Inland Revenue Press Release 133/00 issued on 3 August 2000
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MORE CERTAINTY FOR COMPANIES USING CORPORATE VENTURING GUIDANCE ON HOW TO OBTAIN CLEARANCE Small companies raising finance under the Corporate Venturing Scheme can obtain advance clearance that an issue of shares will satisfy the conditions of the Scheme introduced by Finance Act 2000. A new Statement of Practice published by the Inland Revenue today sets out the details. Two existing Statements of Practice that apply to the Enterprise Investment Scheme and the Venture Capital Trusts Scheme have been replaced by two new Statements extending their scope to the Corporate Venturing Scheme and the Enterprise Management Incentives (which was also introduced in Finance Act 2000). Texts of all three Statements of Practice are attached. DETAILS 1. Statement of Practice SP1/00 explains how to obtain advance clearance that an issue of shares satisfies the conditions of the Corporate Venturing Scheme (CVS). Finance Act 2000 introduced a statutory facility for companies raising finance under the CVS to apply to the Inland Revenue for an advance clearance notice. This is voluntary, but can be helpful in giving reassurance to small companies and their potential investors. 2. Statement of Practice SP2/00 extends to the Corporate Venturing Scheme and Enterprise Management Incentives Scheme the existing Statement of Practice SP5/98 which already applies for Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS). It explains how "gross assets" are to be interpreted for the purpose of the "gross assets" tests which define a small company for the purposes of all four Schemes. This Statement supersedes SP5/98 and will apply a consistent approach across the four Schemes. 3. Statement of Practice SP3/00 extends to the Corporate Venturing Scheme and Enterprise Management Incentives Scheme the existing Statement of Practice SP7/98 which applies to the EIS, VCTs, and Capital Gains Tax Reinvestment Relief (which was available for investments before 6 April 1998). It explains how the requirement that qualifying trades or activities for which money is raised must be carried on wholly or mainly in the United Kingdom is interpreted for all five Schemes and supersedes SP7/98. NOTES FOR EDITORS 1. Schedule 15 Finance Act 2000 introduced the Corporate Venturing Scheme (CVS), which provides for a number of tax incentives to encourage companies to invest in small higher- risk trading companies and to form wider corporate venturing relationships with those companies. The tax reliefs provided for by the Scheme are available in respect of shares issued on or after 1 April 2000 and before 1 April 2010. 2. Schedule 14 Finance Act 2000 introduced the Enterprise Management Incentives (EMI) Scheme, which provides for tax- advantaged share schemes to help small trading companies with potential for growth to recruit and retain high-calibre managers. The Scheme applies to qualifying share options granted after 5 April 2000. 3. The Enterprise Investment Scheme (EIS) was introduced in 1994 and provides a range of tax incentives for investors to subscribe for new ordinary shares in qualifying companies. 4. The Venture Capital Trust (VCT) scheme offers similar reliefs to individuals investing in VCTs, which are quoted companies that invest in the same sort of small companies which can qualify for EIS purposes. 5. The purpose of all these schemes is to foster growth in small higher-risk trading companies. The CVS, VCT and EIS schemes encourage the provision of start-up and expansion finance for unquoted small higher-risk trading companies. Small companies are defined as ones whose gross assets are no more than #15 million immediately before the investment or, in the case of EMI, at the date of the grant of the option. For CVS, VCTs and EIS the gross assets must not exceed more than #16 million immediately after the investment. Where a company is a member of a group of companies, the limits are applied to the assets of the whole group. 6. A booklet giving details about the Corporate Venturing Scheme will be published in due course. In advance of that, information about the Scheme can be obtained from the Corporate Venturing Unit, New Wing, Somerset House, Strand, London WC2R 1LB. 7. Statements of Practice explain the Inland Revenue's interpretation of legislation and the way the Department applies the law in practice. They do not affect a taxpayer's right to argue for a different interpretation, if necessary in an appeal against an assessment. Some Statements deal with administrative practice or procedure. 8. Inland Revenue Statements of Practice are published in the free booklet IR131: "Statements of Practice". The new and revised Statements issued today will be included in a future edition of the booklet. 9. Inland Revenue booklets and leaflets are available from any Tax Enquiry Centre or Tax Office. They are also available from the Inland Revenue Information Centre Ground Floor, South West Wing, Bush House, Strand, London WC2B 4RD. 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:
The Board of Inland Revenue 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 paragraph 16 will be satisfied; b. confirmation that the "independence" requirement set out in paragraph 17 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 at paragraph 18 will be satisfied at that time; d. confirmation that the "partnerships and joint ventures" requirement set out in paragraph 19 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 at paragraph 21; f. sufficient information to establish whether the "gross assets" requirement set out in paragraph 22 will be satisfied (see Statement of Practice SP2/00); g. 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 at e. 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 at paragraph 36. 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 at paragraph 37. 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. SP2/00 Venture Capital Trusts, the Enterprise Investment Scheme, the Corporate Venturing Scheme and Enterprise Management Incentives. Value of "gross assets" GROSS ASSETS RULE 1. Paragraph 8, Schedule 28B, ICTA 88 provides that a Venture Capital Trust's holding of shares, or of shares and securities, in a company cannot be part of its qualifying holdings for the purposes of section 842AA ICTA 88 if the value of that company's gross assets exceeds -
#15 million immediately before the issue of the holding in question; or #16 million immediately afterwards. 2. Section 293(6A) ICTA 88 provides that a company cannot be a qualifying company for the purposes of the Enterprise Investment Scheme in relation to an issue of eligible shares if the value of its gross assets exceeds -
#15 million immediately before the issue of the shares; or #16 million immediately afterwards. 3. Paragraph 22, Schedule 15 FA 2000 provides that a company cannot be a qualifying company for the purposes of the Corporate Venturing Scheme in relation to any shares if the value of its gross assets exceeds -
#15 million immediately before the issue of the shares; or #16 million immediately afterwards. 4. Paragraph 16, Schedule 14 FA 2000 provides that a company cannot be a qualifying company for Enterprise Management Incentives in relation to a qualifying option, if the value of its gross assets exceeds -
#15 million at the date the option is granted. 5. Where the company is a member of a group of companies, the limits set out in each of the four preceding paragraphs apply to the aggregate value of the gross assets of all the companies in the group. For this purpose, no account is taken of -
any assets which consist in rights against another company in the group, or any shares in, or securities of, another such company. VALUATION OF ASSETS 6. In applying these rules, the Inland Revenue's general approach is that the value of a company's gross assets at any time is the aggregate of the values of the company's gross assets as shown in its balance sheet if the company were to draw one up at that time. "Gross assets" means all the assets which would be shown on that balance sheet, without any deduction in respect of liabilities. This approach is subject to the proviso that the balance sheet would be drawn up on a basis consistent with that used in the accounts for preceding periods (if any), and in accordance with normal UK accounting practice. (This is referred to later in this Statement as "the accounting practice proviso".) This general approach is also subject to what is said in paragraphs 10 and 11 below. 7. So if the shares or securities in question were issued, or as the case may be, the option was granted, immediately after the date to which the company's accounts were drawn up, the value of the company's gross assets immediately before the issue, or grant, would be the value shown in the balance sheet (subject to the accounting practice proviso and to paragraphs 10 and 11 below). And if the shares or securities were issued, or the option was granted, immediately before the date to which the company's accounts were drawn up, the value of the company's gross assets immediately after the issue, or grant, would be the value shown in the balance sheet (subject to the accounting practice proviso and to paragraphs 10 and 11 below). 8. Where shares or securities are issued, or options are granted, at other times, the values will, in the first instance, be based on the values given in the company's latest available balance sheet (subject to the accounting practice proviso and to paragraphs 10 and 11 below). However, these values should be updated as precisely as is practicable, taking into account all the relevant information available to the company (and, where applicable, to its subsidiaries). For example, where a company is able to ascertain the amount of trade debts owed to it at any given time, it would be reasonable to take the aggregate amount of such debts outstanding at the time of the issue or grant. 9. When accounts covering -
the accounting period in which the issue was made or the option was granted, and if they were not available at the time of the issue or grant, those for the immediately preceding accounting period, become available, the values arrived at in the way described in paragraph 8 above may need to be reviewed in the light of the information contained in those accounts. PAYMENTS IN RESPECT OF SHARES OR SECURITIES 10. The Inland Revenue will not regard the assets of a company immediately before the issue of the shares or securities in question as including any advance payment received by the company in respect of that issue. 11. Where shares or securities are issued partly paid, the right to the unpaid portion will be regarded as an asset of the company. That asset will be taken into account for the purpose of deciding whether the relevant gross assets rule is satisfied, whether it is shown in the company's balance sheet or not. SP3/00 Enterprise Investment Scheme, Venture Capital Trusts, Corporate Venturing Scheme, Enterprise Management Incentives and Capital Gains Tax Reinvestment Relief. Location of activity 1. The provisions for -
the Enterprise Investment Scheme; Venture Capital Trusts; the Corporate Venturing Scheme; Enterprise Management Incentives; and capital gains tax Reinvestment Relief (which is not available for investments made after 5 April 1998) each include the requirement that a company's trade should, at a certain time or for a certain period, be "carried on wholly or mainly in the United Kingdom". This Statement explains the way in which the Inland Revenue applies this condition in those contexts. 2. The way in which the requirement is applied in any particular case will depend on the relevant facts and circumstances. A company may at any given time carry on some of the activities of the trade outside the United Kingdom and yet satisfy the requirement if the major part of the trade, that is over half of the trading activity, taken as a whole, is at that time carried on within the United Kingdom. 3. In considering whether the requirement is satisfied, the Inland Revenue will take into account the totality of the activities of the trade. For example, they will consider where the capital assets of the trade are held, where any purchasing, processing, manufacturing and selling is done, and where the company's employees and other agents are engaged in its trading operations. For trades involving the provision of services, the location of the activities giving rise to the services and the location where they are delivered will both be relevant. 4. No one factor is in itself likely to be decisive in any particular case. In particular, the Inland Revenue will not regard a company's activities as not being carried on in the United Kingdom solely because -
the goods or services which it manufactures or provides are exported or supplied to overseas customers; its raw materials are purchased from abroad; or its raw materials or products are stored abroad. 5. In the case of a trade consisting of ship chartering, the trade will be considered to satisfy the requirement if all the charters are entered into in the United Kingdom and the provision of the crews and the management of the ships while under charter take place mainly in the United Kingdom. If these conditions are not met the test may still be satisfied, but this will depend on all the facts and circumstances of the case. 6. The corresponding requirements in certain of the schemes mentioned in relation to research and development and to oil exploration are applied in a similar way.
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