June 1, 2017

Commentary on the Draft Guidance on Venture Capital Schemes



Commentary on the Draft Guidance on Venture Capital Schemes as issued by HMRC on 4th December 2017 – and its impact on MEDIA – and observations


  1. HMRC have issued draft guidance following the Autumn 2017 Budget announcements which affect both SEIS and EIS.
  2. They have asked for comments on the guidance by 31 January 2018 – emails to policy@hmrc.gsi.gov.uk
  3. This builds on the Guidance issued previously at the tail end of 2015 regarding EIS in general and is specifically geared to address ‘RISK v CAPITAL’ conditions and also GROWTH and DEVELOPMENT for all SEIS and EIS businesses.
  4. The Government wishes to ensure that all SEIS and EIS companies are aimed at investors who are prepared to lose some or all of their capital in making higher risk investment.
  5. The Government wants to support through SEIS and EIS early-stage, entrepreneurial companies that have growth potential in the longer term.
  6. The Government does NOT wish to support a single project company before being wound up with the stated aim being to encourage the carrying on of trade on an ongoing basis.
  7. The Government wishes to support investors engaging with higher risk businesses which might otherwise find it difficult to obtain funding and in circumstances where these investors know their capital is at genuine risk of substantial loss and is not secured. Such investors are minority investors in terms of their influence in the company and have no intention of running the company themselves.
  8. The Government does not wish to support tax-motivated, low risk investments i.e. the outlawed ‘capital preservation’ There is a general statement with regard to “compliant” arrangements from the letter of the law but which are contrary to the policy intention.


Risk-to-Capital Condition (R2C):

  1. Applies to SEIS and EIS
  2. Principles based (however it has a subjective ‘reasonableness’ test too)
  3. Is in two parts:
    1. SEIS/EIS company must have objective to grow and develop over the long term; and
    2. Investment must carry significant risk that the investor will lose more capital than they gain as a return (including any tax relief)
  4. Applies to investments made on or after the Royal Assent of the Finance Bill which is expected in Spring 2018.


How the R2C Condition will be applied:

  1. All factors and context appertaining to the Company at the DATE OF INVESTMENT.
  2. The list of factors is non-exhaustive.
  3. There is to be an overarching subjective judgment of the HMRC inspector as to whether capital preservation is taking place, which will be guided by their assessment of the level of risk posed to investor’s capital and whether the company has a genuine intent to grow and develop in the long term.
  4. The condition will sit ABOVE all other eligibility requirements as a first test.


There are two elements to the risk-to-capital condition: –

 Growth and development:

  1. Generic indicators of long term growth ambition include plans for increasing revenues, customer base and number of employees – these are initial indicators and the overall intention that needs to be demonstrated is that the company needs to demonstrate that the money raised is to be employed in a way in intended to enable the company to grow and develop.
  2. As a result of 1 above, the company will have to cover these indicators in its business plan and in terms of any information memoranda or promotional documentation.
  3. May be others depending on each company’s circumstances and not all indicators may be appropriate for all businesses.
  4. Money must be employed for growth and development.
  5. No definition of GROWTH AND DEVELOPMENT – so takes its ordinary meaning although the general tenor of the Guidance is that the relevant inspector will need to be satisfied that the company is not established for a single project, accordingly there needs to be a long-term business model.
  6. Whereas a company may not be exactly aware of its trajectory it must have genuine ambitions for growth.
  7. This is all very subjective and does not suit all industries however the inspectors are given effective free rein to determine what constitutes an intention to promote long-term growth and development.
  8. Subcontracting is regarded as indicating a capital preservation activity, this means that the inspector on review will automatically have a negative view on the activities of the company. The guidance note indicates that it is appreciated that a business may not have all the skills it requires in house, however, if the company subcontracts all of its trading activity and control or decisions are not made by the company itself this will be regarded as falling foul of the underlying anti-capital preservation principle INCLUDING if external industry specialists are always used.
  9. The company’s founder or manager must be wholly independent from the investors. One of the key elements of the guidance note is that the company is managed by genuine entrepreneurs “with a long-term view to its growth and development”
  10. No FRAGMENTATION –e. carrying out a similar trade to another company also set up for SEIS or EIS – so a company’s relationship to another company will be taken into account.


Risk of loss of capital:

  1. Essentially risk of failure of the business and the complete loss of any investment.
  2. The risk of loss covers both losing the capital invested and the net investment return – the amount the investor puts at risk must exceed all returns (including dividends, interest, fees etc.) likely at the time the investment was made. There must not be any pre-agreed income or support underpinning an investment.
  3. Not be marketed as a short-term investment with low risk – this will be regarded by the HMRC inspectors as constituting capital preservation.
  4. Even if the none of the indicators listed in the legislation are met, it is open to HMRC to determine on the ‘wider circumstances of the case’ that capital preservation is taking place. This gives the individual inspector the ability to form a view in respect of each company which could result in protracted delays if the business model for the company does not match with their own interpretation of the intended business.


Advance Assurance and Compliance Checks:

  1. No AA from 4th December 2017 for companies that (on consideration of the guidance note) the inspectors determine appear to fall foul of the R2C condition.
  2. Judgment on whether the R2C condition is met will take into account all facts HMRC has available at the time an Investment is made.
  3. Compliance procedures will also involve post-investment checks and relief will be withdrawn if the information supplied at the time of the investment was misleading or incomplete and it is reasonable to conclude that the R2C condition was not met.
  4. No reliance on AA for the purposes of issuing compliance certificates if HMRC decides that the full facts relating to the company’s eligibility were withheld at the time of the investment.


Case example for FILM (Example 3 in the guidance):


  • A film production company is seeking investment for a new film. It sets up an SPV to produce the film.
  • There are some agreed pre-sales and also the availability of the UK Film Tax Relief.
  • These two items are used as collateral for a proportion of the investment.
  • The SPV subcontracts parts of the film making process –g. VFX and set design – but has overall control and decision-making capability.
  • Company intends to develop other films and reinvest the profits for the first film.


Assessment from HMRC:

  1. Investment in the SPV will not qualify for relief as the SPV will not grow and develop.
  2. Investment in the parent company of the SPV will qualify if all other conditions are met.
  3. Only the investment not covered by the ‘security’e. the ‘gap’ will be eligible for relief.
  4. Sub-contracting in this instance does not necessarily indicate a capital preservation investment.


Specific Industry and General Observations:

  1. Whereas the Budget did not outlaw Film Production as a general investment asset class by way of the Example 3 above, many of the SEIS companies formed for the purposes of undertaking production of a single film seem to be outlawed as well as those for EIS – we need to ask for further guidance on the industry-wide impact of the Guidance and the loss, potentially, to the UK Film and Media Industry as a result of the initial impression the Guidance is giving.
  2. There seems to be a general assumption by HMRC that all SPVs will be the entire property of the overall Production House. This is not necessarily the case as differing content may be done by differing shareholders/producers. The guidance does not appear to take account of co-productions at any level where a production house may be involved in a film I terms of the delivery of production services and coordination along with the original writer or developer of a screenplay.
  3. We need clarification on 1 and 2 above and also if there is a differential between SEIS and EIS here as there was previously i.e. that an SEIS for early development of a film or indeed the production of a low budget film is allowed otherwise there is no difference between SEIS and EIS.
  4. There seems to be absolutely no distinction between SEIS and EIS in the Guidance.
  5. Regarding AA and also the post-investment checks it would seem that the length of time HMRC deals with AA applications and the subjectivity of some of the R2C condition tests, the value of AA seems to be minimal – indeed from a company perspective it seems questionable both time-wise and reliance-wise. It would appear that if post-investment checks are being done the safer or more pragmatic way for investing would be to apply for the SEIS 3’s as soon as possible rather than AA as it would seem potentially worthless.
  6. Indeed, it appears that HMRC have potentially relieved themselves of one bottle neck re AA and created a mammoth task re post-investment checks. How are they going to deal with this and regarding MEDIA have they the staff at a high enough level who truly understand this business?
  7. It is also evident that a business plan is needed for BOTH SEIS and EIS – the size of the SEIS raises and the cost of a business plan must be taken into account here. What may be more appropriate is a checklist of sorts?
  8. The mention of the use of external agents and consultants in the business – the very nature of MEDIA is that this is common – many people work across many businesses all with differing aims and partners. It seems to me that HMRC need to understand the nature of the MEDIA industry more (see point 2 above) and we would urge them to sit down with representatives thereof.
  9. Example 3 is also aimed at part-securitised investments – it must be made clear that no Goldfinch Projects have had any such security and it is only through our own due diligence and assessment of risk that we decide with the relevant Directors if the business plan is sound taking on board risk to capital and long-term growth. This must apply across the asset class as a whole and any company set up.
  10. The employees’ indicator does not apply in a conventional manner to this industry and although the Guidance gives wriggle room here again, it should be noted by the Government.
  11. It seems there is much subjectivity in the decision-making process set out in the guidance and since HMRC are working at a complete stretch in any event and do not have Industry experts covering all industry sectors, we need input from a Film and Media industry steering group comprising experts in this field, to ensure real risk to capital businesses do not fall by the wayside causing this industry to suffer. The consequences are evident as it is the second largest contributor to UK GDP

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