HMRC have today published their draft guidance in relation to new the ‘Risk-to-capital’ condition, which is a ‘gateway test’ to be introduced for SEIS, EIS and VCT investments, as set out in the draft Finance Bill 2017-18 which was published on 1 December 2017.
This follows the announcements made in the Autumn Budget 2017 regarding tax advantaged venture capital schemes and HM Treasury’s response to the Patent Capital Review which was conducted during 2017.
The draft guidance published here provides detail on how HMRC will interpret and apply the new ‘Risk-to-capital’ condition in relation to new advance assurance applications. The draft guidance will be revised shortly after Royal Assent to the Finance Bill 2017-18 (which is expected in Spring 2018) when the new Risk-to-capital condition becomes law.
The ‘Risk-to-capital’ condition is a principles-based test where HMRC will take a view as to whether an investment has been structured to provide a low-risk return for investors. There are two parts to the condition and both parts must be met; the first relates to the intention for the company to grow and develop, and the second to the risk to the investor of loss of capital:
a) the company in which the investment is made must have objectives to grow and develop over the long term; and
b) the investment must carry a significant risk that the investor will lose more capital than they gain as a return (including any tax relief)
When considering whether both parts of the condition are met, HMRC will take into account all factors and context relevant to the company at the time the investment is made; that is, when the shares (or securities, for some VCT investments) are issued. The legislation contains a non-exhaustive list of the factors including:
- the extent to which the company’s objectives include increasing the number of its employees or the turnover of its trade,
- the nature of the company’s sources of income, including the extent to which there is a significant risk of the company not receiving some or all of the income,
- the extent to which the company has or is likely to have assets, or is or could become a party to arrangements for acquiring assets, that could be used to secure financing from any person,
- the extent to which the activities of the company are subcontracted to persons who are not connected with it,
- the nature of the company’s ownership structure or management structure, including the extent to which others participate in or devise the structure,
- how any opportunity for investment in the company is marketed, and
- the extent to which arrangements are in place under which opportunities for investments in the company are or may be marketed with, or otherwise associated with, opportunities for investments in other companies or entities
The guidance includes various examples which can be found here.
HMRC will decline to provide advance assurances from 4 December 2017 for investments that, taking into account all the facts available to them, appear likely to fail the ‘Risk-to-capital’ condition.
