TAX ADVANTAGED VENTURE CAPITAL SCHEMES

Transcription

1 TAX ADVANTAGED VENTURE CAPITAL SCHEMES Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to respond to the consultation document Tax-advantaged venture capital schemes: ensuring continued support for small and growing businesses (the Consultation) that was published jointly by HM Treasury and HMRC on 10 July We welcome the recognition in the Chief Secretary s Foreword that the tax-advantaged venture capital schemes provide a highly important source of finance for SMEs and the indication of the Government s commitment to ensuring that the schemes continue to support small and growing businesses. 1.3 A central theme in this response is our focus on the legislative and practical constraints which prevent more limited companies from being able to access the investment that is incentivised by the existing VCT, EIS and SEIS schemes. Those companies are largely defined by their absence from the statistics included in the Consultation. With SEIS (the scheme designed specifically with smaller and start-up companies in mind) producing investment totalling over 175 million into over 2,000 companies, that means that the average investment in each SEIS company is around 87,500. That strongly suggests that the companies that have most benefited from SEIS are those that have attracted investment that was closer to the scheme s ceiling of 150,000 than any more modest level of start-up funding for a company. This prompts the question whether as a matter of policy it is acceptable that start-up companies seeking more modest levels of investment are unlikely to access the tax-advantaged schemes. 1.4 It will be apparent from the repeated references in this response that our central concern is that the complexity of the rules (and the resulting cost of compliance) is discouraging the use of the schemes for more modest levels of investment. We advocate consideration of a genuinely simpler scheme possibly with more modest limits of tax relief and exemption. 1.5 We respond in section 2 below to the specific Consultation questions. Registered in England and Wales Registered Office: 1st Floor, Artillery House, Artillery Row, London SW1P 1RT A company limited by guarantee: Number Registered as a charity: Number VAT Registration: Number

2 2 Response to the consultation questions Our comments in this section 2 follow the numbering of the Consultation questions so that our 2.1 is in answer to question 1 and so on. Question One 2.1 Are the tax-advantaged venture capital schemes currently meeting the overarching principles, as detailed in Box 2A? Have the recent reforms to the schemes resulted in more effective and welltargeted support? Our comments on the attainment of the five overarching principles detailed in Box 2A are set out below. Effective and targeted Box 2A indicates that the intention is that the tax relief effectively shifts investor behaviour to provide finance for higher-risk and relatively unproven companies that might otherwise struggle to access finance The statistics included in the Consultation indicate what investment has been made under the schemes. It is probably reasonable to assume that the vast majority of the investment would not have been made without the tax incentive provided by the schemes and that the investee companies would otherwise have struggled to access finance but we do not have an evidence base with which to support that assumption. Provided the assumption is valid, the schemes are effective and targeted We do, however, think that it is important to consider not only what companies have benefited from the schemes but also what companies meeting the higher risk/unproven criteria have for any reason been unable to benefit from the schemes. We develop the point in this response In relation to the second part of the question, we think that the take-up of SEIS confirms that there are companies for whom EIS or VCT would have been inappropriate. By extension, we think that lends support to our contention that there are similarly companies for whom SEIS itself is inappropriate. Affordable We note that the second principle included in Box 2A focuses on the affordability of the schemes to the Exchequer. In assessing whether the schemes represent good value for money for the taxpayer, it is essential to consider not only what additional productivity, profit and tax revenue result from investment under the schemes but also what impact they have in reducing unemployment and the cost that imposes on the taxpayer. We do not have access to this level of detailed information Although the Consultation focuses (understandably) on the affordability of the schemes to the Exchequer, it does prompt reflection on the affordability of the schemes to prospective investee companies. We have noted in our introduction that the statistics provided suggest that the average investment under SEIS is around 87,500. From the limited evidence available to us, we P/ATTTSG/Submissions/2014 2

3 think that the professional fees associated with the setting up of even a straightforward SEIS opportunity for a company can quite easily amount to between 5,000 and 10,000. Such an outlay for a company that is by definition struggling to access finance is a significant obstacle. The work required of professional advisers is not determined by the amount of capital to be invested; the same degree of care in terms of compliance with the terms of the legislation is required regardless. This necessarily makes even SEIS unattractive where the potential investment is relatively modest. We accordingly think that the three existing schemes are failing to meet the needs of companies which may be struggling to access finance just as much as those for whom the schemes do provide a solution albeit at a more modest level We have not researched the point but we do not think there is a significant difference in the amount of professional work that is required to facilitate either an EIS or an SEIS investment. The relative attraction in SEIS is therefore more to do with the level of up-front Income Tax relief than in any saving in professional fees The amount of work required of professional advisers may make them reluctant to recommend use of a scheme where a relatively low amount of capital investment is sought. Advisers do not like to be seen as out of touch with their clients expectations particularly in relation to professional fees. Simple and straightforward to administer The Consultation properly recognises in Box 2A that the simplicity of the schemes is important for investing individuals, the investee companies and HMRC. Looking specifically at EIS and SEIS, the basic administration a company s application for advance approval [EIS/SEIS(AA)] and subsequent [EIS1/SEIS1] application for authorisation to issue forms EIS3/SEIS3, the company s subsequent issue of those forms and the investor s claim to HMRC is probably as straightforward as it can be. So far, so good. Where both schemes are so daunting is in the legislative provisions relating to eligibility and other compliance considerations. The burden of this complexity falls squarely on the investee companies (rather than HMRC) and they are obliged to incur the professional fees already referred to in order to be able to satisfy themselves and (critically) their investors that they are complying with the scheme rules In order for prospective investors and investee companies to be able to understand and interact with the scheme rules with ease, those rules would need to be written so that anyone with Grade A*-C at GCSE in English and Maths would be able to identify what needed to be done in order to comply with the rules. Such an aspiration is obviously inconsistent with the level of complexity of the current provisions. That poses the question whether that degree of complexity is inevitable where the potential tax savings (due to the relatively high limit on an individual s annual investment and the total exemption from CGT after three years) are so high. In turn, that prompts consideration of whether it would be practical to structure a truly simple and more straightforward scheme (perhaps as a variant of SEIS) if the potential upside tax savings (for the investor) and matching tax yield downside (for the Exchequer) were significantly restricted. Consideration might for example be given to having a much more modest annual investment limit (say 20,000) and a CGT exemption on disposal capped at a multiple of either the ordinary Annual Exemption limit or the amount invested. It could be very illuminating if P/ATTTSG/Submissions/2014 3

4 research was carried out to establish what level of tax incentive was required to prompt a potential investor to make a relatively modest investment under a simplified scheme. If a startup company has identified a single individual who might invest a much needed 10,000, none of the existing schemes has any practical relevance. Sustainable and not subject to abuse The Consultation restates that the schemes exist to incentivise investment in smaller high risk companies which would otherwise experience difficulties in raising finance and goes on to note that they are not intended to provide a tax-efficient investment solution for investors seeking to minimise their tax liability. We have commented above on the former point We wholly appreciate that valuable reliefs need appropriate protection from abuse but we think that the legislation for the existing schemes (and particularly EIS and SEIS when viewed in the context of modest levels of investment) has been over-burdened by concerns about abuse. We have referred in above to the possible need for a simple scheme specifically designed for modest levels of investment and with appropriately restricted levels of tax relief. If the Exchequer was substantially less exposed to loss of revenue, it should be possible to significantly reduce the qualifying conditions. Compliant with State aid rules We would not anticipate any difficulty in State aid compliance for the type of simple scheme that we are recommending. As the relevant limits would be no higher than those for SEIS (and frequently lower), they would be within the de minimis criteria. We strongly believe that there is a market failure in relation to the provision of finance to small and start-up companies which the existing schemes are incapable of addressing because of their complexity. Question Two 2.2 Does the current limit for tax-advantaged investment into qualifying companies, of 5 million per year, achieve the same effect as a total limit of 15 million? Please provide details where you have experience with companies receiving more than 15 million under any of the schemes, and explain the need for that level of investment We have not undertaken specific research on this point but our instinct is that the annual investment limit of 5 million coupled with the other scheme rules is likely to achieve much the same effect as a cumulative limit of 15 million We are very doubtful that a stipulation that there has to be less than an arbitrary seven years between a company s first sale and it first benefiting from a State aid intervention would achieve the overall objective of targeting appropriate companies. Each company s development and its need for investment has individual features. Any attempt to cater specifically for particular circumstances (such as entering a new market referred to in footnote 5 of section 2.17 of the Consultation) would unavoidably require additional legislation and definitions. We think that the Government would be right to resist changes and that it should indeed seek to P/ATTTSG/Submissions/2014 4

5 demonstrate that the existing scheme rules produce an outcome that is consistent with the Risk Finance guidelines. Question Three 2.3 Would a total investment limit of 15 million actually offer more flexibility and simplicity than an annual investment limit We have not specifically researched the point but we think there could be some companies that would benefit more from a 15 million total investment than the annual investment limit. Our key concern would be that replacing the annual limit with a higher total limit might be seen as carrying an enhanced risk of abuse with the result that the legislation for the scheme was further complicated. That particular consequence would be of less concern if there was (as we advocate) a separate scheme to accommodate more modest investment levels. Question Four 2.4 Do the qualifying companies rules and limits on company size effectively target the investment towards less established companies? How would a limit on the time that a company had been trading in the market impact on any investments made? Please provide details where you have experience with older companies, or companies with more established trades, receiving investment under the schemes, and explain the need for that investment All rules and limits necessarily have arbitrary features. Why for example should the employment of one additional member of staff make a difference to scheme eligibility? The obvious answer is that the line has to be drawn somewhere. One of the difficulties in devising qualifying criteria is in defining a less established company. One company may have been trading for many decades and be very well established in its particular niche market without exceeding any of the limits for a scheme. Another, by contrast, may be trying to break into a well-developed existing market or to pioneer an innovative technology and be over a particular limit without being established in any real sense. As arbitrary rules go, the existing ones are reasonably conceived For the reasons stated in above, we would not favour the introduction of an age of company rule. We are aware of a situation where a company incorporated 13 years ago is still attracting further venture capital to assist its development of a new technology which if successful could be a major generator of income for UK plc (and revenue for the Exchequer). It would be inappropriate to exclude that company from tax-advantaged venture capital simply because its ground-breaking technology was taking time to develop. Question Five 2.5 What do you think the impact of the increase to 5 million as annual limit for investment into qualifying companies has been? Has it unlocked investment throughout early and growth stages of company? Has it allowed for further rounds of funding over time? We do not have the evidence base from which to answer this question. P/ATTTSG/Submissions/2014 5

6 Question Six 2.6 What do you think the impact of the increased employee limit for qualifying companies has been? Has it unlocked investment throughout early and growth stages of company? Has it allowed for further rounds of funding over time? We do not have the evidence base from which to answer this question. Question Seven 2.7 Do you believe that these increased limits are now supporting more established companies that are less in need of support? Please provide evidence to support your answer We do not have the evidence base from which to answer this question. Question Eight 2.8 What do you believe the impact of SEIS has been on the market more generally? On a positive note, we think that the arrival of SEIS has helped companies, potential investors and advisers consider the relevance of SEIS itself to particular situations. It may also have served to reawaken interest in EIS On a less positive note, the complexities of SEIS have frustrated those who were hoping that the opportunity would be taken to introduce something that was conceptually different from EIS. What SEIS has delivered has been a broadly comparable range of qualifying conditions (with comparable complexity so that there is no significant scope for any reduction in the professional costs in implementing a scheme) with lower investment limits which make the ratio of professional cost to potential investment less attractive than for EIS. A member has reported a specific situation where a client who was generally prepared to pay relatively high levels of professional fees was put off making SEIS investments because of the high level of costs. Question Nine 2.9 Do you believe that the type of investors using the venture capital tax reliefs is changing? What are the risks and benefits of this? We do not have the evidence base from which to answer this question Our more general concern is that the complexity of the schemes has meant that they are predominantly used in connection with larger investments into relatively sophisticated companies with experienced advisers rather than modest investments made by an individual directly into a company that is known to them. As a result, we think there is a risk that the schemes could come to be seen by prospective investors more as a tax-efficient investment solution than as an incentive to take entrepreneurial risk in a company that they would personally like to support. P/ATTTSG/Submissions/2014 6

7 Question Ten 2.10 Is the lack of a minimum investment limit for SEIS, EIS, and VCTs a help or a hindrance for investors, companies and intermediaries including fund managers? We do not have the evidence base from which to answer this question Our instinct is that the lack of any minimum investment level is neutral. By contrast, we think that the relatively high levels for investment may add to the perception that none of the schemes are really intended to cater for modest investment. This, we think, supports our recommendation for a simplified scheme specifically designed for lower levels of investment. Question Eleven 2.11 Do you believe that the recent change to allow VCT shares to be subscribed for by nominees will have a significant impact on the market going forwards? We do not have the evidence base from which to answer this question. Question Twelve 2.12 Is there more that the government should be doing to facilitate the use of tax reliefs by retail investors? Please refer to our comments above concerning the case for a truly simplified scheme for modest levels of investment with appropriately modest levels of CGT exemption. Question Thirteen 2.13 Do the current mechanisms for claiming tax relief create difficulties for investors or investee companies? How? We have not identified any. Question Fourteen 2.14 Do you believe an alternative process, such as that used for Gift Aid, would work more easily? Why? How would HMRC be able to verify the tax liabilities with this type of mechanism? Without more detail on how such an alternative scheme might work, we are only able to comment briefly The current process ensures that the investee company receives the full amount of investment at the earliest opportunity. If the company had to make a repayment claim to HMRC, there would be some unavoidable delay in the cash-flow to the company. That delay would be extended by any requirement upon HMRC to verify the capacity of each individual for full tax relief prior to making repayment. P/ATTTSG/Submissions/2014 7

8 Where the investment was made prior to or shortly after the commencement of trading, the investee company would presumably have to wait until it had been trading for four months before submitting a repayment claim Even if a Gift Aid type process was practical, it would still be necessary for investors to make claims on their individual tax returns for the CGT deferral/reinvestment relief Overall, we consider it more important to address the situation of modest levels of investment than to focus on the mechanics of claims. Question Fifteen 2.15 Do you agree with the summary of the issues relating to convertible loans set out at paragraphs 3.22 and 3.24? We agree that the issues mentioned in the summary are relevant. There may be additional issues that are not identified in the summary. Question Sixteen 2.16 Have you used an advance purchase agreement to facilitate investment? If not, would you consider doing so if the process were formalised? Why? We cannot reply to this question. Question Seventeen 2.17 Do you believe that a change in legislation to enable shares received on the conversion of a loan note to qualify is necessary? If so, what conditions do you believe are reasonable to ensure that the use of loans in this circumstance does not create significant opportunities to mitigate risk? We think that a change to the legislation would produce a more satisfactory solution. Whilst advance purchase arrangements may work well in some situations, we think that the alternative of a short period of time in which investments could be formalised into a share issue would provide greater flexibility and might encourage investment under the schemes. Question Eighteen 2.18 Are there other approaches that you believe would be preferable? Why? No. Question Nineteen 2.19 Has the recent change in shares allowed to qualify under EIS been beneficial? Have investors continued to make investments in line with the overarching principles of the schemes (see Box 2A)? We do not have the evidence base from which to answer this question. P/ATTTSG/Submissions/2014 8

9 Question Twenty 2.20 Are there cases where the current rules on qualifying shares have created barriers to investments being made? What changes to the rules could prevent these cases without creating opportunities for investors to benefit from tax relief on investments where they are protected against risk? We do not have the evidence base from which to answer this question. Question Twenty-one 2.21 Have the current rules relating to the creation of intangible assets facilitated investments? We do not have the evidence base from which to answer this question. Question Twenty-two 2.22 Are there cases where the current rules on qualifying shares have created barriers to investments being made? What changes to the rules could prevent these cases without creating opportunities for investors to benefit from tax relief on investments where they are protected against risk? We do not have the evidence base from which to answer this question We note the observation in section 3.35 of the Consultation that the government is concerned that there may be some misunderstanding among investors and companies who may not realise the intention of the current rules or the flexibilities within them. We think that any such misunderstanding might be more effectively remedied by appropriate resourcing of HMRC s Small Company Enterprise Centre [SCEC] (for example by the provision of a technical helpline facility) than by any further change to the rules. Question Twenty-three 2.23 Are there other areas where current rules have created barriers to investments being made? What changes to the rules could prevent these cases while continuing to ensure that the overall principles, as outlined in Box 2A, are maintained? We have already commented that we consider that the complexity of the rules for the existing schemes discourages more modest levels of direct investment by individuals. We think this is one of the most significant barriers to investment. Question Twenty-four 2.24 Do the current rules for determining qualifying companies work effectively overall? We do not have the evidence base from which to answer this question. Question Twenty-five 2.25 Do you find the flexibility offered by the interpretation of substantial useful in determining whether a trade can qualify? Or, would it be helpful to set this out in legislation, with rules P/ATTTSG/Submissions/2014 9

10 explaining both the proportion of activities that can qualify and determining the criteria to which that applies (turnover, capital etc) We think that the flexibility offered by the use of an undefined term like substantial necessarily introduces an accompanying element of uncertainty. The two outcomes are the two sides of the same coin. We are very doubtful whether any attempt to provide further definition by means of legislation would be practical. Rather than additional legislation, we think that some form of clearance procedure operated by SCEC could be significantly more useful to prospective investee companies at the same time as enabling HMRC to maintain its position as gatekeepers to the schemes. Question Twenty-six 2.26 Considering the existing exceptions to the excluded activities list for community energy projects, AD, and hydro, do you believe there is still a strong justification for these exclusions? To what extent are these projects reliant on venture capital tax reliefs? We do not have the evidence base from which to answer this question. Question Twenty-seven 2.27 What impact, if any, would the removal of tax relief under EIS and VCT for investment in companies receiving energy subsidies, together with the absence of SITR, have on community energy schemes? We do not have the evidence base from which to answer this question. Question Twenty-eight 2.28 Are there any areas where the excluded activities list precludes investment into genuinely high risk investments? We do not have the evidence base from which to answer this question. Question Twenty-nine 2.29 Are there particular areas where low-risk investment activity is taking place and that may be diverting investment away from higher-risk, innovative companies? We do not have the evidence base from which to answer this question. Question Thirty 2.30 Are there particular areas where high-risk investment activity into innovative companies with growth potential is not taking place? Are there any common features that could be used to identify these sectors, or investment opportunities? Yes. As previously noted, one key common feature of situations where we consider that highrisk investment activity is not taking place is where the more modest levels of investment that P/ATTTSG/Submissions/

11 would be required and the complexity of the scheme rules combine to make use of a scheme impractical. Question Thirty-one 2.31 Do you believe that a new principled approach is necessary? Without a clear indication of what this might look like and the changes that it might involve, we find it difficult to answer this question. We do not wish to dismiss the possibility but think that specific consultation would be necessary to determine whether there was more support for such an approach than for the current provisions In theory, at least, the move to a principled approach might possibly introduce some simplification in the rules but if that was at the expense of certainty we would question the benefit. Question Thirty-two 2.32 Do any of the options outlined in paragraphs 4.19 to 4.22 appeal to you? Why? Not particularly. They are not currently explained in sufficient detail to enable a proper appreciation of their implications. Question Thirty-three 2.33 Are there any other approaches that you believe would be preferable? Why? No. 3 Overall observation on the Consultation questions 3.1 As consistently indicated in this response, we are concerned that the complexity of the existing scheme rules is discouraging more modest levels of direct investment into prospective investee companies. We do not think that the structuring of the Consultation questions will have prompted many responses to have addressed this point. 4 Call for evidence: Questions for supporting evidence and case studies 4.1 Apart for the comments included earlier in this response, we are not in a position to provide evidence or case studies. 4.2 Going forward, we wonder whether it would assist the monitoring of the schemes if companies were invited to provide additional information (either at the time of seeking authority to issue P/ATTTSG/Submissions/

12 certificates to investors or perhaps on the anniversary of such event). If that information could be supplied and treated in a similar manner to ethnicity information provided as part of a job application (so that its provision could not influence the application but was used to inform the monitoring process), it might assist understanding of the use of the schemes. 5 Summary 5.1 In relation to the three existing schemes, we think that changes should only be introduced if they either address identified anomalies or unintended consequences or result in simplification of the rules. 5.2 We would be pleased to join in any discussion with HMT and/or HMRC in relation to this Consultation. Should you wish to discuss any aspect of this response, please contact our relevant Technical Officer, Will Silsby, on or at: wsilsby@att.org.uk Yours sincerely Paul Hill Chairman, ATT Technical Committee 6 Note P/ATTTSG/Submissions/

13 6.1 The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible. Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia. The Association has over 7,500 members and Fellows together with over 5,000 students. Members and Fellows use the practising title of 'Taxation Technician' or Taxation Technician (Fellow) and the designatory letters 'ATT' and 'ATT (Fellow)' respectively. P/ATTTSG/Submissions/