Corporate Venturing

The issuing company

The issuing company - the company in which the investment is made - must be a trading company or the parent company of a trading group and at the time the relevant shares are issued it must meet conditions relating to its

• unquoted status, and
• gross assets.

Throughout the qualification period related to the shares, it must also meet conditions relating to its

• independence
• ownership: the 'individual-owners' requirement
• membership of partnerships and joint ventures
• subsidiaries
• trading activities.

The issuing company can apply to us for advance clearance that it meets these requirements (see 'Using the Corporate Venturing Scheme').

The 'unquoted status' requirement

At the time when the shares are issued they, or any other of the company's shares, debentures or other securities, may not be

• listed on a 'recognised stock exchange'
• listed on a 'designated' exchange
• dealt in by 'designated means', outside the United Kingdom.

There must not be any arrangements for the shares to be listed or dealt in at that time.

'Recognised stock exchanges' have been established as such by Order of the Board of Inland Revenue. Further information on recognition and a list of recognised exchanges can be found on our web site at http://www.inlandrevenue.gov.uk/home.htm

'Designated' means designated for the purposes of the Enterprise Investment Scheme and CVS by an Order made by the Board of Inland Revenue. At the time of publication, no exchanges are designated for these purposes and no means of dealing in shares are designated. So, companies listed on an exchange other than a recognised stock exchange can qualify for further investment under the CVS.

If a company meets the unquoted status requirement when shares eligible for investment relief are issued, it will not cease to meet it because of the subsequent designation of a stock exchange as a recognised stock exchange, or if an exchange becomes a designated exchange by Order.

The 'gross assets' requirement

The 'gross assets' of the issuing company must not exceed £15 million immediately before the issue of the shares and £16 million immediately afterwards. If the issuing company is the parent company of a trading group, this limit applies to the group as a whole. More details of this requirement are given in our Statement of Practice 2/ 00 (see under 'Further information').

The 'independence' requirement

The issuing company must not be

• a 51% subsidiary (have more than 50% of its ordinary share capital owned by another company), or
• controlled by another company (or another company and persons connected with it).

No arrangements must exist that could result in the company becoming a 51% subsidiary or otherwise being controlled (excluding arrangements for the exchange of shares, or shares and securities, resulting in the acquisition of the company by a new holding company - see 'Company Reorganisations').

'Control' in this context means the power of a company to secure the issuing company's affairs are conducted in accordance with that company's wishes, whether through share ownership, or voting power, or because of any powers conferred by Articles of Association or any other document.

The conditions regarding control of the issuing company must be met at the time the shares are subscribed for and must continue to be met throughout the qualification period. If they cease to be met at any time during this period all investment relief given on the shares will be withdrawn.

The 'individual-owners' requirement

'Independent individuals' must own at least 20% of the issuing company's ordinary share capital. An independent individual is a person who is not

• a director or employee of the investing company or any company connected with it, or
• a relative of one of the above (' relative' for this purpose means spouse; parent, or grandparent etc.; child or grandchild etc.).

If someone who is an 'independent individual' dies while owning the shares, the shares will be regarded as owned by an independent individual while they remain part of his or her estate.

Partnerships and joint ventures

The issuing company, and any qualifying subsidiaries or associates, must not be a member of a partnership

• which includes at least one other company
• which carries on the trade by which the trading activities requirement is met in relation to the relevant shares (the relevant trade), and
• where one or more persons and their associates own more than 75% of the share capital of both the issuing company and one or more of the other partners.

The issuing company, or any of its qualifying subsidiaries, cannot be a party to a joint venture

• which includes at least one other company
• where it carries on the relevant trade in its capacity as a party to the joint venture, and
• where one or more persons and their associates own more than 75% of the share capital of both the issuing company and one or more of the other parties.

A 'joint venture' is a trading venture carried on by two or more persons under arrangements that fall short of creating a partnership.

Qualifying subsidiaries

All of an issuing company's subsidiaries must be 'qualifying subsidiaries', that is, the issuing company, or one of its subsidiaries, must

• possess at least 75% of the share capital and the voting power of the subsidiary
• be entitled to receive at least 75% of the assets of the subsidiary, in the event of a winding up or in any other circumstances, if they were all distributed
• be entitled to at least 75% of profits of the subsidiary available for distribution to shareholders.

No other person can have control of the subsidiary ('control' has the same meaning as it has for the 'independence requirement').

No arrangements must exist that could prevent these conditions from being met.

The 'trading activities' requirement

A 'qualifying trade' is a trade carried on wholly or mainly in the UK on a commercial, profit making basis, and does not to any substantial extent consist of carrying on certain excluded trading activities.

Carrying on research and development from which a qualifying trade will be derived, or will benefit, is treated as carrying on a qualifying trade, but preparing to carry on research and development does not count as preparing to carry on a qualifying trade. The derived or benefiting trade must be carried on by the same company, or by another company in the same group. 'Research and development' means activities that are treated as research and development in accordance with normal accounting practice, excluding oil and gas exploration or appraisal.

Single companies

Throughout the qualification period a company, which is not a member of a trading group, must exist (apart from any incidental purposes) wholly for the purpose of carrying on one or more 'qualifying trades'. It must also be either

• carrying on a qualifying trade, or
• preparing to carry on a qualifying trade (which it must begin to carry on within two years of the shares being issued). In considering whether a single company exists for the purpose of carrying on a qualifying trade, holding and managing property used by the company, and holding shares to which investment relief is attributable (if this is not a substantial part of the company's business) are disregarded.

Parent companies

Where the company is the parent of a group, then the business of the group must not consist wholly, or to a substantial extent, of carrying on non-qualifying activities. At least one company in the group must meet the same conditions as those described for the single company (above). The 'business of the group' means all the activities of the companies in the group taken together.

In determining whether a group company exists for the required purpose, we disregard the following intra-group activities

• holding shares in, securities of, or making loans to, another company in the group
• holding and managing property used by a company in the group for non-financial trade purposes carried on by a group company
• holding shares to which investment relief is attributable, if this is not a substantial part of the company's business
• incidental activities of a company that meets the trading activities requirement for a single company.

Excluded trading activities

A trade will not qualify if one or more 'excluded activities' together amounts to a substantial part of it. Excluded trading activities are

• dealing in land, commodities or futures, or shares, securities or other financial instruments
• dealing in goods, other than in the course of an ordinary trade of wholesale or retail distribution
• banking, insurance, money-lending, debt-factoring, hire purchase financing or other financial activities
• leasing (including letting ships on charter, or other assets on hire) or receiving royalties or other licence fees
• providing legal or accountancy services
• property development
• farming or market gardening
• holding, managing or occupying woodlands, any other forestry activities or timber production
• operating or managing hotels or comparable establishments or managing property used as a hotel or comparable establishment
• operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home
• providing services or facilities for a business carried on by another person if
  • the business consists, to a substantial extent, of excluded activities, and
  • a controlling interest in the business is held by a person who also has a controlling interest in the business carried on by the company providing the services or facilities.

These conditions are the same as those for the Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT) scheme, and for Enterprise Management Incentives.

Two exceptions to the excluded activities are

• the receipt of royalties and licence fees, where the amounts received can be attributed to the exploitation of 'relevant intangible assets'. A 'relevant intangible asset' is one, the greater part of which (in terms of value) has been created by the company carrying on the trade, or by another company in its group. Intangible assets are defined in line with normal accounting practices
• ship chartering, where the company owns the ship and certain other conditions are satisfied.

Can issuing companies be traded on the Alternative Investment Market (AIM)?

Yes. An issuing company must be 'unquoted', meaning its shares, stocks, debentures or other securities are not listed on the official list of a stock exchange, but they may be traded on the AIM of the London Stock Exchange, or dealt in on OFEX.

Can a company qualify if it enters into a joint venture with another company where they each own 50% of a third company?

It depends on the facts. The terms of the arrangement must not cause the joint venture company to become treated as a subsidiary of the issuing company, and the shares must be held for the purpose of benefiting the company's trade rather than for the purpose of investment.

How is the value of a company's 'gross assets' calculated?

Our Statements of Practice 2/ 00 explains how this is calculated. For more details on Statements of Practice see 'Further information'.

What is meant by 'a substantial part' of a company's trade?

We decide whether the particular activities amount to a substantial part of a company's trade, or the business of a group, based on the facts and circumstances of each case. But, we consider that activities amounting to more than 20% of the trade will form a substantial part of that trade or business.

What happens if a company goes into receivership or liquidation?

If a company is in administration or receivership, it is not regarded as ceasing to meet the 'trading activities' requirements because of actions taken as a consequence of this. This is also the case if it is wound up or dissolved without winding up. (Subject to the actions being taken for commercial reasons, not as part of a scheme or arrangement for the avoidance of tax.)

Can an issuing company qualify if its trade is the development of computer software?

Yes, a company receiving royalties and licence fees from computer software that it has, or other companies in its group have, developed can qualify if they meet the other rules of the CVS.

Are payments for the use of know-how covered by the exception to the exclusion of royalties and licence fees rule?

The exception applies, and so the activity is not an excluded activity, where the type of know-how would be treated as an intangible asset under normal accounting practice. The exception is not restricted to industrial know-how.

Can a company whose computer software is developed from a third party's software qualify for the CVS?

It will depend on the facts. If the licence fees or royalties received by a company are attributable to its software, rather than to that of the third party, and where the company created at least half of its software (in terms of value) it can qualify for the CVS.

Will companies be excluded if they are located in the UK but the potential customer base is mainly outside the UK (e.g. Internet companies)?

Our Statements of Practice 3/ 00 explains how the location of activity rule applies. For more details on Statements of Practice see ' Further information'.

Does the company have to be incorporated or resident in the United Kingdom?

No, the CVS has no residence or incorporation conditions.