The Corporate Venturing Scheme

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, we 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: nor 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.

Contents

1. What is ‘corporate venturing’?
2. Investment relief
3. Deferral relief
4. Relief for losses
5. The investing company
6. The issuing company
7. The investment
8. Circumstances in which investment relief may be withdrawn or reduced
9. Company reorganisations, reconstructions and amalgamations
10. Using the Corporate Venturing Scheme
11. Further information
12. Glossary of terms
13. Appendix

1. What is ‘corporate venturing’?

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,

• make available particular skills or knowledge, perhaps in technical or management areas, which a smaller company would otherwise not have access to, and
• provide access to established marketing and distribution channels, or complementary technologies.

In addition to any financial return it receives from an investment the larger company may gain a competitive advantage by

• being able to make better use of its own resources, and
• gain access to
  • research or development, or other work in an area it is interested in
  • new ideas
  • a more entrepreneurial culture.

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 United Kingdom (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.

An overview of the Corporate Venturing Scheme

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

• increase the availability of venture capital to small higher-risk trading companies from corporate investors, and through this
• foster wider corporate venturing relationships between otherwise unconnected companies.

The tax reliefs available are

• investment relief - relief against corporation tax of up to 20% of the amount subscribed for full-risk ordinary shares, provided that the shares are held throughout a qualification period
• deferral relief – deferral of tax on chargeable gains arising on the disposal of shares on which investment relief has been obtained and not withdrawn in full, if the gains are reinvested in new shares for which investment relief is obtained
• loss relief - relief against income for capital losses arising on most disposals of shares on which investment relief has been obtained and not withdrawn in full, net of the investment relief remaining after the disposal.

A summary of the main rules

There are rules applying to

• the investing company - the company making the equity investment
• the issuing company - the company receiving the investment
• the investment process - the issue of shares to the investing company by the issuing company, and the use of the money raised by it.

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

• immediately before the third anniversary of the issue date where the qualifying trade for which the funds have been raised is already being carried on, or
• immediately before the third anniversary of the date on which the trade commences where the company issues the shares to raise money for a trade which is not already being carried on.

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

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

• not own more than 30 % of the issuing company, nor be able to exercise control of the issuing company
• exist wholly for the purpose of carrying on non-financial trades, or if it is a member of a non-financial trading group of companies, exist wholly for the purpose of carrying on non-financial trades, investment (or other non-trade businesses), or be the parent company.

The issuing company

When the shares are issued the issuing company

• must be an unquoted company and must not have made any arrangements to become a quoted company
• must have gross assets of no more than £7 million immediately before, and £8 million immediately after the issue (if the issuing company is the parent company of a group, this test is applied to the group as a whole). For shares issued before 6 April 2006 the limits are £15 million before and £16 million after.

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% 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 investment process

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% 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:

• the end of the period of 12 months starting with the issue of the shares, or
• where the relevant trade was not being carried on at the time the shares were issued, the end of the period of 12 months starting when the issuing company or a subsidiary begins to carry on the relevant trade.

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.

Using the CVS

A company, which is considering raising money through the CVS, can get advance clearance from us 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 us 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 we are satisfied with the statement, we 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.

2. Investment relief

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% 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 either

• 20% of the amount subscribed for the shares, or
• the amount which reduces the liability to nil.

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

• the size (in terms of asset value) of the issuing company following the investment, and
• the proportion of its share capital that can be owned by the investing company.

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.

Can any unused investment relief be carried forward or backwards to other accounting periods?

No. Investment relief is available only for the accounting period (for corporation tax purposes) in which the shares are issued.

What if qualifying investments have been made in more than one company during an accounting period?

The investing company may claim investment relief in respect of some, or all, of the qualifying investments it has made in the accounting period.

What if a company claims relief for more than one qualifying investment in an accounting period and has insufficient corporation tax liability for relief at 20% of the amount subscribed to be obtained in full?

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.

Example

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.

Is investment relief available for investments other than in ordinary shares?

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.

If the issuing company uses cash paid for the shares to purchase products or services from the investing company, will this affect the availability of investment relief?

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.

Can the investing company get investment relief for non-cash investments?

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.

When and how can a claim be made?

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’.

In what order are reliefs/deductions given?

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.

3. Deferral relief

Corporation tax on chargeable gains arising from the disposal of shares by an investing company may be deferred if

• CVS investment relief was attributable to the shares immediately before the disposal
• the shares have been held continuously by the investing company from the time they were issued until the disposal
• the gain is reinvested in shares in another company, which also meets the conditions for investment relief.

To defer a gain the investing company must have

• subscribed for further qualifying shares
  • on which at least some investment relief is obtained
  • in a company other than the one whose shares gave rise to the gain, or another company in the same group when either the gain arises or the new investment is made
  • at any time within four years, beginning one year before the gain to be deferred arose
• held those shares continuously from the date they were issued until the date the gain to be deferred arose (if later).

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.

What happens if the qualifying shares are issued before the gain to be deferred arises?

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.

Does it matter if the investment relief on the shares is withdrawn as a consequence of the disposal?

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).

Is deferral relief available for investments made before the CVS began?

No. Only shares issued on or after 1 April 2000 can qualify for reliefs under the CVS.

Are gains on shares to which investment relief is attributable taxable?

Yes. They are taxable in the normal way.

How does an investing company claim deferral relief?

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.

Can deferral relief be claimed provisionally pending subscription for qualifying shares or pending receipt of a compliance certificate in respect of the shares?

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.

4. Relief for losses

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

• there must be an allowable loss on a disposal of shares to which investment relief is attributable, such that the relief is not withdrawn in full on account of the disposal
• the shares must have been held continuously by the company since issue, and
• the disposal must be one of the following
  • a ‘bargain made at arm’s length’ for full consideration
  • a distribution in the course of dissolving or winding up the issuing company
  • a disposal within section 24(1) Taxation of Chargeable Gains Act 1992 (for example, when the issuing company is struck off the Register of Companies and dissolved)
  • a deemed sale following a negligible value claim under section 24(2) Taxation of Chargeable Gains Act 1992.

The amount of the loss is reduced by the amount of any investment relief retained.

Example

An investing company subscribes £100,000 for 100,000 shares (obtaining investment relief of £20,000).

It retains the shares for 4 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.

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Can the loss be carried forward?

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.

If an investing company disposes of part of a holding at a loss, how much loss relief is it entitled to?

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.

When can an investing company claim loss relief?

A company cannot make a claim for loss relief unless

• the trade the investment is funding has been carried on by the issuing company or a subsidiary for four months, and
• it has received a ‘compliance certificate’ from the issuing company, in respect of the shares.

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.

5. The investing company

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

• not own more than 30% of the issuing company (the ‘no material interest’ requirement)
• not control the issuing company
• exist to carry on one or more non-financial trades, or be a member of a non-financial trading group and exist to carry on a non-financial trade or trades, or businesses other than trades; or be the parent company of such a group.

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.

The ‘no material interest’ requirement

Throughout the qualification period, the investing company must not possess, directly or indirectly, or be entitled to acquire, more than 30% of either

• all of the issued share capital, other than certain types of preference shares (relevant preference shares - described below), together with any loan capital which is convertible into ordinary share capital of the company or of any subsidiary, or
• the voting power in the company or any subsidiary.

The 30% 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.

The ‘no reciprocal arrangements’ requirement

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.

The ‘no control’ requirement

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% of

• the company’s issued ordinary share capital
• the voting power in the company
• the company’s income, if it were all distributed
• the assets of the company on a winding up.

For this purpose we ignore

• all rights attached to certain types of preference shares (‘relevant preference shares’) of the issuing company
• rights as a loan creditor of the issuing company.

Relevant preference shares

‘Relevant preference shares’ are shares that have qualities more akin to debt than to equity. More precisely, they are shares which

• do not carry voting rights
• are issued wholly for new consideration
• do not carry any right to conversion into shares or securities of any other description or to the acquisition of any additional shares or securities
• carry no rights to dividends for a period or periods, or yield only dividends which
  • are of a fixed amount, or at a fixed rate (including dividends where the amount or rate may be changed to another fixed amount or fixed rate under the terms of issue of the shares), or which are of a percentage rate of the nominal value of the shares where the rate fluctuates in accordance with one of certain pre-determined factors, and
  • do not depend on the results of the company’s business or the value of the company’s assets (except where they reduce if the results of the business improve or the value of the assets increases, or increase if the results of the business deteriorate or the value of the assets diminishes), and, together with any redemption sum, represent no more than a reasonable commercial return.

The ‘non-financial activities’ requirement

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, we disregard

• holding shares in or securities of, or making loans to, another company in the group
• holding and managing property used by a company in the group for non-financial trade purposes
• holding shares to which investment relief is attributable, as long as this is not a substantial part of the company’s business.

Financial activities, for the purpose of this requirement, include

• banking, or money-lending, carried on by a bank, building society or other person
• debt-factoring, finance-leasing or hire-purchase financing
• insurance
• dealing in shares, securities, currency, debts or other assets of a financial nature
• dealing in commodity or financial futures or options.

Is there any size restriction on the investing company?

No. The company may be of any size, and may be larger, smaller, or a similar size to the issuing company.

Must the investing company also be an unquoted company?

No. The investing company may be quoted or unquoted.

Is investment relief available if a company makes its investment through a limited partnership?

No. The CVS is limited to direct investment by companies that meet the investing company requirements.

If a company makes corporate venturing investment(s) would it be considered to have ceased to be a trading company for the purpose of business asset taper?

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.

What does ‘a substantial part’ mean?

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, we consider that activities are ‘a substantial part’ where they amount to more than 20% of the trade or business.

Can a nominee hold shares?

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.

Can a director, or other employee, of the investing company resign from that company and take a stake in the issuing company without the two companies being considered connected?

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.

Will an investing company, which is a party to a shareholders’ agreement, be treated as controlling the issuing company?

Only if the terms of the agreement give it control over the issuing company.

Will a company be able to claim consortium relief on a company it has invested in under the CVS?

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.

6. The issuing company

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 its

• unquoted status, and
• gross assets.

Throughout the qualification period related to the shares, it must also meet conditions relating to its

• independence
• ownership: the ‘individual-owners’ requirement
• membership of partnerships and joint ventures
• subsidiaries
• trading activities.

The issuing company can apply to us for advance clearance that it meets these requirements (see Advance Clearance).

The ‘unquoted status’ requirement

At the time when the shares are issued they, or any other of the company’s shares, debentures or other securities, may not be

• listed on a ‘recognised stock exchange’
• listed on a ‘designated’ exchange
• dealt in by ‘designated means’, outside the United Kingdom.

There must not be any arrangements for the shares to be listed or dealt in at that time.

‘Recognised stock exchanges’ have been established as such by Order of the Board of Inland Revenue. Further information on recognition and a list of recognised exchanges can be found on our web site at IR Recognised stock exchange.

‘Designated’ means designated for the purposes of the Enterprise Investment Scheme and CVS by an Order made by the Board of Inland Revenue. 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 by Order.

The ‘gross assets’ requirement

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 ‘independence’ requirement

The issuing company must not be

• a 51% subsidiary (have more than 50% of its ordinary share capital owned by another company), or
• controlled by another company (or another company and persons connected with it).

No arrangements must exist that could result in the company becoming a 51% 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.

The ‘individual-owners’ requirement

‘Independent individuals’ must own at least 20% of the issuing company’s ordinary share capital. An independent individual is a person who is not

• a director or employee of the investing company or any company connected with it, or
• a relative of one of the above (‘relative’ for this purpose means spouse; parent, grandparent etc.; child or grandchild etc.).

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 his or her estate.

Partnerships and joint ventures

The issuing company, and any qualifying subsidiaries or associates, must not be a member of a partnership

• which includes at least one other company
• which carries on the trade by which the trading activities requirement is met in relation to the relevant shares (the relevant trade), and
• where one or more persons and their associates own more than 75% of the share capital of both the issuing company and one or more of the other partners.

The issuing company, or any of its qualifying subsidiaries, cannot be a party to a joint venture

• which includes at least one other company
• where it carries on the relevant trade in its capacity as a party to the joint venture, and
• where one or more persons and their associates own more than 75% of the share capital of both the issuing company and one or more of the other parties.

A ‘joint venture’ is a trading venture carried on by two or more persons under arrangements that fall short of creating a partnership.

Subsidiaries

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.

For shares issued before 17 March 2004

All of an issuing company’s subsidiaries must be ‘qualifying subsidiaries’, that is, the issuing company, or one of its subsidiaries, must

• possess at least 75% of the share capital and the voting power of the subsidiary
• be entitled to receive at least 75% of the assets of the subsidiary, in the event of a winding up or in any other circumstances, if they were all distributed
• be entitled to at least 75% of profits of the subsidiary available for distribution to shareholders.

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.

For shares issued on or after 17 March 2004

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% 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% subsidiary of the issuing company.

Any property managing subsidiary of the issuing company must also be a qualifying 90% 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% subsidiary’ of the issuing company, the issuing company itself must-

• possess at least 90% of the share capital and the voting power of the subsidiary
• be entitled to receive at least 90% of the assets of the subsidiary, in the event of a winding up or in any other circumstances, if they were all distributed
• be entitled to at least 90% of profits of the subsidiary available for distribution to shareholders, and
• have sole control over the subsidiary (‘control’ has the same meaning as for the ‘independence requirement’ control).

The ‘trading activities’ requirement

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.

Single companies

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 either

• carrying on a qualifying trade, or
• preparing to carry on a qualifying trade (which it must begin to carry on within two years of the shares being issued).

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.

Parent companies

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, we disregard the following intra-group activities

• holding shares in, securities of, or making loans to, another company in the group
• holding and managing property used by a company in the group for non-financial trade purposes carried on by a group company
• holding shares to which investment relief is attributable, if this is not a substantial part of the company’s business
• incidental activities of a company that meets the trading activities requirement for a single company.

Excluded trading activities

A trade will not qualify if one or more ‘excluded activities’ together amounts to a substantial part of it. Excluded trading activities are

• dealing in land, commodities or futures, or shares, securities or other financial instruments
• dealing in goods, other than in the course of an ordinary trade of wholesale or retail distribution
• banking, insurance, money-lending, debt-factoring, hire purchase financing or other financial activities
• leasing (including letting ships on charter, or other assets on hire) or receiving royalties or other licence fees
• providing legal or accountancy services
• property development
• farming or market gardening
• holding, managing or occupying woodlands, any other forestry activities or timber production
• operating or managing hotels or comparable establishments or managing property used as a hotel or comparable establishment
• operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home
• providing services or facilities for a business carried on by another person if
  • the business consists, to a substantial extent, of excluded activities, and
  • a controlling interest in the business is held by a person who also has a controlling interest in the business carried on by the company providing the services or facilities.

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

• the receipt of royalties and licence fees, where the amounts received can be attributed to the exploitation of ‘relevant intangible assets’. A ‘relevant intangible asset’ is one, the greater part of which (in terms of value) has been created by the company carrying on the trade, or by another company in its group. Intangible assets are defined in line with normal accounting practice
• ship chartering, where the company owns the ship and certain other conditions are satisfied.

Can issuing companies be traded on the Alternative Investment Market (AIM)?

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.

Can a company qualify if it enters into a joint venture with another company where they each own 50% of a third company?

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.

How is the value of a company’s ‘gross assets’ calculated?

Our Statements of Practice SP2/00 explains how this is calculated. For more details on Statements of Practice see ‘Further information’.

What is meant by ‘a substantial part’ of a company’s trade?

We 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, we consider that activities amounting to more than 20% of the trade will form a substantial part of that trade or business.

What happens if a company goes into receivership or liquidation?

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.)

Can an issuing company qualify if its trade is the development of computer software?

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.

Are payments for the use of know-how covered by the exception to the exclusion of royalties and licence fees rule?

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.

Can a company whose computer software is developed from a third party’s software qualify for the CVS?

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.

Will companies be excluded if they are located in the UK but the potential customer base is mainly outside the UK (e.g. Internet companies)?

Our Statements of Practice 3/00 explains how the location of activity rule applies. For more details on Statements of Practice see ‘Further information’.

Does the company have to be incorporated or resident in the United Kingdom?

No, the CVS has no residence or incorporation conditions.

7. The investment

To be eligible for investment relief, an investment must meet requirements relating to

• the shares
• use of the money raised
• pre-arranged exits and investor protection, and
• the purpose of the issue

The issuing company can apply to us for advance clearance that these requirements are met (see ‘Using the Corporate Venturing Scheme’.

The shares

The shares must be

• ordinary shares carrying no preferential rights to dividends or assets on a winding up, and no rights to redemption
• subscribed for wholly in cash, and
• fully paid up on issue to the investing company.

Requirements regarding use of the money raised

The money raised by the issue of shares must be used (except for any insignificant amounts used for other purposes) for either

• the purposes of a trade by reference to which the issuing company meets the ‘trading activities’ requirement, or
• research and development from which a qualifying trade will be derived, or which will benefit a qualifying trade (where any member of the group may carry on that trade).

At least 80% of the money raised must be used wholly for the purposes of the relevant trade no later than:

• the end of the period of 12 months starting with the issue of the shares, or
• where the relevant trade was not being carried on at the time the shares were issued, the end of the period of 12 months starting when the issuing company or a subsidiary begins to carry on the relevant trade.

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.

Pre-arranged exits and investor protection

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

• for a subsequent repurchase, exchange or other disposal of any shares in or securities of the issuing company
• for the cessation of any trade by the issuing company or a person connected with that company, including arrangements for the issuing company to be wound up
• for the disposal of a substantial amount of the assets of the issuing company or of a person connected with that company
• providing protection for persons investing in the issuing company against the normal commercial risks attached to making the investment
• the main purpose of which (or one of the main purposes of which) is the avoidance of tax.

‘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

• arrangements for the exchange of shares, or shares and securities, resulting in the acquisition of share capital by a ‘clean’ holding company (see the ‘Special rules for one type of reorganisation’)
• arrangements that take effect on a winding up, except where they provide for the issuing company to be wound up or where the winding up is not for commercial reasons.

Purpose of issue

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.

Will the ‘pre-arranged exits’ rule apply if the intention is a flotation or sale of the issuing company in due course?

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.

Do normal warranties and indemnities given in relation to the investing company’s subscription for shares in the issuing company (e.g. warranties to the accuracy of the accounts of the issuing company) infringe the rules on ‘pre-arranged exits’?

This will depend on the particular circumstances, but normal warranties and indemnities are unlikely to infringe the rules.

8. Circumstances in which investment relief may be withdrawn or reduced

Disposal of an investment

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%) 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% of the amount received on the disposal of the shares, it will be reduced by 20% of the amount received if the disposal is

• a ‘bargain at arm’s length’
• a distribution in the course of dissolving or winding up the issuing company
• a disposal within section 24(1) Taxation of Chargeable Gains Act 1992 (such as occurs when the issuing company is struck off the Register of Companies and dissolved), or
• a deemed sale following a negligible value claim under section 24(2) Taxation of Chargeable Gains Act 1992.

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

• circumstances where the amount of investment relief was reduced before it was obtained (for instance because there had been a prior receipt of value – see receipt of value rules )
• company reorganisations and amalgamations (see the section on ‘Company reorganisations, reconstructions and amalgamations’).

Identification of shares on the disposal of part of a holding

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

• first, shares to which investment relief is not attributable
• next, shares to which investment relief, but not deferral relief, is attributable, and

finally, shares to which both investment relief and deferral relief are attributable.

How is investment relief withdrawn?

If investment relief has been obtained and is either not due, or has to be reduced or withdrawn in full for any other reason, we will withdraw it. We will make an assessment to corporation tax under Case VI of Schedule D for the accounting period in which the relief was obtained.

We cannot make an assessment for reducing investment relief or withdrawing it in full, or give a notice that in our opinion relief falls to be reduced or withdrawn in full, more than six years after whichever is the later of either

• the end of the accounting period in which the time limit for employing money raised occurs, or
• the end of the accounting period in which the event that causes the investment relief to be reduced or withdrawn in full occurs.

These limits do not apply where there has been fraud or negligence.

What if there is a disposal of part of a holding where bonus shares have been issued?

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

• the original shares have been held continuously by the investing company from the time they were issued until the bonus shares are issued
• relief has been obtained in respect of the original shares and not lost
• the shares are in the same company, of the same class and carrying the same rights as the shares they are given in respect of.

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.

Example

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.

Other circumstances in which investment relief may be withdrawn or reduced

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

• receipt of value - to ensure that the investing company is not simply reclassifying an existing investment, and that money invested under the CVS remains in the company and is not returned to the investor or to any other shareholder
• the grant of put options and call options - to ensure that risk is not reduced by an option being granted over the shares or by advance provision being made for the investor to realise the investment at some future date.

Receipt of value

This section describes

• what a ‘receipt of value’ is, and how the amount received is determined
• what happens if there is a ‘receipt of value’ by the investing company during the period of restriction
• how a ‘receipt of value’ may be reversed to prevent loss of relief if value is received by persons other than the investing company.

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.

What is a ‘receipt of value’ for the investing company?

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.

What happens if there is ‘receipt of value’ by the investing company?

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% of the amount of value received, by that amount, or

withdrawn, if the investment relief attributable to the relevant shares is less than 20% of the amount received.

Reversing a ‘receipt of value’

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.

Receipt of value other than by the investing company

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

• an investing company under the CVS, or
• any person for whom this would mean the reduction or withdrawal in full of investment relief or relief under the EIS, or the revival of a chargeable gain under the EIS.

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% 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% 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.

Put options and call options

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

• a ‘put option’ (an option the exercise of which would oblige the grantor company to purchase the shares) is granted to the investing company, or
• a ‘call option’ (an option the exercise of which would oblige the investing company to sell the shares) is granted by the investing company.

What happens if more than one issue of shares has been made to the investing company on which investment relief has been claimed, and the relief is to be withdrawn because value has been received during the period of restriction relating to two or more of the issues?

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% of the value received (or all the relief, if this is less than 20% of the amount received).

Example

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).

How much relief is withdrawn if there has been a receipt of value and maximum investment relief has not been obtained?

The amount of value received is reduced by the amount of investment relief received, divided by 20% of the amount invested (the maximum potential relief). The same proportion of the relief is withdrawn.

Example

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.

What happens if there are arrangements for the investing company to receive value?

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.

Does the rule on receipt of benefits by directors or employees of the issuing company include all benefits, however small?

No, an amount of insignificant value is disregarded.

9. Company reorganisations, reconstructions and amalgamations

General

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.

Special rules for one type of reorganisation

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

• the consideration for the new shares must consist wholly of the issue of shares in the new company
• when the new shares are issued there must not be any shares in the old company, other than subscriber shares and any new shares already issued in consideration of old shares
• the consideration for the new shares of each description must consist wholly of old shares of the corresponding description (if they were shares in the same company they would be of the same class and carry the same rights), and
• new shares of each description must be issued to the holders of old shares of the corresponding description in respect of, and in proportion to, their holdings.

We must also have given an approval notification stating that we are 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.

Can investment relief be obtained for a ‘rights issue’?

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.

10. Using the Corporate Venturing Scheme

Summary

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. We 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 us 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. We 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 Tax Office that normally deals with their affairs. But, the CVS is administered centrally as far as determining whether the conditions are met by

• the issuing company, and
• the investment.

Advance clearance

If the issuing company applies for ‘advance clearance’ and the relevant conditions are met, we will issue an advance clearance notice. This will state that, on the basis of the information provided, we are 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 we receive an application for an advance clearance notice and we are satisfied, on the basis of the information provided with the application, we will issue the notice within 30 days of receiving the application.

If necessary, we will ask for further information to be provided within a specified time. If we are then satisfied, we will issue the notice within 30 days of the information, or any further information, being provided. If we are not satisfied with the application, we will notify the company within the same time period.

If we are not satisfied that the requirements will be met, or will be met for the time being, or if we 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 us.

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).

The compliance statement

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

• from the time the shares are issued (or four months from the time the funded trade starts, if this is later)
• not later than two years after the end of that accounting period, or two years after the start of the trade if this is later.

The compliance certificate

If we are satisfied that the information given in a ‘compliance statement’ is correct and meets our requirements, we 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 our 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 our decision not to allow a compliance certificate to be issued.

Obligation to notify

Investment relief can be reduced or withdrawn in full for an issue of shares on the grounds that

• the issuing company requirements or the general requirements are not met at any time during the qualification period
• the investing company requirements are not met at any time during the qualification period
• value has been received.

The time limits for notifying us are shown below.

The investing company must notify us if it	The specified time limit for notifying us 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 us if it	The specified time limit for notifying us 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 we believe that we should have been notified of an event but have not been, we can require the person concerned to provide the appropriate information.

We can withdraw relief if we discover grounds for withdrawal without being notified by the appropriate persons. But, we must give notice to the investing company beforehand, and a company receiving such a notice has the right to appeal against it.

Can investing companies get advance clearance that they are carrying out the right kind of trade for the CVS?

The Corporate Venturing Scheme Unit 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.

If an issuing company attracts investment under the Enterprise Investment Scheme or Venture Capital Trust scheme as well as CVS, will it have to seek advance clearances from different parts of the Inland Revenue?

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.

11. Further information

Legislation

The provisions for the Corporate Venturing Scheme 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

Contacts

The Small Company Enterprise Centre deals with enquiries from companies using the Corporate Venturing Scheme, 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 Ferrers House
Castle Meadow Road
Nottingham
NG2 1BB

Telephone: 0115 974 1250
Fax: 0115 974 2954
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.

Practice

HMRC Statements of Practice can be found in our booklet Statements of Practice (PDF 1.2MB). Three Statements of Practice applying to the CVS were published in August 2000 and are available in the IR131 ‘Statements of Practice Supplement 2000’ published in November 2000.

Two existing Statements of Practice were extended to include the CVS, they are

• SP 2/00 – ‘Venture Capital Trusts, the Enterprise Investment Scheme, the Corporate Venturing Scheme and Enterprise Management Incentives: Value of “gross assets”’ (formerly SP 5/98)
• SP 3/00 – ‘Enterprise Investment Scheme, Venture Capital Trusts, Corporate Venturing Scheme, Enterprise Management Incentives and Capital Gains Tax Reinvestment Relief: Location of activity’ (formerly SP 7/98).

The third Statement of Practice applying to the CVS is

• SP 1/00 – ‘Corporate Venturing Scheme; applications for advance clearance under Part X, Schedule 15, FA 2000’.

The text of this Statement of Practice is included as an Appendix to this booklet.

Tax Bulletin

Tax Bulletin shows some of our 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 020 7438 7080.

The HM Revenue & Customs on the Internet

Our web site at http://www.hmrc.gov.uk/ features news and information on tax and National Insurance matters in the United Kingdom.

Department of Trade and Industry

Information on help for small businesses can be obtained from the Small Business Service (a Government department)

• by calling the General Enquiry line on 020 7215 5363

Trade associations

You can obtain information about the venture capital industry from the British Venture Capital Association (BVCA) by phoning 0207025 2950.

12. Glossary of terms

‘Arrangements’ includes any scheme, agreement or understanding, whether or not legally enforceable.

‘Associate’, in relation to a person, means

• any relative or partner of that person
• any trustee(s) of any settlement which the person or any relative is or was a settlor
• where the person has an interest in any shares or obligations of a company that are subject to any trust, or are part of the estate of a deceased person,
  • the trustee(s) of the settlement concerned or the personal representatives of the deceased, or
  • if the person is a company, any other company interested in those shares or obligations.

‘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

• the same person has control of both
• a person has control of one, and persons connected with him, or he and persons connected with him, have control of the other, or
• a group of two or more persons has control of each company, and the groups either consist of the same persons, or of persons connected with the same persons.

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

• that individual has control of the company, or
• the individual and persons connected with him or her together have control of it.

An individual is connected with another individual if

• they are spouses
• they are relatives
• one is the spouse of a relative of the other, or
• one is a relative of the spouse of the other.

‘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% subsidiaries, and, ‘parent company’ means a company that has one or more 51% 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’ (see page xx), 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

13. Appendix

SP1/00 Corporate Venturing Scheme; applications for advance clearance under Part X, Schedule 15, FA 2000

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.

Procedure

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.

Information and documents needed

1. General

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.

2. Accounts and other documents

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.

3. Transactions subsequent to accounts

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.

4. The company

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:

• the name of each such company, together with the name of its Tax Office and its tax reference or, if there is no tax office, the address of its registered office, and
• a statement or diagram showing the shareholding interests of each group company in other group companies, sufficient to show that all subsidiaries will be ‘qualifying subsidiaries’ as defined in subsidiaries;
• sufficient information to establish whether the ‘gross assets’ requirement set out in gross_assets will be satisfied (see Statement of Practice SP2/00);
• a description of each activity comprised in any trade carried on, or to be carried on, by the company and, in the case of each subsidiary or controlled company mentioned above, each activity comprised in any trade carried on, or to be carried on, by that subsidiary.

5. The share issue and the money raised

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).

Undertakings needed

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’.

Informal EIS clearances

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.