UK: No BASIS For Celebration?

Last Updated: 2 August 2011
Article by Ronnie Brown

On 6 July 2011 HM Treasury issued a consultation document titled Tax-advantaged venture capital schemes, although it is mainly aimed at the Enterprise Initiative Scheme (EIS). Its purpose is to gather views on a new scheme for early stage investment by Business Angels, to be known as the Business Angel Seed Investment Scheme ("BASIS"), and on a variety of other reforms which are intended to improve the effectiveness of the EIS and VCT schemes.

The consultation is split into three main themes.

Support for seed investment via BASIS

In recognition of the lack of funding to early stage companies, particularly high tech and/or innovative businesses, greater incentive is needed than currently exists under EIS and VCT schemes.  Coupled with the need for funding it is recognised that such companies would also benefit from business advice and expertise.  As a result, it is proposed that enhanced but unspecified relief should be available for investment by a specific category of people (Business Angels) in a specified range of companies (seed – stage companies).  The consultation seeks views on how to define both of these.

So far as a seed stage company is concerned the general approach is to view a company which would qualify for EIS purposes but which in addition has not yet commenced trading as qualifying for BASIS. The document seeks answers to a number of questions regarding the acceptable level of activity and timescales for use of funds.

The possibility is also raised of at least an element, up to 30%, of the funding being by way of loan capital rather than pure equity. This is a welcome aspect.

It is proposed that the definition of a Business Angel should revolve around someone with experience of this type of investment who will be providing direct support or advice to the company.  Recognising this may be unduly restrictive, for example by eliminating syndicated investment from qualifying, views are sought on where otherwise the line can be drawn.

The extent of the tax relief and/or incentives is also left rather vague, although, in fairness, views upon these are also sought.


With a view to simplifying the unnecessarily arcane rules surrounding current EIS and VCT relief the following measures are to be implemented:-

  • The definition of qualifying shares for EIS purposes will mirror those now in place for the purposes of VCT investment.
  • In relaxing the myriad of tests as to whether an investor is "connected" with the company, there will be disregarded non-convertible loans made by a shareholder in calculating whether the 30% interest test has been breached.

In addition, views are sought upon further simplifications in relation to the following:-

  • The extent to which the current rules on the use of anti-dilution clauses should be relaxed;
  • To the extent that the current EIS rules inhibit commercially beneficial mergers how  this should be addressed;
  • Given the notoriously difficult rule regarding the timing of subscription and issue of shares, the extent to which there is a need for a formalised period of grace; and
  • the extent and priority to which should be given a review of the excluded activities lists.

Changes in all of these areas would be welcome at a practical level and would remove much of the burden and expense surrounding the mechanics of investing without exposing the relief to abuse.

Improving the focus of existing schemes

Improving the focus is the Treasury's description of narrowing the scope of current reliefs.  This focuses on two uses of the schemes which HMRC regard as unacceptable and contrary to their original intention:-

  • companies which are lacking in any commercial substance which carry out low risk quasi lending activities; and
  • companies which are initially qualifying but onto which are attached shortly afterwards larger non-qualifying trades.

Provided the provision covering elimination of these activities is in itself narrowly drawn, the Treasury's position should not be controversial.

In addition, the document provides further commentary and draft legislation to supplement the Budget 2011 announcement relative to the exclusion from April 2012 of trades based substantially around the receipt of feed-in tariffs.

Finally, by way of a sweep-up, the document invites evidence of areas where further improvements to the schemes can be made of how, otherwise, the funding gap can be bridged.

Responses to this consultation are invited by 28 September 2011.  Should you wish to discuss the same further or have any submissions that you would wish to make then please do not hesitate to contact the writer.

A link to the consultation document can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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