Summary of measures
Further improvements to the Corporate Venturing Scheme were announced today, following consultation on draft clauses. The Scheme will be introduced from 1 April 2000.
1. The new Corporate Venturing Scheme is a tax incentive scheme which is being introduced to encourage companies to invest in small higher risk trading companies and to form wider corporate venturing relationships. The Scheme will allow investor companies to:
– obtain corporation tax relief at 20 per cent on amounts invested in new ordinary shares held for at least 3 years;
– defer tax on any gain made on corporate venturing investments which are reinvested in another shareholding under the Scheme;
– claim relief against income for capital losses (net of corporation tax relief) on disposals of shares.
2. As a result of consultation on draft clauses published last December further improvements have been made to the Scheme, as follows:
Licence Fees and Royalties
Small companies which obtain a substantial proportion of their income from licence fees and royalties are excluded from the Scheme, but an exception is made where royalties and licence fees arise from intellectual property which the company has itself created. The scope of this provision is being widened by
– including royalties and licence fees from intangible assets of any kind;
– requiring that the company should have created the greater part of the intangible asset being exploited rather than the entirety;
– dispensing with the requirement that the intellectual property must have been created within the 2 years preceding the issue of the shares.
These changes will also apply to the Enterprise Investment Scheme and Venture Capital Trust scheme, where existing provisions are being amended in line with the Corporate Venturing Scheme, (see Budget Notes REVBN1B) and to Enterprise Management Incentives.
Definition of “control”
A corporate venturer cannot obtain tax relief under the Scheme if it controls the small company in which it has invested. The definition of “control” used for this purpose is being modified in two ways:
– the test of control already leaves out of account certain fixed rate preference shares. This is being extended so that preference shares where the rate is pre-determined but can vary in line with interest rates and certain indices will be left out of account, together with preference shares where there is an initial dividend holiday before a fixed rate becomes payable.
– the test of control allows the shareholdings of connected persons to be aggregated with that of the corporate venturer in determining whether the corporate venturer controls the small company. The directors of a corporate venturer are regarded as “connected” for this purpose but its employees will now be excluded.
Minimum shareholding by individuals
For a small company to qualify under the Scheme, a proportion of its ordinary share capital must be held by individuals. This helps to target the Scheme on independent companies. The proportion is being reduced from 30 per cent of the ordinary share capital to 20 per cent.
Maximum shareholding by corporate venturer
For a corporate venturer to qualify under the Scheme its maximum stake in the small company must not exceed 30 per cent. The way this is measured is being changed so that only ordinary share capital, and share and loan capital which can be converted into ordinary share capital, will count towards this limit.
Unquoted company requirement
Only investments in unquoted companies can qualify for the tax reliefs provided by the Scheme. However this requirement has been modified by providing that as long as the small company is unquoted at the time the shares are issued and there are no arrangements in place or planned at that time for seeking a listing, relief will not be withdrawn if the company subsequently becomes quoted within the three year period for which the shares must be held.
The Scheme makes provision to safeguard relief when a small company in which an investment has been made goes into liquidation by ensuring that it continues to be a qualifying company if it would otherwise meet the requirements of the Scheme. This provision is being extended to provide similar protection when a small company goes into receivership and would, on that account only, fail to meet the qualifying conditions of the Scheme. Parallel changes are being made to the Enterprise Investment Scheme and Venture Capital Trust scheme (see REVBN1B on these schemes).
3. A formal Regulatory Impact Assessment will not be issued as comments received from potential users indicated that the compliance costs of the Scheme are likely to be small. Guidance on the Scheme will be issued in the summer.
1. The Inland Revenue issued a technical note outlining the proposed Scheme at the time of the March 1999 Budget. Following a period of consultation a number of changes and enhancements to the scheme were announced in the Pre-Budget Report (Press Release of 10 November). Draft clauses were issued under cover of a further press release on 22 December for a second period of consultation. The proposals now being made reflect the outcome of this further consultation.
2. The small higher risk trading companies which the Scheme is intended to benefit are defined in the same way as for the Enterprise Investment Scheme and for Venture Capital Trusts. Broadly they must be unquoted trading companies with gross assets of no more than 15 million pounds immediately before the issue of the shares or 16 million pounds immediately afterwards.
3. The cost of the scheme is forecast to build up from #5 million in 2000/01 to 100 million pounds in a full year.
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