EIS Disqualifying Arrangements – the main purpose test has been fixed
We blogged at the end of May that we had been in touch with HMRC to ask that the main purpose test in the new EIS disqualifying arrangements rules be amended to reflect the "normal" formulation,
We blogged at the end of May that we had been in touch with HMRC to ask that the main purpose test in the new EIS disqualifying arrangements rules be amended to reflect the "normal" formulation, rather than referring to the main purposes of "any party" to arrangements.
We're very pleased to see that HMRC have followed through and amended the main purpose element of the new rules to reflect our suggested language, so that the clause now reads:
"(a) the main purpose, or one of the main purposes, of the arrangements is to secure—
(i) that a qualifying business activity is or will be carried on by the issuing company or a qualifying 90% subsidiary of that company, and
(ii) that one or more persons (whether or not including any party to the arrangements) may obtain relevant tax relief in respect of shares issued by the issuing company which raise money for the purposes of that activity or that such shares may comprise part of the qualifying holdings of a VCT,
(aa) that activity is the relevant qualifying business activity, and
(b) one or both of conditions A and B are met…"
HMRC kindly shared the revised clause with us before it was finalised, but specifically asked us not to put it on our blog(!) before it was considered in Parliament. It has now been approved as amended by the Public Bills Committee, so we can properly expect this to be the final form.
AND THE EIS LIMIT WILL BE £5m…
While on the subject of EIS, there was a late attempt to amend the limit on annual tax-advantaged venture capital funds raised by a company from £5m back to the £10m originally mooted by the government. Sadly it failed. Interestingly, HM Government's representative suggests that the need to get the EIS proposal through the EU state aid process was NOT the reason for reducing the limit. Yes. Right. We believe you. Here is the relevant extract from the Public Bill Committee proceedings:
"Amendment 43, tabled by Opposition Members, seeks to increase the annual investment limit for qualifying companies to £10 million. After a review of the evidence, we have concluded that £5 million is the appropriate figure at which to set the limit. It is the figure that most closely describes the equity gap at the present time. It is the figure at which a majority of companies could be expected to benefit. As with all taxes, we will keep this under review in case circumstances change.
Rachel Reeves: Could the Minister clarify whether the change was due to his analysis that £5 million was the correct limit, or had to do with state aid rules? If he thinks that the correct limit is £5 million, rather than the previous estimate of £10 million, is that consistent with the Rowlands report of 2009?
Mr Gauke: We have looked again at the evidence. The hon. Lady is right that there are state aid constraints in this area. I should point out that the increase to £5 million more than doubles the current limits and provides one of the most generous schemes in the European Union. The decision was also taken in light of concern that expanding the scheme to extremely large investments would lead to a reduction of smaller investments at the £2 million level, where the equity gap is more acute.
The weight of the evidence suggests that for the majority of businesses the shortfall in the supply of equity extended to around £5 million, with investment below £2 million remaining the point on the scale where the equity gap is most acute. There are some sectors and companies that require larger investments, and these will not be able to benefit from an annual investment of £10 million. However, they should still benefit from the increase to £5 million, and the Government’sUKinnovation investment fund is in place to provide sectoral support when it comes to those in the £2 million to £10 million range. Obviously the Government will keep the situation under review to ensure that Government support remains effective in helping to address the equity gap."
(For the source, see here)
We're very pleased to see that HMRC have followed through and amended the main purpose element of the new rules to reflect our suggested language, so that the clause now reads:
"(a) the main purpose, or one of the main purposes, of the arrangements is to secure—
(i) that a qualifying business activity is or will be carried on by the issuing company or a qualifying 90% subsidiary of that company, and
(ii) that one or more persons (whether or not including any party to the arrangements) may obtain relevant tax relief in respect of shares issued by the issuing company which raise money for the purposes of that activity or that such shares may comprise part of the qualifying holdings of a VCT,
(aa) that activity is the relevant qualifying business activity, and
(b) one or both of conditions A and B are met…"
HMRC kindly shared the revised clause with us before it was finalised, but specifically asked us not to put it on our blog(!) before it was considered in Parliament. It has now been approved as amended by the Public Bills Committee, so we can properly expect this to be the final form.
AND THE EIS LIMIT WILL BE £5m…
While on the subject of EIS, there was a late attempt to amend the limit on annual tax-advantaged venture capital funds raised by a company from £5m back to the £10m originally mooted by the government. Sadly it failed. Interestingly, HM Government's representative suggests that the need to get the EIS proposal through the EU state aid process was NOT the reason for reducing the limit. Yes. Right. We believe you. Here is the relevant extract from the Public Bill Committee proceedings:
"Amendment 43, tabled by Opposition Members, seeks to increase the annual investment limit for qualifying companies to £10 million. After a review of the evidence, we have concluded that £5 million is the appropriate figure at which to set the limit. It is the figure that most closely describes the equity gap at the present time. It is the figure at which a majority of companies could be expected to benefit. As with all taxes, we will keep this under review in case circumstances change.
Rachel Reeves: Could the Minister clarify whether the change was due to his analysis that £5 million was the correct limit, or had to do with state aid rules? If he thinks that the correct limit is £5 million, rather than the previous estimate of £10 million, is that consistent with the Rowlands report of 2009?
Mr Gauke: We have looked again at the evidence. The hon. Lady is right that there are state aid constraints in this area. I should point out that the increase to £5 million more than doubles the current limits and provides one of the most generous schemes in the European Union. The decision was also taken in light of concern that expanding the scheme to extremely large investments would lead to a reduction of smaller investments at the £2 million level, where the equity gap is more acute.
The weight of the evidence suggests that for the majority of businesses the shortfall in the supply of equity extended to around £5 million, with investment below £2 million remaining the point on the scale where the equity gap is most acute. There are some sectors and companies that require larger investments, and these will not be able to benefit from an annual investment of £10 million. However, they should still benefit from the increase to £5 million, and the Government’sUKinnovation investment fund is in place to provide sectoral support when it comes to those in the £2 million to £10 million range. Obviously the Government will keep the situation under review to ensure that Government support remains effective in helping to address the equity gap."
(For the source, see here)