HM Treasury document also contains proposals to simplify and refocus the Enterprise Investment Scheme and Venture Capital Trusts
UPDATE 29 November 2011 and 6 December 2011: The Chancellor has now confirmed the launch of this tax-advantaged scheme for angel investors, which will be called the Seed Enterprise Investment Scheme (SEIS), not BASIS - see this post - and the details of the SEIS in this post.
The Government today published a consultation paper (the Consultation Paper) on proposals for a new stand-alone scheme to target seed investment by business angels – the “Business Angel Seed Investment Scheme” (BASIS).
The Consultation Paper, which in addition sets out intended changes to the Enterprise Investment Scheme (EIS) and to Venture Capital Trusts (VCT), can be read here. The accompanying Treasury press release can be read here.
BASIS: Encouraging seed investment through the tax system
The Consultation Paper makes clear that the Treasury’s thinking around the BASIS is at a very early stage. In that spirit, the consultation has two purposes:
- To gain an “understanding and evidence on the exact nature and scale of the problem” that start-up companies have in accessing seed finance; and
- To assess “whether and how best the tax system might effectively support an increase in seed investment”.
The Treasury suggests that the BASIS would be based on the current EIS but with a narrower category of companies and of investors – i.e. business angels – to:
“incentivise their investing at the seed-stage of a company’s development, with the possibility of more flexibility around the use of debt instruments”
and would operate by identifying characteristics of an angel investor and seed-stage company. The Consultation Paper requests respondents’ assistance in framing definitions for both concepts.
Tax relief would only be available for investment in seed stage businesses. These would, suggests the Consultation Paper, be defined as companies in a pre-trading stage which intended to use the funds raised to develop business concepts, perhaps involving the production of a business plan or production of prototypes, but prior to bringing a product to market and prior to commencing large scale commercial manufacturing. The BASIS would not be available to companies which are already trading but which intend to raise money to develop a new product.
The Consultation Paper envisages that a “business angel” could be defined as someone who has previously invested in four or more seed stage companies and is or will be a director or will provide other specified support or advice (but providing they do not have more than a 30% stake in the company).
The BASIS would facilitate tax relief for investment via debt, but in order to comply with State aid rules any individual seed investor would have to have at least 70% of their investment in the form of equity or quasi-equity.
The Consultation Paper does not state the amount of investment that would be allowed into a BASIS company by an angel investor or the capital gains tax reliefs that would apply. If the BASIS is established, companies would be able to transition from a seed-stage scheme into the existing EIS.
EIS and VCTs: Simplification and reform
The 2011 Budget announced changes to the EIS and VCTs, subject to State aid approval:
- raising the rate of EIS income tax relief to 30% from April 2011;
- increasing the annual EIS investment limit for individuals to £1m from April 2012;
- increasing the qualifying company limits to 250 employees and gross assets of £15m for both EIS and VCTs from April 2012; and
- increasing the annual investment limit for qualifying companies to £10m for EIS and VCTs from April 2012.
The Consultation Paper sets out proposals for simplifying both schemes – concentrating on the types of investment that can attract EIS relief and on which investors, who are connected with the company, can qualify – and on refocusing the schemes to “ensure that [they] continue to be targeted at genuine high risk capital investments”.
The consultation period on all of these proposals runs to 28 September 2011. Legislation to implement the proposals would be contained in the Finance Bill 2012.
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