Corporate Venturing

Circumstances in which investment relief may be withdrawn or reduced

Disposal of an investment

The amount of investment relief obtained by a company in respect of an issue of shares is allocated evenly between all the shares, so that each of the relevant shares has the same amount of investment relief attributed to it. For example, an investing company subscribing £100,000 for 100,000 shares may obtain investment relief of £20,000 with 20 pence (20%) relief being attributable to each share.

If an investing company disposes of any shares on which it has received investment relief during the qualification period, the investment relief attributable to each of the shares disposed of will be withdrawn or reduced, depending on the circumstances.

If the amount of relief given is more than 20% of the amount received on the disposal of the shares, it will be reduced by 20% of the amount received if the disposal is

• a 'bargain at arm's length'
• a distribution in the course of dissolving or winding up the issuing company
• a disposal within section 24( 1) Taxation of Chargeable Gains Act 1992 (such as occurs when the issuing company is struck off the Register of Companies and dissolved), or
• a deemed sale following a negligible value claim under section 24( 2) Taxation of Chargeable Gains Act 1992.

In any other case the investment relief will be fully withdrawn.

If the disposal does not fall within the categories described above, for example, if the shares are a gift, then again the investment relief attributable to the shares is fully withdrawn.

There are special rules to cater for

• circumstances where the amount of investment relief was reduced before it was obtained (for instance because there had been a prior receipt of value - see Receipt of value)
• company reorganisations and amalgamations (see the section on Company reorganisations, reconstructions and amalgamations).

Identification of shares on the disposal of part of a holding

Shares on which investment relief has been obtained that are disposed of within the qualification period will be treated as disposed of on a first-in, first-out basis. If more than one holding of shares has been acquired on the same day, and investment relief is attributable to some of the shares but not to others, for example, second-hand shares, any shares disposed of will be treated as having been disposed of in this order

• first, shares to which investment relief is not attributable
• next, shares to which investment relief, but not deferral relief, is attributable, and
• finally, shares to which both investment relief and deferral relief are attributable.

How is investment relief withdrawn?

If investment relief has been obtained and is either not due, or has to be reduced or withdrawn in full for any other reason, we will withdraw it. We will make an assessment to corporation tax under Case VI of Schedule D for the accounting period in which the relief was obtained.

We cannot make an assessment for reducing investment relief or withdrawing it in full, or give a notice that in our opinion relief falls to be reduced or withdrawn in full, more than six years after whichever is the later of either

• the end of the accounting period in which the time limit for employing money raised occurs, or
• the end of the accounting period in which the event that causes the investment relief to be reduced or withdrawn in full occurs.

These limits do not apply where there has been fraud or negligence.

What if there is a disposal of part of a holding where bonus shares have been issued?

An issuing company may allot bonus shares to its shareholders under a share reorganisation. No relief is available in respect of these shares. But, if they are 'corresponding bonus shares' they may be treated, for CVS purposes, as part of the original holding that qualified for investment relief. Bonus shares are 'corresponding bonus shares' if

• the original shares have been held continuously by the investing company from the time they were issued until the bonus shares are issued
• relief has been obtained in respect of the original shares and not lost
• the shares are in the same company, of the same class and carrying the same rights as the shares they are given in respect of.

If this is the case, any investment relief attributed to the original holding is spread evenly over the enlarged holding of original shares and these 'corresponding bonus shares'.

On a disposal of part of this holding, where investment relief is reduced or withdrawn in full, the amount of investment relief attributable to each of the shares is reduced proportionately.

Example

A company buys 10,000 qualifying shares for £10,000. The full amount of relief was given - £2,000 (20% x £10,000) and none has been withdrawn. Two years later there is a bonus issue and the investing company receives an additional 5,000 shares, which meet the requirements for corresponding bonus shares, giving a total qualifying holding of 15,000 shares.

The investing company then disposes of half (7,500) of the shares. The disposal is within the three year qualifying period starting when the 10,000 shares were bought, so the relief on the shares sold is withdrawn.

Half of the holding has been sold, so the amount of relief to be withdrawn is half of that given - £1,000.

Other circumstances in which investment relief may be withdrawn or reduced

The CVS provides for the reduction or withdrawal in full of investment relief if, during a period beginning one year before the relevant shares are issued and ending when the qualification period for the shares ends, certain types of transaction occur. The period is known as the 'period of restriction', and the types of transaction are those involving

• receipt of value - to ensure that the investing company is not simply reclassifying an existing investment, and that money invested under the CVS remains in the company and is not returned to the investor or to any other shareholder
• the grant of put options and call options - to ensure that risk is not reduced by an option being granted over the shares or by advance provision being made for the investor to realise the investment at some future date.

Receipt of value

This section describes

• what a 'receipt of value' is, and how the amount received is determined
• what happens if there is a 'receipt of value' by the investing company during the period of restriction
• how a 'receipt of value' may be reversed to prevent loss of relief if value is received by persons other than the investing company.

Where the total amount returned to the investor is insignificant (either less than £1,000 or, if greater, an amount which is insignificant in relation to the amount subscribed by the investing company for the shares), then there will not be any withdrawal of investment relief. But, where arrangements existed to receive value during the period of restriction before the issue of the shares, the insignificant criteria are not applied.

What is a 'receipt of value' for the investing company?

The main ways the investing company might 'receive value' from the issuing company, and the amounts of value received are shown below.

If the issuing company The amount of value received is a. repays, redeems or repurchases any of its shares or securities belonging to the investing company (or makes any payment for giving up the right to any of them) either the amount received or the market value of the shares or securities, whichever is greater b. repays a debt owed to the investing company incurred before the date of issue of the shares, as part of the arrangements for, or in connection with, the purchase of the shares either the amount received or the market value of the debt, whichever is greater c. makes a payment to the investing company for giving up the right to payment of a debt either the amount received or the market value of the debt, whichever is greater d. waives any liability of the investing company to it or discharges, or undertakes to discharge, any liability of the investing company to a third person the amount of the liability e. lends or advances any money to the investing company, which has not been repaid in full before the shares are issued (other than an ordinary trade debt) the amount of the loan or advance, less the amount of any repayment made before the issue of the shares f. provides a benefit or facility for the directors or employees of the investing company or any of their associates the cost to the issuing company of providing the benefit or facility less any consideration given for it g. disposes of an asset to the investing company for less than its market value the difference between the market value of the asset and any consideration given for it h. acquires an asset from the investing company for more than its market value the difference between the market value of the asset and any consideration given for it i. makes a payment to the investing company other than a 'qualifying payment', that is - reasonable payment for goods, services or facilities - payment of interest on money on normal terms - payment of a dividend on normal terms - payment of market value for an asset - payment of reasonable rent for a property - reasonable payment in discharge of a debt the amount of the payment

References to the issuing company or to the investing company includes references to any person who at any time in the 'period of restriction' relating to the relevant shares is connected with the company, whether or not they are at the material time.

What happens if there is 'receipt of value' by the investing company?

If there is a 'receipt of value', investment relief obtained in respect of those shares will be

• reduced, if the amount of investment relief is greater than 20% of the amount of value received, by that amount, or
• withdrawn, if the investment relief attributable to the relevant shares is less than 20% of the amount received.

Reversing a 'receipt of value'

If value, which is not an insignificant amount, has been received by the investing company or by a person connected with the company, perhaps inadvertently, then investment relief must normally be reduced or withdrawn in full. But, if whoever received the value, whether the investing company or the connected person (the original recipient), pays an equivalent amount back (replacement value) to the issuing company or other other person from whom the value was received (the original supplier), then there is no loss of relief. A receipt qualifies as 'replacement value' if

• it is a payment by the original recipient to the original supplier, so long as it is not a 'qualifying payment', nor a payment for shares or securities of any company (unless the receipt of value being rectified was itself the transfer of shares at under or over value)
• it reverses a receipt of value arising from a waiver or discharge of a liability or debt
• the receipt of the original value was
  • a disposal of an asset to the investing company for less than its market value, or the acquisition of an asset from the investing company for more than its market value
    and the receipt of replacement value is
  • the acquisition by the original recipient of an asset from the original supplier for more than its market value, or the disposal by the original recipient of an asset to the original supplier for less than its market value.

If the 'replacement value' is The amount of value received is a. a payment the amount of the payment b. a waiver of a liability the same as the amount of the original value c. a disposal or acquisition of an asset the difference between the market value of the asset and the consideration received for it

The replacement value does not have to have been received after the original value, but it will be disregarded if

• it is received before the start of the period of restriction relating to the relevant shares
• there was an unreasonable delay before the replacement value was received
• the investing company has appealed against a reduction or withdrawal in full of investment relief because of a receipt of value, and the receipt of replacement value occurs more than 60 days after the amount of relief due to be withdrawn has been finally determined.

If the replacement value includes a subscription for shares by the investing company (or a person connected with the investing company), the person subscribing will not be eligible for investment relief in relation to those, or any other, shares in the same issue. If the person is an individual, he or she will not be eligible for income tax relief or deferral relief under the Enterprise Investment Scheme (EIS) in relation to the issue of shares.

Receipt of value other than by the investing company

The investment relief attributable to the relevant shares will be reduced or fully withdrawn, if, at any time during the relevant period of restriction, the issuing company (or any subsidiary) repays, redeems or repurchases any of its share capital other than that owned by

• an investing company under the CVS, or
• any person for whom this would mean the reduction or withdrawal in full of investment relief or relief under the EIS, or the revival of a chargeable gain under the EIS.

There is one exception, where either the market value of the repaid shares or the amount received by the shareholder, whichever is the greater, is insignificant in relation to the market value of the remaining share capital of the issuing company (or, the subsidiary).

If the exception does not apply, then the amount of relief withdrawn is 20% of the amount of the payment, or, if this is more than the amount of relief given, the relief is withdrawn in full. If more than one investing company has received relief, or the investing company obtains investment relief, which was less than 20% of the amount subscribed, an appropriate proportion of relief is withdrawn.

Redemptions made within 12 months of a share capital of nominal value being issued, for the purposes of complying with section 117 of the Companies Act (public company not to do business unless requirements as to the share capital complied with) will not cause investment relief to be reduced.

Put options and call options

Any investment relief attributable to the shares to which the option relates will be withdrawn in full, if, during a qualification period for an issue of shares

• a 'put option' (an option the exercise of which would oblige the grantor company to purchase the shares) is granted to the investing company, or
• a 'call option' (an option the exercise of which would oblige the investing company to sell the shares) is granted by the investing company.

What happens if more than one issue of shares has been made to the investing company on which investment relief has been claimed, and the relief is to be withdrawn because value has been received during the period of restriction relating to two or more of the issues?

The total amount of value received is shared between each issue of shares in the same proportion as the amount subscribed, divided by the total amount subscribed for all the relevant issues of shares. The amount of investment relief withdrawn is 20% of the value received (or all the relief, if this is less than 20% of the amount received).

Example
An investing company subscribes for two holdings of shares in the same issuing company on different dates. It subscribes £50,000 for the first holding and £30,000 for the second holding. The maximum amount of investment relief (£ 10,000 and £6,000) is obtained on the holdings. The investing company then receives £20,000 worth of value from the issuing company within the period of restriction for both issues.

The amount of value received apportioned to the first holding is

£20,000 x £50,000 = £12,500
(£ 50,000 + £30,000)

So, the relief given is reduced by £2,500 (20% of £12,500).

The amount of value received apportioned to the second holding is

£20,000 x £30,000 = £7,500
(£ 50,000 + £30,000)

So, the relief given is reduced by £1,500 (20% of £7,500).

How much relief is withdrawn if there has been a receipt of value and maximum investment relief has not been obtained?

The amount of value received is reduced by the amount of investment relief received, divided by 20% of the amount invested (the maximum potential relief). The same proportion of the relief is withdrawn.

Example
A company invests £100,000. It is entitled to relief of up to £20,000, but its corporation tax liability is £15,000, so it can only obtain relief of £15,000.

It receives value of £10,000 from the investing company. For the purpose of computing the amount of investment relief to be withdrawn, the amount of value received is

£10,000 (the amount received) x £15,000 (the relief given) = £7,500
£20,000 (the maximum amount of relief that could be obtained)

The amount of relief to be withdrawn is

£7,500 x 20% = £1,500.

What happens if there are arrangements for the investing company to receive value?

If, during the 'period of restriction', arrangements exist for the investing company to receive any value from the issuing company, all value received will be treated as a receipt of significant value for this purpose.

Does the rule on receipt of benefits by directors or employees of the issuing company include all benefits, however small?

No, an amount of insignificant value is disregarded.