Venture Capital Advance Assurance Service Changes & Proposal for new EIS knowledge-intensive Fund

Tue 13 Mar 2018

Following on from the welcome news from last year’s Autumn Budget about increased limits for venture capital tax relief (which take effect from 6 April 2018 as set out in our prior blog [link here: https://blogs.mazars.com/letstalktax/2017/11/enterprise-investment-scheme-limits-doubled-but-relief-becomes-more-targeted/ ] HM treasury has published information on  changes taking place in relation to the advance assurance process for these tax-advantaged venture capital schemes.

The schemes to which this new announcement relates are:

• the Seed Enterprise Investment Scheme (SEIS);
• the Enterprise Investment Scheme (EIS);
• Venture Capital Trusts (VCTs); and
• The Social Investment Tax Relief (SITR).

Increased demand for such relief, additional complexities introduced by changes in legislation (most notably in 2015) and headcount reduction at the HMRC Small Company Enterprise Centre (SCEC) has resulted in significant delay in processing times. A 10 week wait to get applications allocated to an HMRC officer was becoming the norm and the increasingly protracted process was not at all palatable to companies seeking to manage investor expectations.

Following a consultation, the Government has now seemingly acknowledged that streamlining is required. This is welcome, as the mounting backlog of applications was only going to increase as more companies apply for advance assurance for secondary fundraising rounds when the new higher limits kick in from 6 April 2018.

More HMRC officer resource has been deployed to SCEC to help speed up the processing of applications and there is a commitment to continue to operate the advance assurance process.

In particular, companies and their advisers should now heed:

• Increasingly the process will be digitalised. (However no timeline has been set for this and the current online application does not cover all the statutory criteria so additional correspondence and paper certificates are likely to remain for the time being);
• As currently, an assurance application will only be considered by HMRC where all the information about a proposed investment is provided (discrete aspects will not be looked at in isolation);
• This is a discretionary and non-statutory service so HMRC are not obligated to provide an opinion and may decline to do so in certain cases;
• If a company is relying on a particular interpretation of the law to support its application, it should provide a full technical analysis of the relevant law and how its circumstances meet that law. – For which read seek professional advice as this is where expert knowledge and experience can provide value-add support that can accelerate and help clear the assurance position.
• The publication announces that HMRC will now not provide assurance on speculative applications and will only provide an opinion where the application names the individual(s), fund manager(s) or other funder(s) who are expected to make the investment. – This is a new level of detailed disclosure not previously required at the assurance stage. HMRC does not expect investment offers to have been formalised (many will no doubt be contingent on the relief advance assurance being obtained) but it does expect the company to have approached potential investors and to be able to set out details of the likely investment that would be closed upon receipt of such advance assurance.
• As highlighted in our previous blog, HMRC will apply  new risk to capital anti-avoidance criteria which will come into effect from 6 April 2018 Applications in respect of investment to be made from this date should set out evidence regarding the genuine risk to capital that investors will be exposed to with the applicant company. HMRC will not provide an advance assurance opinion where they conclude the proposed investment is part of a capital preservation arrangement. (Sadly the test is quite subjective in this regard.)
• HMRC are working to improve its written guidance and this will include publishing a checklist of supporting documents that need to be submitted to HMRC as part of the advance assurance submission.

Further consultation on a new EIS knowledge-intensive fund

In addition to the above published Government response, a new consultation has been launched (on 13 March 2018) in relation to an EIS knowledge-intensive fund for financing growth in innovative firms. This seeks to explore why some knowledge-intensive businesses are unable to obtain the sustained ‘patient’ capital funding they require. This consultation states that the Government does not intend to introduce any new scheme but envisages a new fund model that would build on existing EIS rules. Specifically it envisages retaining the requirement for equity investment into ordinary shares and a three year holding period.

Amongst the proposals offered out for stakeholder response are:

• A dividend tax exemption to reward ‘patient’ investment;
• Changes to Capital Gains Tax (CGT) relief to encourage serial re-investment in knowledge-intensive businesses;
• Extended carry-back of income tax or CGT deferral; and
• Enhancements to access to up-front tax relief.

This consultation closes on 11 May 2018 and the expectation must be that the responses will shape an announcement in the Chancellor’s Autumn Budget later this year.

Mazars experts will be pleased to support you with your venture capital advanced assurance support needs. For further information please contact Liz Hunter.