Consultation Response Tax-advantaged venture capital schemes streamlining the advance assurance service January 2017 1 Question 1. In what context are you responding to this consultation? 1.1 We are the national network for co-operatives, working to promote, develop and unite co-operatives across the economy. On behalf of our member co-operatives we campaign for a policy environment in which they can thrive, and in which more people can meet their own needs and aspirations through co-operatives. 1.2 Tax-advantaged venture capital schemes, particularly Enterprise Investment Scheme (EIS) and now increasingly Social Investment Tax Relief (SITR), are a useful tool for supporting investment in new and growing co-operatives. In particular community co-operatives, using the co-operative and community benefit society legal forms *, have made significant use of these schemes when using community shares - a practice wherein people pool capital in their co-operative to do things like generate renewable energy, take ownership of local assets, or start a community enterprise. Since 2012 communities have invested over 100 million in more than 300 community share offers. 1 1.3 Through a range of activities, including working with government to run the Community Shares Unit (CSU), we have supported the growth a vibrant community co-operative sector and community shares market. Thus, along with the hundreds of community co-operatives we represent, and our CSU, we are stakeholders in policy for tax-advantaged venture capital schemes. 1.4 In this response we focus on the implications of proposed changes in Advance Assurance (AA) for this core interest group of co-operative and community benefit societies (hereafter referred to collectively as societies ), and those who advise them. 2 Question 2. Which tax-advantaged scheme or schemes have you used? 2.1 On recent years our members have made significant use of EIS (and SEIS) to support community investment in their ventures. With the welcome development of SITR, we are seeing growing use of this scheme as well. * Co-operative and community benefit societies are bodies corporate registered under the Co-operative and Community Benefit Societies Act (2014). In form and function they are specifically intended to allow people to work together to meet their needs and aspirations along co-operative lines. Their purposes, governance and uses of capital are subject to regulation by the FCA Mutuals Team. They are able to make use of a unique financial security called withdrawable share capital, used by members to invest in their society. 1 Community Shares Unit
2 3 Question 3. What would be the impact of increasing response times, including any increase in costs and / or administrative burdens? 3.1 This would increase timescales and costs associated with making a community share offer. This could be particularly problematic for societies need to act quickly to put a community buyout together in order to save an Asset of Community Value under the Localism Act. 2 4 Question 4. What would be the impact of withdrawing the advance assurance service? 4.1 We believe the complete removal of AA would have a number of negative consequences on the future development of the community shares market, community enterprise and social investment more broadly. All this would reduce the scope for people to benefit from co-operative ownership and control, limit communities ability to create social value, and thus reduce the prospects for the more inclusive economy our Prime Minister has ambitions to create. 4.2 Societies raising money through community shares and making use of EIS and SITR are by their very nature small enterprises facing considerable uncertainty. Community share offers tend to be used to raise start-up capital, so the societies involved are usually in their infancy. Furthermore these are ventures where ordinary members of the community are collectively acting as an entrepreneur. In these early days societies are run by volunteers, who together are taking a risk to try something new. These societies have little to no experience of the complexities of tax law. 4.3 Given these particular uncertainties for societies, AA and other sources of official reliability are instrumental in helping them move forward confidently towards their objectives. Thus we anticipate that the withdrawal of AA would increase uncertainty and risk for societies and communities, which would deter a range of economically and socially beneficial activities. 4.4 HMRC should particularly consider that the vast majority of people buying community shares are very unfamiliar with investments, business ownership and tax reliefs. The official nature of AA, when added to the tax reliefs themselves, helps these investors take the positive step to pool their money with others in their community. We are very concerned that these community investors will not rely on unofficial expert assurance to the same degree. This is partly because it is unofficial, and partly because societies making the share offers will have to be less full-throated in their statements on tax reliefs and projected returns on investment. Thus the removal of AA will deter some 2 http://www.legislation.gov.uk/ukdsi/2012/9780111525791/contents
3 broad-based, democratic participation by ordinary people in their local economies. 4.5 The community shares market is currently well served by a diverse group of professional advisers who specialise in co-operative and community development. This is a rather niche area, requiring an understanding of the values and principles of co-operatives as well as co-operative law, capital and business practices. In preparing this response we have asked these advisors to consider the implications of the removal of AA would have on their practice. Most expressed concerns that their professional liability and indemnity insurance costs would rise if they were required to provide unofficial expert assurance to societies. At the very least the costs for societies trying to use EIS and SITR will rise. Given the nature of societies, this is would be an unwelcome new burden. 4.6 But the impact could be even more severe. As the risks and costs of providing expert assurance rise, this activity could become the preserve of larger professional service providers that are able to employ fully qualified tax advisors and afford expensive liability and indemnity insurance. This will push out existing co-operative and community development professionals and create a new market in which only larger better financed societies are able to afford the expensive expert assurance on offer from a smaller pool of providers that are not specialists in this field. This would certainly not be good for competition, market diversity or for the creation of a more inclusive economy. 4.7 HMRC should also be aware that AA is part of the infrastructure upon which various policies and programmes are predicated. For example a Big Society Capital match-fund for community shares includes AA as one of its eligibility criteria. Meanwhile CSU guidance on community shares best practice encourages the use of AA in share offers where EIS and SITR are involved. No doubt there are other such arrangements that would come undone if AA is withdrawn. 5 Question 5: How could the advance assurance service be changed to focus on cases where there is greatest uncertainty? What would be the impact of such changes? 5.1 For the reasons set out in 4.2, HMRC should consider that cases involving smaller societies making community share offers are by their very nature full of uncertainty for the actors involved. Yet at the same time these are the cases where there is the greatest focus on social benefit alongside commerciality. If there is a way to focus AA on these and other similar cases then this could be very beneficial. 5.2 Our preference would be to limit AA to those entities that use one of the following socially regulated legal forms:
4 Co-operative society Community benefit society Community interest company Charitable company Charitable incorporated organisation 5.3 Another possible means of focusing AA in this way would be to limit its use to SITR. There would be a good rationale for doing so, given that this tax relief has been developed specifically to support social investment in inherently small social enterprises and charities that cannot make use of expensive professional services to the same extent that more commercially driven users of EIS and other VCSs can. 5.4 Note co-operative societies are not currently eligible for SITR and continue to make use of EIS. Co-operative societies are still subject to strict regulation regarding their purpose, their uses of capital and the returns they can pay to shareholders. Thus we have a strong preference that co-operative societies seeking EIS be able to use AA. 5.5 Yet another possibility would be to limit the availability of AA to investment offers below a certain threshold, on the basis that those enterprises issuing larger investment offers should be able to afford expert assurance. The vast majority of community share offers are made by societies seeking to raise less than 1 million in share capital, have projected turnovers of less than 5 million per annum and employ fewer than 50 people. 5.6 The least preferred option would be to focus AA on first time applications. 5.7 The impact of such targeting would be to support the continued developed of the community shares and wider social investment markets, and to help more people share in ownership and control of the economy. 6 Question 6. In what way could the advance assurance service be limited to discrete aspects of the rules? Please provide details of the impact on your business, particularly any increase in costs and / or administrative burdens. 6.1 Rules on excluded activities are the source of the greatest uncertainty for societies and those who advise them. This is partly because the rules change regularly. But it is also more fundamentally because in practice there are so many grey areas and circumstances where eligibility is finely balanced and subject to change. For instance, rules relating to the percentage of income earned from rents in a given period, or the distinction between leasing other uses of assets, can create significant uncertainty for societies that are formed to give communities control of local assets and enterprises (community owned pubs for example).
5 6.2 The degree of complexity involved in these cases is such that dialogue with HMRC AA officials is usually a necessity if all involved are to make a fair assessment of eligibility for a relief. 6.3 Thus there may be a case for limiting AA to consideration of excluded activities. However this might not be a favourable option as it could benefit enterprises determined to test the boundaries of the rules. Perhaps if AA was limited in one of the ways discussed in our answer to question 5, a further limiting of focus on excluded activities would be appropriate. 7 Question 7. How would a standard set of approved documents assist you? Would you be prepared to cooperate in devising a standard set of documents? Please provide details of any savings in costs and / or administrative burdens from using standard documents. 7.1 Such assistance would certainly be extremely valuable for societies. If this could be provided in a way which complements the ongoing sector-led work of the CSU to promote good understating and good practice, and engages practitioner groups such as our Co-operative Development Body Forum, this would be especially beneficial. 8 Question 8. Do you have any other suggestions to improve our advance assurance service? 8.1 It would be very helpful if HMRC could provide more access to tax relief specialists so that practitioners can engage in more informed dialogue as projects develop. 8.2 Longer term it may prove cost effective for HMRC to invest in a more customer-facing IT system to streamline AA and related processes. James Wright, Policy Officer james.wright@uk.coop 0161 214 1775 Co-operatives UK Holyoake House Hanover Street Manchester M60 0AS www.uk.coop
6 About Co-operatives UK Co-operatives UK is the network for Britain s thousands of co-ops. We work to promote, develop and unite member owned businesses across the economy. From high street retailers to community owned pubs, fan owned football clubs to farmer controlled businesses, co-ops are everywhere and together they are worth 34.1 billion to the British economy.