Advance Assurance: Risk to capital forum took place at HM Treasury on May 14

On 14 May the HMRC policy team – Alex Buckley, Bezhan Salehy, Martin Trott, Cathy Wilson – held a Q&A session at HM Treasury in London to demystify the new rules changes to Advance Assurance and VC schemes.

The audience included financial advisers and VC investment managers. Topics included how the risk-to-capital condition would be implemented, as well as queries related to the Advance Assurance process.

One of the most crucial updates to the VC landscape from the Autumn Budget 2017 was the introduction of the risk-to-capital condition to assess whether investments are aligned with the “spirit” of the legislation.

The condition, stipulated in Clause 14 of the Finance Bill, is a principles-based condition that depends on taking a ‘reasonable’ view about whether an investment has been structured to provide a low-risk return for investors.

HMRC updated its VC schemes manual in April to include the new risk-to-capital condition.

The panel discussion focused on various topics of ongoing great interest to the tax-advantaged investment community. What follows is an abridged version of the debate.

How has the risk-to-capital condition been created?

Cathy Wilson explained:

“We published our consultation response document in December 2017. But it wasn’t just about risk to capital – we looked at other ways we could do Advance Assurance.

“One issue has been around speculative applications. We’re saying no to them. We’re now concentrating on companies that have a very likely possibility of raising money.

“We’ve been taking a slightly tougher approach on Advance Assurance applications. If it’s too complex, or the investment seems to be solely oriented around tax planning – we will say no. We haven’t got time to delve into these cases, and we haven’t got time to deliver a financial-planning service which we have perhaps done in the past. We’re having to take a more broad brush approach, the reality is, the resource is not available.”

How are Advance Assurance applications being dealt with?

Bezhan Salehy revealed the chain of command for Advance Assurance applications:

“In the first instance, one inspector will pick up an application and do the initial review. They have an internal process by which reviews can take place, particularly in cases with different levels of complexity, with routes to a more senior inspector to have their view confirmed, or to get technical advice on a complicated aspect.

“The key thing with risk to capital is the involvement of the HMRC policy team. We are in contact with the Small Company Enterprise Centre (SCEC) on a regular basis, we have sight of the list of applications that they’re looking at.

“We’re constantly asking them about the kind of cases they’re seeing, issues that have come up, and we are actively involved in reviewing that decision -making process.

“If you receive a rejection letter, that is very likely to have been looked at by both a SCEC inspector and head office. There may be some cases where one application is substantially the same as another one that’s come in at the same time. We may not look at each case individually, but this is definitely not a case of one inspector making a decision.”

Alex Buckley added:

“With regards to standardised letters, although there may be a short response if there’s a refusal, it doesn’t mean to say it hasn’t been looked at fully.

We haven’t been cutting corners as it were, everything is being considered in full.”

Wilson said that HMRC has changed its policy regarding telephone enquiries:

“We had an open enquiry service, but because we didn’t have the people to look after it properly, we turned it into a call back service where you leave a message on an answer phone.

“Lots of the calls we were getting were just queries about the guidance. Calls have now gone down by 80%. That’s released people to process applications.

“The calls that really needed an answer were going to be ones that couldn’t be answered straight of the top of their head. The query can now go to the appropriate person.”

How much risk is enough for HMRC?

Buckley said:

“What we didn’t want to do is give definite examples that say – this formula is ok and this formula isn’t.

“It’s a question of how much risk is at stake. A genuine entrepreneurial company doesn’t tend to fall into these conditions. What we are looking at is to apply this to a wide range of circumstances.”

How will HMRC define knowledge intensive companies (KICs)?

Wilson said:

“On KICs, we’re not going to be able to say for every company that comes along whether it’s defined as a KIC. We need a reason for a firm to be a KIC for us to give an opinion.

“If they’ve got investors who are interested in going over the £1m limit, then we will review the situation, but we will not do that routinely. We have limited resources and obviously the more work we do on KICs, the less time there is for everything else.”

How are VCTs dealt with if there’s no Advance Assurance application?

An audience member asked: “If a company doesn’t opt for Advance Assurance in a VCT context, what happens after a compliance check if they’ve gone through a robust process to come to their decision?”

Wilson, said:

“If you make an investment and later find that its non-qualifying, we will use our discretion to say – you tell us about how it complies under VCT regulations, and we’ll agree a way to put things right.

“If you’ve done everything you possibly could, well, what’s the difference between that and making an investment in a company that was genuinely qualifying at the time, but fails to meet the continuing conditions?”

Another question from the audience further enquired over what the reasonable steps would be to ensure that a VCT investment was compliant, without having sought Advance Assurance.

Martin Trott said:

“What we would regard as reasonable steps is looking at how overall the investment conforms to legislation, how it might conform going forward, and what has been done to establish that.

“Reasonable is not defined closely. It allows us the flexibility to see what is being done and why, and in the circumstances, was that a reasonable thing to do, rather than being prescriptive about exactly what has to be done.

“Industry professionals expect HMRC to have a greater idea of what should give them confidence, when they are the professional advisers who are seeing what’s going on. It is perhaps a bit unfair to expect HMRC to start putting down hard and fast rules. Really, the reasonable test is – what seems reasonable to me?”

Buckley added:

“If you are within the rules, and not looking at companies with a short life, that’s the first big step. In terms of having done due diligence, we expect you to be able to identify areas of uncertainty. If we saw you flagged areas of doubt, but it was reasonable to continue on the basis that you’d identified them – we’d accept that. Its being honest about those things being considered.”

How will developments on film projects be affected?

An audience member asked:

“In relation to the film industry, when the guidance refers to SPVs and projects – it says it won’t give the relief if the project has been initiated or developed. In film industry, there’s a script, and sometimes the script writer might approach people to develop the film – would that bar it?”

Buckley responded:

“One of the biggest sticking points you have with project-based businesses is the money being raised for projects or is it being raised for the business itself? Is this company being set up for future growth and development? If it delivers that trade by a project, that’s ok, but what you’ve mostly been seeing is, companies which are used effectively to deliver projects,there’s no growth attached to the company itself.

“In terms of script development, what we’re looking at is the funding of the production company, so not the funding of the script itself. Is it a company that’s set up to produce these and go on producing these and create its own name, displace others in the market, and set itself up as a business going forward? Or is it a vehicle to deliver projects for which other established names are involved, but only in their own name rather than the underlying EIS company?”

Why can’t investors determine the company’s future direction?

Salehy said:

“In terms of investors setting the direction of the company – what we’re looking for is a company that has a genuine entrepreneur behind it – its their business, they’re seeking investment, and they’re retaining interest in the management of that company and in what it does going forward.

“On the other hand, we’re looking to exclude vehicles where a product is created purely for EIS. A hallmark of that is if the company is created with the interests of the investors at the forefront, and interests of the investors will trump the interests of any business that the company is carrying on.”

How will the guidance be updated?

Trott said:

“The guidance cannot be expected to cover every possible permutation and the minutiae of individual cases. It is going to be a balance between what we can include that will be useful without expanding the guidance to the point where it becomes unusable.

“As we see issues, we can consider putting further examples with further explanation in the guidance.”

What did the the forum achieve?

The forum went some way to addressing the concerns of industry players. However, the responses to questions still prompted a degree of uncertainty, and there are bound to be further questions that will arise over the coming months.

Details of HMRC’s risk-to-capital condition will continue to be ironed out. Intelligent partnership will be giving updates on the specifics as they develop.

For a more detailed analysis of how the risk-to-capital condition will apply, read our latest EIS report.

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