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We at Cooper Faure believe that start-ups at the heart of innovation should not be penalised for being unable to afford to employ permanent staff, and we are campaigning against this change. Given the government’s desire to be a UK world leader in enterprise and innovation, this measure is counter-intuitive to that goal.
To make your voice heard, please sign our Parliamentary Petition here.
If you have ever wondered whether there is an element of your business activity that would qualify for R&D tax relief, please contact us a tax@cooperfaure.co.uk arrange an initial consultation with one of our team of specialists.
As ever, the Budget speech contains a quick reference to changes to the tax regime and it takes a detailed review the full Budget 2018 report to understand the true implications. This newsletter, the first of three, looks at the proposals for changes R&D tax relief for small and medium-sized enterprises.
The Treasury opines that HMRC has prevented fraudulent claims totalling £300m under the SME R&D Tax Credit scheme. This scheme enables a qualifying loss-making company to receive a tax credit payment. However, there is no reference to the timeframe that the £300m covers.
To counter this, the proposal is that, from the 1st April 2020, the amount of payable R&D tax credit will be restricted to three times the company’s total PAYE and NICs liability for that year. The government will hold a consultation on this proposal.
Let us be clear, there is without doubt an element of fraudulent claims under the SME R&D Tax Credit scheme. We have heard horror stories. The current ‘no win, no fee’ culture of many service offerings combined with a lack of transparency has enabled a small number of disreputable providers to thrive.
However, for the start-up, contracting out innovation work when finances allow rather than employing staff often makes business sense. The ability to recover 33.5% of qualifying spend as a payment from HMRC that often only amounts to a few thousand pounds but can provide vital oxygen to move the business to the next stage.
At a time when the aim is for Britain to lead the world in technological innovation, we strongly oppose this proposal and will be outlining our views in the consultation.
SME is such a broad term covering business with between 0 and 249 employees. In 2017, there were 5.695 million businesses in the UK of which over 99% were SMEs and 5.5 million businesses were classed as micro-businesses with between 0 and 9 employees and only 24% were employers.
The real scandal is that, according to official statistics, in the 2016-17 tax year, there were just 33,880 claims made under the SME R&D scheme. Are we really saying that less than 1% of SME businesses are undertaking any R&D?
From our client portfolio, roughly 25% have an element of qualifying R&D across a wide profile of business sectors. Indeed, at CooperFaure we have made our own successful R&D tax relief claim.
Fraud is serious and we fully support a considered approach to effectively combat it. However, the proposal of an arbitrary arithmetic formula to combat it smacks of laziness and the pervading law of unintended consequences will stifle innovation.
£300m is a significant amount. However, in 2016-17, the tax credit element within the 33,880 claims totalled £1,820m and, on the most conservative estimates, this means that £10 billion of R&D tax relief entitlement has gone unclaimed.
At CooperFaure, we are on a mission to demystify, simplify and educate on the generous UK tax incentives to support business innovation.
If you have ever wondered whether there is an element of your business activity that would qualify for R&D tax relief, please contact us a tax@cooperfaure.co.uk arrange an initial consultation with one of our team of specialists.
In the 2018 UK Budget, the Chancellor of the Exchequer, Philip Hammond, was able to make some eye-catching announcements including:
However, as ever, there some announcements which will adversely impact a wide cross-section of tax payers – changes to the off-payroll working in the private sector, Entrepreneurs’ Relief, R&D tax relief for small and medium-sized enterprises and to Letting Relief and the final period exemption in calculating the Capital Gains Tax private residence relief.
Our newsletter in the morning will explore these changes in more detail.
In the meantime, if you have any questions on the 2018 UK Budget, please contact us at tax@cooperfaure.co.uk.
The UK Chancellor of the Exchequer, Philip Hammond, has announced that the 2018 Budget Statement will be presented on Monday 29th October.
As Brexit looms closer and with Theresa May announcing that “austerity is over” and pledging a major uplift to the NHS budget, the Treasury is under real pressure. Measures that are said to be under consideration include an effective increase in Income Tax by freezing the Personal Allowance and Higher Rate threshold, reducing the VAT compulsory registration threshold from £85,000, cutting the annual tax-free pension allowance from £40,000 and targeting contractors working in the private sector through Personal Service companies.
At CooperFaure, we will once again be providing a live Twitter feed followed by two newsletters, one that afternoon highlighting the key announcements and another on Tuesday morning looking behind the statement into the detail of the Budget Report. Invariably, there will be a devil buried in the detail!
If you have any questions or concerns that arise from the 2018 Budget, please contact us at tax@cooperfaure.co.uk.
The 2016 Budget included a clause on future measures to tackle the current and historic use ‘disguised remuneration’ schemes. These are generally schemes that involve individuals being paid in loans through structures such as an offshore Employee Benefit Trust (EBT) or Contractor Loans. In both instances, whilst the loans are theoretically repayable, the Loan Agreement is drawn up in a such a way to ensure that, in reality, these loans are never repaid.
The clause ended “…this will include a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding on 5th April 2019.”
Two years on and this date is drawing close, especially considering that it is the last date of the current 2018-19 tax year.
The HMRC has assured everyone that submitted their information to request a settlement by 30th September that “you will receive a response which will allow you sufficient time to settle ahead of the April 2019 Loan Charge”.
The question is what constitutes “sufficient time”? In our view, this has to a minimum of three months. In practice, this means that HMRC need to issue settlement offers before the Christmas holiday season.
In a landscape dominated by Brexit, we have a real concern as to whether this is going to be achievable by HMRC and to what the implications will be if a loan is outstanding on 5th April 2019 despite the best efforts of the tax payer. From this perspective, we are looking to the Budget at the end of the month to see if there is any movement on this.
On the settlement terms, faced with the real prospect of families being driven into bankruptcy, there has been a softening in tone from HMRC.
For someone with current earnings of up to £50,000 and who is no longer participating in a tax avoidance scheme, you can request time to pay of up to five years without needing to provide detailed information on your circumstances.
If your income is higher or you need a longer payment period, HMRC say “we will work with you to agree a suitable arrangement”.
At CooperFaure, we are representing a number of clients working under a raft of these schemes. If you are concerned about your situation, please contact us at tax@cooperfaure.co.uk for a free and informal consultation.
As the deadline for the paper filing of the 2017-18 approaches at the end of October, one frequent question that we asked is “I am paid a PAYE salary and owe less than £3,000 in tax on my self-assessment, so why can’t I pay my tax through my tax code?”
On the face of it and in the narrative of the both the online and paper tax returns, there are three simple conditions that all have to be met to allow the self-assessment bill to be paid through your PAYE tax code:
However, there are three further conditions that need to be met:
It is this last condition that often prevents your self-assessment tax being collected via your PAYE code.
Take, for example, someone on a £20,000 salary in the current tax year with the standard Personal Allowance is £11,850, the total PAYE Income Tax due will be £1,628.20. In this scenario, the self-assessment tax can only be collected through the PAYE tax code if it is less than £1,628.20.
The figure if the salary is £24,000 would be £2,428.20 and £26,860 is the PAYE threshold where the Income Tax exceeds £3,000 and, therefore, you can be sure that a self-assessment bill of up to £3,000 can be collected through the PAYE tax code.
As the personal tax season comes to the fore, at Cooper Faure, we have a team of experts who can provide guidance and support. For further information, please contact us at tax@cooperfaure.co.uk.
Policy objective
The government have begun the restriction on the amount of Income Tax relief landlords can get on residential property finance costs, such as mortgage interest, to the basic rate of tax. This is due to their belief that this method will make for a fairer tax system.
This will ensure that landlords with higher incomes no longer receive the most generous tax treatment. To give landlords time to adjust the government has introduced this change gradually from 6th April 2017 over 4 years.
Who is likely to be affected?
Individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest), excluding where the property meets all the criteria to be a furnished holiday letting.
General description of the measure
This measure will restrict relief for finance costs on residential properties to the basic rate of Income Tax. This will be introduced gradually from 6th April 2017.
Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
Landlords will be able to obtain relief as follows:
If you are a landlord and are unsure how these restrictions will affect you please do not hesitate to contact us at tax@cooperfaure.co.uk
Here is a useful an overview which should help you to better understand what the Enterprise Investment Scheme is and whether or not your eligible to apply for one.
Enterprise Investment Scheme provides the investors with a tax relief on their investment and has been made available by the government to aid growth. The investors receive a tax relief for the amount invested and in turn acts as an incentive, easing the process to attract investors. It is one of four schemes available under the venture capital schemes.
The following applies under EIS:
There are certain rules that you must follow to ensure your investors receive their tax relief. These rules must also be followed for at least 3 years after the investment has been received.
The money received from the investor is limited to be spent on qualifying business activities:
If more than 20% of you trade includes any of the following it does not qualify:
The money raised through EIS must be used within 2 years of the investment or if trade has not commenced it is on the start date of trading. The key is to use the money to grow your business, it cannot simply be used to purchase another business. Therefore, growth can be for example an increase in revenue, client base or the number of staff. This is part of the risk to capital condition that was introduced this summer. This condition also includes that the investment should be a risk to the investor’s capital and therefore within the agreement between the company and the investor there cannot be arrangements in place to reduce the risk. If the investment is in any way protected, for example by assured future income streams or capital repayment, the investment is unlikely to meet the risk condition. For more information regarding the risk to capital condition please click here – https://cooperfaure.co.uk/risk-to-capital-condition/).
Additionally, in order to qualify for the scheme your business must be permanently established in the UK without being on the stock market. Additionally, the company cannot be controlled or control another company.
To apply for EIS a compliance statement (EIS1) along with the following documents must be submitted, per share issue once a minimum of 4 months qualifying business activities has occurred:
If successful you will receive the authority to issue certificate (EIS2) and compliance certificate (EIS3) from HMRC. The EIS3 certificate must be passed on to the investor as without it they will not receive their tax relief.
In the past we would have strongly recommended to apply for Advanced Assurance as it provides you with a confirmation if you will be eligible for EIS before submitting EIS1. However, the HMRC has recently amended the requirements and you are no longer allowed to provide speculative plans within the Advanced Assurance application (EIS(AA)). Therefore, you must have particular investors in mind before submitting the EIS(AA). This has removed the ability to use the Advanced Assurances as a mechanism to attract investors by showing that you will be eligible. Nevertheless, if the investor is reluctant to commit we would still recommend to use EIS(AA) but you should bear in mind that this will prolong the process.
For further information please visit the HMRC’s website: https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme
You can also listen to an interview of Jon Cooper on this topic, in our blog, here – https://cooperfaure.designmindshost.com/eis-tax-relief-on-investments/(opens in a new tab)
At CooperFaure, we have vast experience of helping businesses to secure investments and, in particular, benefit from government schemes. If you have any questions regarding Venture Capital Schemes, please email us at welcome@cooperfaure.co.uk.
The deadline to declare under the Requirement to Correct (RTC) legislation is fast approaching. RTC is the statutory obligation for UK taxpayers with overseas assets to correct any issues with their historic UK tax position. Those who fail to comply by 30th September 2018 face potentially severe financial penalties.
RTC applies to any taxpayer with undeclared UK Income Tax, Capital Gains Tax or Inheritance Tax on overseas assets.
Many taxpayers may not be aware that they have an obligation under this legislation. Renting out a property abroad, transferring an asset between countries or renting out a UK property whilst living overseas are examples that could result in a tax liability in the UK.
The key driver to this legislation is that from 1st October 2018, the UK is one of over one hundred participating countries that will be sharing data under the Common Reporting Standard to augment tax transparency.
The Common Reporting Standard will significantly boost the ability of HMRC to detect offshore non-compliance and, aligned with this, the HMRC will apply the Failure To Correct measures which allows them to apply penalties including:
As a result, we urge anyone with offshore assets to review their affairs to ensure they have been and will continue to be wholly tax compliant.
Offshore assets that typically could generate a tax liability include:
If you discover that you have any undeclared tax due on offshore assets or on UK property income whilst living abroad, it is absolutely essential that you notify HMRC by 30th September of your intention to make a declaration. Once this notification is made, you have ninety days to make the full disclosure and pay any tax owed.
If you are unsure whether a taxable event has occurred, we strongly recommend that you contact your tax advisor for guidance.
At CooperFaure, we are working with clients on these matters and, if you would like to arrange an initial consultation discuss your circumstances, please email us at tax@cooperfaure.co.uk.
As we reach halfway through the 22nd self-assessment tax return filing season, we still find that some of the most basic questions need a bit of thought before answering. This is especially prevalent when considering the tax obligations of a company director.
How would a company director know if they need to file a self-assessment tax return?
Firstly, it is mandatory for a company director to file a tax return with the HMRC if a return notice has been issued.
Secondly, it is also mandatory for a director to notify the HMRC if they have a liability to tax for a particular year of assessment. This notice must be sent to the HMRC by 5th October following the end of the year assessment. If the HMRC are not notified the director becomes liable to penalties.
However, what if a self-assessment tax return notice has not been issued by the HMRC to a director and they do not have a tax liability?
The HMRC’s online guidance states that a director must send in a return if in the last tax year they were an active director. However, if they were the director of a non-profit organisation, such as a charity, and they did not receive any pay or benefits from being a director they will not be required to complete a tax return.
Discretion is advised however as in some case the HMRC has been known to insist that a director file a self-assessment tax return even though a return notice has not been issued and there is no further tax liability for the year, in accordance with the above guidance.
Our recommendation is for all directors to register for the filing of a self-assessment tax return as we’ve often found that our clients have been entitled to a tax rebate; either from gift aid payments, pension contributions or un-reimbursed travel expenses.
If you are a director and are unsure if you fit the criteria to file a self-assessment tax return or if you have been issued a notice by the HMRC but feel you do not fit the criteria please do not hesitate to contact us at tax@cooperfaure.co.uk
Within this newsletter we will share the latest updates on Making Tax Digital (MTD) including who it will affect, how to ensure you are compliant and who are the MTD-compatible software suppliers.
To read the latest regarding MTD as of October 2021, please read out blog post here.
MTD was originally postponed, however the mandatory start date for MTD for VAT has been set, 1st April 2019. This requires any UK business who is registered for VAT with a turnover above the VAT threshold of £85,000 to submit their returns digitally from their first VAT Return starting on or after 1st April 2019. This applies for any business registered on the standard or flat rate scheme.
If a company’s turnover falls below the threshold after 1st April 2019 and they stay VAT registered they will still be required to submit VAT returns digitally. This applies to all businesses unless they deregister or fall into liquidation.
All records must be kept digitally and the returns must be submitted using any of the software suppliers working alongside the HMRC in support of MTD for VAT. To find out who these suppliers are please click here.
From experience, we strongly recommend for any company who is VAT registered to commence digital reporting prior to 1st April 2019 due to the increase in transparency and efficiency it has brought to our own business and clients.
Xero is one of our main accounting software’s which we use for our clients at CooperFaure and we are delighted that Xero is one of the software suppliers working alongside the HMRC in support of MTD. Therefore, Xero will automatically upgrade Xero’s VAT functionality to ensure that we will be using MTD-compatible software come 1st April 2019 with no upgrade fees attached. Due to this our clients are MTD ready and this is the same for anyone else currently using Xero.
At present numerous companies are still keeping their records and information on non-digital platforms, for example within Excel spreadsheets and then manually submitting the VAT Returns on the HMRC online portal or by post. In comparison, software that is compatible for MTD will integrate with HMRC directly to submit VAT returns. This ensures that the information equating the totals on the VAT returns will be much more easily accessible within digital software. It will increase transparency as a clearer audit trail will be available and copies of receipts and transactions can be kept in one place. Using software to connect directly will also minimise human error as well as increase efficiency within the business and between businesses and their agents.
From April 2020 all data for the VAT returns must be transferred digitally between each software within the business. This means that any data within a spreadsheet must be connected to a compatible MTD bridging software to pull the information digitally to HMRC. HMRC have announced that they will not be providing their own bridging software for businesses to use. However, they are providing Application Programming Interfaces (APIs) to enable commercial software developers to set up the integration between their software and HMRC.
There is no requirement to keep any additional business records because of MTD, but the records that are kept must be done so digitally in order to be compliant. Additionally, when MTD come into action the VAT return periods and the payment deadlines will not change.
Income Tax and Corporation Tax for MTD has been placed on hold and will not be compulsory until at least April 2020, but the option is available to voluntarily take part in the Income Tax pilot. HMRC has made a software available for agents or clients themselves to send Income Tax updates digitally. This has been put in place as a substitution to filing a Self-Assessment tax return. You can sign up to use this service if at least one of the following applies:
To sign up for this service, please click here.
Please click here to see which software providers connect can send Income Tax updates.
We at CooperFaure fully support MTD and can see the long-term positive effects it will have upon individual businesses and for the economy as a whole. We strongly advice everyone to take this opportunity to streamline their businesses and make the most of the new innovative technology that is now available. We believe this is a small step into the future of accountancy and we are excited to be a part of it.
If you have any queries or would like any assistance to ensure you are ready for MTD, please do not hesitate to contact us on tax@cooperfaure.co.uk.
In the UK, we are in the fortunate position where most people earning a PAYE salary or wage or receiving a pension do not need to complete a tax return.
However, each year, as working and lifestyle patterns change, the number of tax returns increases. More than 11,500,000 were filed for the 2016-17 tax year.
For the 2017-18 that ran from 6th April 2017 to 5th April 2018 tax year, if any of the following apply to you, a tax return is required:
In some circumstances, you would need to submit a tax return to claim a tax rebate from HMRC. For instance, on:
If you have not completed a tax return before, for all except sole traders and partnerships, register online with HMRC at: https://online.hmrc.gov.uk/shortforms/form/SA1
For a new sole trader, register with HMRC at: https://online.hmrc.gov.uk/registration/newbusiness
For a new partner, register with HMRC at:
https://public-online.hmrc.gov.uk/lc/content/xfaforms/profiles/forms.html?contentRoot=repository:///Applications/SA_iForms/1.0/SA401_20167&template=SA401_en_1.0.xdp
If you are the ‘nominated partner’, you need to register both yourself and the business partnership at:
https://online.hmrc.gov.uk/registration/newbusiness
HMRC target to post your Unique Taxpayer Reference that enables you submit a tax return within two weeks of registration.
With this you can either prepare and file a paper tax return before the deadline of 31st October 2018, enrol for the HMRC online service that grants a longer deadline of 31st January 2019 or appoint a tax advisor to act as your Agent.
To appoint CooperFaure, we would need is your Unique Tax Reference, National Insurance Number and Post Code to act on your behalf.
If you would like to arrange an initial free consultation to discuss your tax affairs or would like any further information, please email us at tax@cooperfaure.co.uk
A project may qualify for R&D tax relief if it has a result that creates a breakthrough in knowledge or competence within your field. Additionally, this may also be the case if work is carried out to resolve an uncertainty.
Developing a new product is not sufficient enough to qualify. The key is the advancement achieved to the field as a whole and not solely to your own company. Therefore, an important condition that must be met is that the answer is not already common knowledge and that it cannot easily be resolved by a professional.
It can be anything from software development to a new internal process within your company.
How to show that your project qualifies for R&D tax relief
One of the key inquiries HMRC will be questioning is, has there been a technological or scientific advancement. Therefore, it is vital to establish exactly what the research and the development you have or will carry out has achieved and not just the end product. What specific details within the project has produced an advancement?
For example, developing an app for your company will require research and development in order to produce this app. But this is not sufficient enough to qualify. However, if you develop a new feature within the app that has not been produced before it may qualify.
The next question is regarding uncertainty, and this also refers to technological and scientific uncertainties. What have you faced and overcome during the projects timeline? Uncertainty that can be resolved via brief discussions internally or resolved easily by a professional within the field does not qualify. There is a requirement to be proof that it has not been done before and cannot not be easily worked out.
The processes and procedures used throughout the project needs to be explained in detail in order for HMRC to establish if the two questions above have been answered. The language used needs to be comprehensible and not only clear for a professional within the field. Elaborate further with evidence what has been done within the filed and not solely just your own company. Be sure to include what success and failures other professionals have had to prove that the answer is not readily available. If there is not sufficient information available publicly, proof of background, experience and knowledge along with a detail explanation of your case would be required.
The project or product developed does not need to be successful in order to receive R&D tax relief. This is because the focus is on the advancement made and the work carried out to resolve the uncertainties. Additionally, the uncertainty itself is not required to be worked out. So long as it can be demonstrated that the goal was a technological advance, even if the project ends in failure, it would still qualify for the relief.
The costs that qualify for R&D tax relief
The tax relief that is provided is directly linked to the costs incurred to achieve the advancement and the work required to overcome the uncertainty. For example, qualifying costs include staff costs, external staff, costs of materials and resources used, software used and prototypes etc. The key is that the costs have to be directly related to the R&D work carried out. If not 100% of the cost is used for the project then a reasonable proportion needs to allocated.
Therefore, we would recommend to keep a record of all work carried out directly related to the project and the associated costs.
To further assist you with establishing if your company is eligible for R&D tax relief, answer our 6 simple questions.
If you would like to arrange an initial consultation that is free and without obligation to discuss your circumstances, please email us at tax@cooperfaure.co.uk.
Dispatching goods within the European Union (“EU”) is relatively straightforward as the EU operates under a single market which guarantees four key freedoms across the twenty-eight members states. These are the free movement of goods, capital, services and persons.
Whilst the Brexit negotiations are far from concluded, it seems that the UK government is looking for an arrangement that will allow the free movement of goods to continue. In any event, the current rules are set to remain until the end of the transition period.
In practical terms, this means most shipments can be dispatched to other member states of the EU without special customs documentation. There are exceptions, such as sales to international organisations which would be treated as exports, and exclusions such as goods subject to export licensing controls, such as military hardware, and goods classed as excise products, such alcohol, tobacco and hydrocarbon oils.
Goods in movement within the EU are termed as being dispatched upon leaving the state of origin of the goods, and as arrivals when entering the member state acquiring them rather than exports and imports.
Goods dispatched within the EU between VAT-registered businesses are not subject to VAT. This also applies to goods imported into the EU that have been released for free circulation following payment of import duties.
However, goods dispatched to a customer in another EU country who is not registered for VAT in that country and where the seller is responsible for delivery, are treated as ‘distance sales’. This is the case for mail order or internet sales to private consumers in another EU country.
For distance sales, VAT is charged UK rates in the normal way. However, each member state has a ‘distance selling threshold’ and if the value of sales to that country exceeds this limit, the seller must register for VAT in that country, and charge their rate of VAT or the equivalent tax on sales to that country. The current thresholds can be found here.
Customs declarations are not generally required for goods shipped within the EU but traders must raise VAT invoices and retain evidence of shipment.
Every business trading within the EU must declare these sales on its VAT return. If the sales of goods exceed the applicable exemption threshold during a calendar year, the business must also submit Intrastat returns each month.
The Intrastat thresholds are reviewed annually and are currently £1.5 million for Arrivals and £250,000 for Dispatches.
Whilst the levels remain below these thresholds, the trader is only required to declare the value of Dispatches and Arrivals on the normal VAT return.
Once these thresholds are exceeded, there is a requirement to submit additional monthly declarations to HMRC.
The EU has a trade agreement in place with the European Free Trade Association (EFTA) member states of Iceland, Liechtenstein, Norway and Switzerland which broadly applies the same terms for the free movement of goods.
The EU principle of ‘free circulation’ covers not only goods produced in the EU but also goods imported from outside the EU once all import formalities have been completed and import duty and any other customs charges paid.
Free circulation goods can then move within the EU and EFTA states without duty with the exception of goods that require a licence or carry an excise duty.
If you have any concerns of would like any further information, please contact us at tax@cooperfaure.co.uk
For companies looking to raise funds based by a venture capital scheme and for investors looking to benefit from the tax relief, HMRC have introduced a key new condition – the risk-to-capital.
This condition is being applied to the Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT).
The Risk-to-Capital Condition is made up of two components both of which must be met:
Under the first part of the condition, HMRC will be considering whether the company in its business plan has the clear ambition grow and develop its trade over the long term.
HMRC will look at some general indicators, such as increasing revenue, customer base and employees, together with those specific to the applicant’s business plan.
Essentially, HMRC are looking for evidence that investment is both planned to be and, in reality, is employed to support the company to grow and develop.
Under the second part of the condition, HMRC will be considering whether, at the time the investment is made, a given investment presents a significant risk of a loss of capital to the investor of an amount greater than the net return.
Essentially, HMRC will be evaluating the commercial risk of the company failing in the market.
The central issue with the Risk-to-Capital Condition is, as HMRC concedes in their internal manual, that there are no prescribed definitions of ‘growth and development’, ‘long term’ or ‘significant risk’.
As a result, this makes this a subjective decision based on interpretation. As HMRC stated on a recent webinar, “Each inspector will look at an application and view it on its merits. Each inspector obviously can interpret things in a different way……”
Venture Capital Schemes have been designed to encourage the patient capital investor. In this light, HMRC would be expecting the investor to hold their shares for longer than the three-year minimum requirement.
In addition, any indication that the future operation of the company could be compromised to enable investors to exit their investment would be seen as contrary to the objective to grow and develop in the long term.
Broadly speaking, a company that is created solely to deliver a project or a series of projects would not be considered to have objectives for long-term expansion.
This type of company, often referred to as a Special Purpose Vehicle, that would generate a certain amount of money once the project is complete, either through a steady income stream or gains on disposal of the asset created, would not be eligible for the tax reliefs under Venture Capital Schemes.
In evaluating the net investment return from a risk perspective, HMRC will include any income, such as dividends, interest payments or other fees, as well as capital growth and, potentially, the amount of upfront Income Tax relief the investors would be eligible to claim.
If the investment is in any way protected, for example by assured future income streams or capital repayment, the investment is unlikely to meet the risk condition.
However, the potential future return to an investor from the genuine growth the company expects to realise should the company be successful is not considered. As long as there is a significant risk at the time of the investment, the prospect of potential large returns in the future is not compromised by the risk condition.
It is important to remember that HMRC has the right to clawback the tax reliefs granted under Venture Capital Schemes either to the company or an individual shareholder if all the conditions are not met throughout the relevant period. In broad terms, the relevant period is three years from the investment.
As a result, it is not simply a matter of presenting a qualifying case at the time of applying for the initial tax relief, it is also about delivering on the plans and strategies through the relevant period.
If you have any questions or concerns on the Risk-to-Capital condition or Venture Capital Schemes in general, please email us at tax@cooperfaure.co.uk.