional advice beforehand, in order to help ensure that their investors’ investment relief is not put at risk.
The rules in the Taxation of Chargeable Gains Act 1992 for determining the extent to which any chargeable gains arise in the event of share reorganisations, and company reconstructions and amalgamations, have effect subject to the adaptations made for the CVS.
The circumstances in which the special rules apply are where all the shares and securities of the issuing company are exchanged for corresponding shares and securities in a new (‘clean’) holding company. This type of reconstruction commonly takes place in advance of a company seeking a market listing for its shares.
If certain conditions (outlined below) are met, the holding company takes the place of the issuing company as far as the rules of the CVS are concerned. The new shares, issued in respect of the old shares to which investment relief is attributable, take the place of the old shares. Any claims for investment or deferral relief in respect of the old shares are treated as having been made in respect of the new shares.
The main conditions that must be met are:
HMRC must also have given an approval notification stating that HMRC is satisfied that the exchange of shares under the arrangements will be carried out for genuine commercial reasons and will not form part of a scheme or arrangement for tax avoidance.
‘Reorganisation’ for this purpose has the meaning in section 126 of the Taxation of Chargeable Gains Act 1992.
A ‘rights issue’ is treated for CVS purposes as
an issue of shares which is entirely separate from the original
shares that provided the rights to subscribe for them. If the
investing company subscribes for shares in a rights issue, it
can obtain investment relief for those shares if the conditions
of the CVS are met in relation to the issue. The attribution
of investment relief given to shares comprised in a rights issue
does not affect the attribution of investment relief (if any)
to the original shares.
Before it issues shares, an issuing company may, if it wishes, apply to us for ‘advance clearance’ that the requirements of the scheme, other than those that must be satisfied by the investing company, are being met. HMRC hope that this facility will help issuing companies to attract funding under the CVS by enabling them to offer greater certainty to investors.
Following the issue of the shares, issuing companies will need to provide HMRC with a ‘compliance statement’, which will confirm the conditions relating to the issuing company and to the shares issued have been met, or are being met for the time being. HMRC can then authorise the issuing company to provide a ‘compliance certificate’ to investing companies.
Once an investing company has a compliance certificate, it can claim investment relief in its company tax return for the relevant shares. But, if the trade being funded by the money raised from the issue of the shares has not carried on for four months when the shares were issued, the issuing company will need to wait until it has before it makes a claim.
Investing companies will claim the reliefs in their tax returns in the normal way, via the HMRC office that normally deals with their affairs. But, the CVS is administered centrally as far as determining whether the conditions are met by:
If the issuing company applies for ‘advance clearance’ and the relevant conditions are met, HMRC will issue an advance clearance notice. This will state that, on the basis of the information provided, HMRC is satisfied that the requirements relating to the issuing company, together with the general requirements of the CVS (such as those relating to the shares, and to the use of the money raised) have been met, or will be met, for the proposed issue of shares.
When HMRC receive an application for an advance clearance notice and HMRC is satisfied, on the basis of the information provided with the application, HMRC will issue the notice within 30 days of receiving the application.
If necessary, HMRC will ask for further information to be provided within a specified time. If HMRC is then satisfied, HMRC will issue the notice within 30 days of the information, or any further information, being provided. If HMRC is not satisfied with the application, HMRC will notify the company within the same time period.
If HMRC is not satisfied that the requirements will be met, or will be met for the time being, or if HMRC fail to notify the issuing company within the time allowed, the company may require the application, together with any information notices and further particulars, to be sent to the Special Commissioners.
If the Special Commissioners are satisfied that the requirements
relating to the issuing company and the investment will be met,
or will be met for the time being, they will notify the issuing
company. This notification has the effect of an advance clearance
notification issued by HMRC.
If the applicant does not fully and accurately disclose all relevant information, or if it or any of its subsidiaries fails to act in accordance with any assurances or statements of intent which were given, any advance clearance notice given will be void.
Statement of Practice 1/00 provides further information on the procedure for applying for advance clearance (Appendix).
Issuing companies submit compliance statements to the Corporate Venturing Scheme Unit (CVSU) using form CVS1, available from the CVSU or the Small Company Enterprise Centre (details in ‘Further information‘).
An issuing company may submit a compliance statement for an issue of shares in any accounting period:
If HMRC is satisfied that the information given in a ‘compliance statement’ is correct and meets requirements, HMRC will authorise the issuing company to issue a ‘compliance certificate’ to any investing company that requests one.
An issuing company must not issue a compliance certificate without HMRC authority, and an investing company cannot claim investment relief unless it has a compliance certificate for the relevant shares.
Issuing companies have a right to appeal against the decision not to allow a compliance certificate to be issued.
Investment relief can be reduced or withdrawn in full for an issue of shares on the grounds that:
The time limits for notifying HMRC are shown below.
| The investing company must notify HMRC if it | The specified time limit for notifying HMRC is |
|---|---|
| a. ceases to be a qualifying investing company in relation to a particular issue of shares because a particular event has occurred | within 60 days after the event |
| b. receives value on or after the issue of the relevant shares | within 60 days after the event |
| c. receives value before the issue of the relevant shares | within 60 days after the issue of the relevant shares |
| d. finds out that a person connected with the company has received value on or after the issue of the shares | within 60 days after the company discovers the event |
| e. is granted put options or call options in relation to the relevant shares | within 60 days after the event. |
| The issuing company, or any person connected with it, must notify HMRC if it | The specified time limit for notifying HMRC is |
|---|---|
| a. ceases to be a qualifying issuing company in relation to a particular issue of shares because a particular event has occurred | within 60 days after the event |
| b. gives, or arranges to give, value to the investing company or to other persons before the issue of the relevant shares | within 60 days after the issue of the relevant shares |
| c. gives, or arranges to give, value to the investing company or to other persons after the issue of the relevant shares | within 60 days of the company or person discovering the event |
| d. ceases to meet the ‘individual-owners’ requirement | within 60 days of discovering the event |
These time limits also apply if the shares cease to meet the qualifying conditions.
If HMRC believe that HMRC should have been notified of an event but have not been, HMRC can require the person concerned to provide the appropriate information.
HMRC can withdraw relief if HMRC discover grounds for withdrawal without being notified by the appropriate persons. But, HMRC must give notice to the investing company beforehand, and a company receiving such a notice has the right to appeal against it.
The CVSU will help investing companies with any query they have concerning interpretation of the rules of the CVS, which apply to them, but, there is no advance clearance procedure.
No. If a company is considering issuing shares under the EIS
or to VCTs as well as under the CVS, any application for an
informal advance clearance in respect of the first two schemes
should be sent with the CVS clearance application.
The provisions for the CVS are in section
63 of, and Schedule 15 Schedule 16 to, the Finance Act 2000,
and section 5 of, and Schedule 20 to, the Finance Act 2004
Money raised by issue of shares Schedule 15 to the Finance
Act 2001
The Small Company Enterprise Centre deals with enquiries from companies using the CVS, Enterprise Investment Scheme, Venture Capital Trust scheme and Enterprise Management Incentives. It can be contacted by
Small Company Enterprise Centre
HM Revenue & Customs
1st Floor Fitzroy House
Castle Meadow Road
Nottingham
NG2 1BD
Telephone: 0115 974 1250
Email:
Small Company Enterprise Centre
The Venture Capital Manual sections relating to CVS.
VCM50000: CVS:
General
VCM50300: CVS:
Investors & reliefs
VCM55000: CVS:
Loss relief
VCM57000: CVS:
Deferral relief.
HMRC Statements of Practice can be found in booklet Statements of Practice (PDF 1.4MB).
Two Statements of Practice were extended to include the CVS, they are:
The third Statement of Practice applying to the CVS is
Tax Bulletin shows some current thinking on technical aspects of taxation. It is produced six times a year, and is available on annual subscription or on the internet. For further information telephone the Editor on Tel 020 7438 7080.
HMRC's website features news and information on tax and National Insurance matters in the UK.
Information on help for small businesses can be obtained from the Small Business Service (a Government department) by calling the General Enquiry line on Tel 020 7215 5363.
You can obtain information about the venture capital industry
from the British Venture Capital Association (BVCA) by phoning
020 7025 2950.
‘Arrangements’ includes any scheme, agreement or understanding, whether or not legally enforceable.
‘Associate’, in relation to a person, means
‘Connected persons’, for the purpose of the CVS, is the definition at Section 839 of the Taxes Act 1988.
A company is connected with another company if:
Any two or more persons acting together to secure or exercise control of a company will be treated as connected with one another in relation to that company, and with any person acting on the directions of any of them to secure or exercise control of the company.
A company is connected with an individual if:
An individual is connected with another individual if:
‘Relative’ means parent or grandparent etc, child or grandchild etc.
‘Director’ has the meaning that it has in section 417(5) of The Income and Corporation Taxes Act 1988 (S417(5)ICTA 1988)
‘Disposal’ has the meaning that it has in The Taxation of Chargeable Gains Act 1992 (unless the meaning is altered by a special rule in the CVS).
‘Group’ in relation to groups of companies, means a parent company and its 51 per cent subsidiaries, and, ‘parent company’ means a company that has one or more 51 per cent subsidiaries, but is not itself a subsidiary of another company.
‘Ordinary shares’ means shares forming part of a company’s share capital and ‘ordinary share capital’, except in relation to the rules on ‘material interest’ has the same meaning as in section 832(1) of the Income and Corporation Taxes Act 1988.
‘Person’ includes individuals and companies.
‘Relevant shares’ are the shares issued to the investing company by the issuing company and in respect of which investment relief is claimed.
The meanings of the following expressions are given on the
sections indicated
Attribution
Non-financial trade
Period of restriction
Qualification period
Subsidiaries
Qualifying trade
Qualifying Payments
Relevant preference shares
Research and development
The Corporate Venturing Scheme provides relief against corporation tax (‘investment relief’) in certain circumstances to companies investing in new shares of other companies. Where a company hopes to use the scheme to attract investment, paragraph 89, Schedule 15, Finance Act 2000 enables it to apply to the Board of Inland Revenue for an advance clearance notice. Such a notice provides confirmation that the Board consider that the conditions for relief under the scheme, other than those applying to the investor, will be met in relation to the proposed issue of shares at the time the issue is made. In the case of those conditions which have to be met throughout a qualification period, however, there can of course be no certainty until after the end of that period that they will be met.
This Statement of Practice gives guidance to companies wishing to obtain advance clearance.
All references to paragraphs in this Statement are to paragraphs of Schedule 15 FA 2000.
Applications should be sent to
Small Company Enterprise Centre
TIDO
Ty Glas
Llanishen
Cardiff
CF14 5ZG
Under paragraph 91 the Board must respond to an application
within 30 days after receiving the application. The Board may
request further particulars, and if they do their response must
be given within 30 days after the last such request was complied
with
Content of application - general
In order to consider applications the Board need certain basic information and assurances. To assist companies in preparing their applications, an outline of what is needed is given below. However, this is not necessarily an exhaustive list in all cases, and each applicant must fully and accurately disclose all facts and circumstances material for the decision of the Board (paragraph 89). The application will be considered solely by reference to the material provided by the company in its application or in response to a request for further particulars.
It will be helpful if applications follow the order set out below, each item being expanded as necessary and any further information being added at the end. This will enable the Board to come to a decision on the application as soon as possible.
For the purposes of the scheme, an ‘issue of shares’
consists of all the shares of the same class, which are issued
by a company on the same day. An advance clearance notice can
be given only in respect of a single issue of shares. If it
is expected that there will be more than one issue within a
short period of time, please say so. Any clearance will apply
only to the issue or issues in respect of which information
has been given, so if an advance clearance notice is sought
in respect of more than one issue, relevant information must
be provided in respect of each of them.
The name of the tax office dealing with the company making the application, and the tax reference. If the company is newly formed and the tax office is not yet known, state the address of the registered office.
If the company has previously made any application for an advance clearance notice it will be helpful if the Board's reference(s) can be quoted.
a. Copies of the latest available financial statements for the company, or in the case of a group the financial statements for the group and for each group company.
b. A copy of any prospectus or memorandum or other document to be made available to prospective investors or their advisers (or a draft of any such document).
c. A draft copy of any subscription agreement which is to be made with any investor.
Particulars of any material changes or events which have occurred since the date of the latest balance sheet, or which are expected to occur before the issue takes place.
The following particulars are needed in relation to the company which is to issue the shares:
a. confirmation that the ‘unquoted status’ requirement set out in unquoted_status will be satisfied;
b. confirmation that the ‘independence’ requirement set out in independence_requirement will be satisfied when the shares are issued;
c. details of the expected ownership of its ordinary share capital following the issue of the shares, with sufficient information to show that the ‘individual-owners’ requirement set out in individual_owners will be satisfied at that time;
d. confirmation that the ‘partnerships and joint ventures’ requirement set out in Partnerships_joint_ventures will be satisfied when the shares are issued;
e. if, at the time the shares are issued, it will have any subsidiary or control any other company:
a. Details of the total number of shares expected to be issued to investors seeking investment relief (where known), the nominal value of such shares, the rights which they will carry, and the price at which they are expected to be issued.
b. Details of the activity or activities for which it is intended that the money raised by the issue will be used.
c. In the case of a company which will have subsidiaries at the time when the shares are issued, the identity of the company or companies which will use that money.
d. Confirmation that each trade or other activity for which the money will be used will be carried on wholly or mainly in the United Kingdom (see Statement of Practice SP3/00).
a. That the company intends that the money raised by the share issue will be used within the time set out in section relating to ‘The investment Process’.
b. That the shares to be issued to corporate investors wishing to obtain investment relief will not be issued unless they have been subscribed for wholly in cash and that cash has actually been paid.
c. That those shares will be issued for commercial purposes and not as part of a scheme or arrangement which has as a main purpose the avoidance of tax.
d. That the issuing arrangements in respect of the shares will not include any arrangements of the kind set out in section relating to ‘The investment Process’.
Where subscribers to the same issue of shares are expected
to include individuals who may wish to claim relief under the
Enterprise Investment Scheme, any request for an informal clearance
under the EIS should be sent to the Board with the CVS application.
