PLUS_TaxGuide_2008

The new stock exchange for LondonLiquidity,choice, momentumThe T ax Benefit GuideInvesting in the PLUS-quoted marketStandon House21Mansell Street London E1 8AAt. +44 (0) 20 7553 2000 f. +44 (0) 20 7553 2004PLUS Markets is a fully competitive stock market for small and mid cap companies. It operates twomarkets for companies: a PLUS-listed market for companies seeking a full listing on the Official List anda PLUS-quoted market for companies which for tax purposes are considered “unquoted”, i.e. not fully listed.This guide principally addresses the tax benefits that apply to PLUS-quoted companies. As PLUS-listed isa“Recognised Investment Exchange”, companies on that market are considered “quoted”, and so donot attract all of these tax benefits. Section 5 deals briefly with the tax benefits that can applyto PLUS-listed companies.This guide is designed to set out the various tax reliefs available both to direct investors in PLUS-quotedcompanies and to investors in Venture Capital Trusts. The guide also covers the principal conditions thatthe investors and the companies themselves are required to meet in order to take advantage of them.While we would never seek for investment in the PLUS-quoted market to be tax-driven, it is important tous at PLUS Markets Group that we make individual and corporate investors aware of the tax breaksavailable to them. When planning investment decisions, investors need to do so in the presence of fullinformation in this key area.Our thanks go to BDO Stoy Hayward for their kind assistance in producing this guide. If you have anyfurther tax-specific questions or queries relating to PLUS-quoted or PLUS-listed securities, BDO StoyHayward would be delighted to offer their expert guidance.For general information about PLUS Markets Group, please contact the Capital Markets team on +44 (0) 207 553 2010.A guide to PLUS tax benefits 2008/0901 Section 1Individual Investors(a)The Enterprise Investment Scheme (EIS)(b)Inheritance Tax (Business Property Relief)(c)Venture Capital Trusts (VCTs)(d)Capital Gains Tax (Entrepreneurs’ Relief and Gift Relief)Section 2Corporate Investors(a)Corporate Venturing Scheme (CVS)(b)Substantial Shareholdings Exemption (SSE)Section 3Criteria for qualifying companies under the EIS, CVS and VCT schemes Section 4Other considerations Section 5PLUS-listed CompaniesIMPORTANT NOTE:The information in this guide is intended as a condensed summary of the main conditions that must be met by PLUS-quoted companies and investors wishing to benefit from the tax reliefs outlined. The guide should not be used as a substitute for professional advice and investors and PLUS-quoted companies should take specific professional advice on tax planning.The principal tax reliefs available to PLUS-quoted companies are as follows:0203(a) Enterprise Investment Scheme (EIS) ReliefThe EIS gives a tax incentive to qualifying investors (as defined on page 11) who subscribe for shares in certain small unquoted companies, including shares traded on the PLUS-quoted market. The EIS Relief has four main elements.•Income Tax ReliefThis allows an investor to reduce the amount of his, or her, liability to income tax in the year of investment.Relief is obtained at the lower rate of income tax, currently 20%, on the amount subscribed for the shares of qualifying companies. Investors should be able to deduct an amount equal to 20% of their investment from their liability to income tax in the current tax year.Relief cannot be claimed on more than £500,000subscribed by an individual (in any number of qualifying companies).An individual who subscribes for shares after 5 April and before 6 October in a tax year may claim to carry back part of the subscription to the previous tax year. The amount of the subscription that can be carried back is limited to the lower of:(a)£50,000,(b)Half of the amount subscribed, and(c)The unused balance of his/her relief available for the previous year(The maximum amount relievable in 2007/08 was £400,000).T o retain this relief the shares must be held by the investor for a period that ends three years after the shareissue date, or three years after the trade starts, whichever is later . This is referred to below as the three year period.Example£Gross subscription for shares 10,000Less tax relief at 20% (2,000)Net cost of investment8,000Section 1 -Tax benefits for individual investorsPage 03Page 09Page 11Page 14Page 16•Capital Gains Tax ExemptionThis exempts investors from the liability to capital gains tax when they realise a gain on a disposal of their shares in qualifying companies after the three-year period, provided the EIS income tax relief was given on the shares and has not been withdrawn.Example£Realised value of shares after three-year period 20,000Original gross subscription for shares (10,000)Tax free gain10,000•Loss ReliefIn the event of an investor suffering a loss arising from the disposal of the EIS shares at any time, this relief allows the offset of that loss against either capital gains or, by election, taxable income in the year of the loss.Example£Realised value of shares Nil Original cost of investment (10,000)EIS income tax relief 2,000Loss(8,000)EIS loss relief (assuming a 40% taxpayer) 3,200Net loss(4,800)•Capital Gains Tax DeferralIndividuals and certain trustees can defer all or part of their Capital Gains T ax (CGT) liabilities by subscribing for eligible shares in an EIS company. There is no monetary limit on the amount of the EIS subscription and thus the gain that can be deferred in this way .The gains that can be deferred are those that have arisen in the three years before the EIS shares are issued or those that arise up to one year after that date. Such gains may be the result of the disposal of an asset or , a gain previously deferred by the individual, and may have become chargeable to tax.Investors should note that this relief is a deferral only and that the original capital gain will crystallise on the disposal of the EIS shares at any time, resulting in CGT being payable in the normal way . The investor would,however , be able to claim further CGT deferral to the extent that a qualifying reinvestment is made within the time allowed. A transfer of shares on the owner’s death does not cause the deferred gain to crystallise.0405With effect from 6 April 2008, CGT will be charged at a flat rate of 18% (subject to Entrepreneurs’Relief). It is possible to use EIS deferral relief to defer a pre 6 April 2008 gain which would be taxable at 40%, so that when it recrystallises it is taxed at the new CGT rate of 18%. The opposite is also true –gains which are taxable at 10% under pre 6 April 2008 Business Asset Taper Relief rules, if deferred using EIS investments could be taxed at a higher rate when they recrystallise.Example (assumes a higher rate taxpayer with a chargeable gain of £10,000)£Gross investment in shares 10,000Less CGT deferral at 40 per cent (4,000)Less tax relief at 20 per cent(2,000)Cost of investment (prior to capital gain crystallising) 4,000EIS qualifying investorsIndividual investors must meet certain conditions to be a qualifying investor. Qualifying investors must continue to qualify for the three-year period. The conditions, which are less stringent for deferral relief than for income tax relief and tax free capital gains, can be summarised as follows:1.For income tax relief and tax-free capital gains the individual:•Must have a liability to pay UK income tax (the individual need not be UK resident).•Must not be “connected” with the company by being:-an employee-a paid director prior to the share issue-a shareholder who, together with associates, controls the company or is entitled to more than 30% of:i.the company’s issued ordinary share capital;ii.the aggregate of its loan capital and issued share capital;iii.its voting power; or iv.its assets in a winding up.•Must not be a new director unless the complex so-called Business Angel provisions have been met.Finally, there is an upper limit for qualifying investments of £500,000 per person per annum from 6 April 2008.2.For deferral relief the individual:-must be UK resident and ordinarily resident (and not dual resident) at both the date of the disposal, giving rise to the gain and the date of the investment. This status must continue for three years from the date the shares are issued.-must reinvest the chargeable gain (before taper relief) in the period one year before and up to three years after it arises.-may be “connected” with the company as defined above.The individual can invest any amount (restricted of course by the gross asset limit for the company itself,which must not exceed £8m immediately after the share issue, and the company’s annual investment limit of £2m in any 12 month period from a combination of EIS, CVS and VCTs investing money raised after 5 April 2007). The level of investment required to defer the gain is the amount of the gain.Receipt of valueAn EIS investor must not receive “value” from the company (or any of its subsidiaries) at any time during the period one-year before to three years after his shares are issued. The rules in this area are complex but the investor is deemed to receive “value” if, inter-alia:-the company buys back its own shares;-the company makes a loan to the investor;-the investor receives an abnormal amount by way of dividend, or excessive remuneration or expenses.(b) Inheritance Tax (IHT)Subject to certain conditions, investments in PLUS-quoted companies will attract 100% relief from inheritance tax (business property relief) provided the shares have been held for at least two years. Most trades qualify but the company’s business must not be wholly or mainly that of:-dealing in securities, stocks and shares;-dealing in land or building; and-making or holding investments within an investment business.0607(c) Venture Capital Trusts (VCTs)VCTs are fully listed companies that attract individual investors who are able to claim tax reliefs on their investment. The VCTs then invest in a spread of unquoted trading companies (which for these purposes includes PLUS-quoted companies). In order to be approved by HM Revenue & Customs (HMRC) the VCTs investments must, after three years, be at least 70% in qualifying unquoted trading companies.Each VCT may only invest up to £1m per tax year in any one company and no holding may represent more than 15% of the VCT s total investments. These rules are designed to ensure a spread of investments.A VCT company’s investment may be in the form of a cash subscription for shares and/or loan stock with a minimum term of five years. At least 30% of the VCTs total qualifying investments and 10% of each individual investment must be in new ordinary shares.The following VCT reliefs are available to individuals who are over 18 years of age, in respect of subscriptions of up to £200,000 per tax year.-Income tax reliefFor shares issued after 6 April 2006 an amount equal to 30% of the amount subscribed is deducted from the investor's income tax liability. The relief islimited to the income tax liability of an investor and is given before all other deductions. It is only available if new shares are subscribed for and held for five years (previously three years). There is no legal minimum but each VCT decides on its minimum subscription.-Tax-free gainsAny gain on a disposal of VCT shares is tax-free at any time. There is no tax relief of any kind if a loss arises on VCT shares.-Tax-free dividends Dividends paid by a VCT to individuals are tax-free.These last two reliefs are available to individuals who subscribe for or purchase shares, provided they have not exceeded their VCT annual limit of £200,000.VCT capital gains tax deferral relief has been withdrawn for shares issued on or after 6 April 2004.(d) Capital Gains Tax (CGT)Entrepreneurs’ ReliefEntrepreneurs’ Relief (ER) was introduced with effect from 6 April 2008, as a replacement for Business Asset Taper Relief, which was abolished on 5 April 2008.ER provides for the first £1m of gains on disposals of qualifying assets to be taxed at an effective rate of 10%, rather than the standard rate of Capital Gains Tax (CGT) of 18% effective from 6 April 2008.Shares in companies on the PLUS-quoted market should qualify for ER, provided, inter alia, the following conditions are met:(a)The company is a trading company or the holding company of a trading group.(b)The individual disposing of the shares has held the shares for at least one year prior to the disposal.(c)The individual disposing of the shares is an employee, officer, or director of the company.(d)Immediately before the disposal, the individual disposing of the shares held at least 5% of the company’s ordinary share capital and that holding entitles him or her to at least 5% of the voting rights of the company.Capital Gains Tax Gift ReliefIt is possible for shares in an unquoted trading company held by an individual or trust to be transferred to another individual at a price other than arm’s length (e.g. a gift). In such circumstances the capital gain based on the market value of the asset can be “held over” until the recipient sells the shares.Both the donor and the recipient must claim gift relief within certain time limits, and the recipient has a capital gains tax base cost equal to the donor’s base cost. The recipient must be resident or ordinarily resident in the UK.It should be noted that the gift has the effect of restarting the period of ownership for entrepreneurs’relief purposes (except for transfers between spouses).0809Other than VCT s, it is less common for companies to provide funding but corporate investors may benefit from:(a)The Corporate Venturing Scheme (CVS).(b)The Substantial Shareholding Exemption (SSE).(a) Corporate Venturing Scheme (CVS)The scheme is similar to the EIS but for corporate investors which are trading companies or part of a trading group. The scheme is intended to encourage companies to invest in small high risk trading companies and in return the corporate investors may benefit from the following reliefs:-Investment reliefA company that makes a qualifying investment of new ordinary shares in a qualifying unquoted trading company (which can include those quoted on the PLUS market) may claim a reduction in its corporation tax liability.The amount of relief available to the investing company is up to 20% of the amount subscribed.-CVS loss reliefAn investing company may claim to set an allowable loss on a disposal of shares that qualified for investment relief against its income, provided certain conditions are met.-CVS deferral relief An investing company that realises a chargeable gain on a disposal of sharesthat qualified for investment relief which has not been withdrawn, may defer some or all of that charge if it makes a qualifying investment.Section 2-Tax benefits for corporate investorsTo retain the reliefs the investment must be held for at least three years. There is no limit on the amount that can be invested (subject to the gross asset limit for the investee company) and the investing company must not control the issuing company or hold, or be entitled to acquire, more than 30% of the:-ordinary share capital, or -the voting rights, or-the combined share capital and loan capital of the issuing company.Following the introduction of the substantial shareholding exemption described below the CVS deferral relief is now less important but the CVS loss relief on the other hand has increased in importance.(b) Substantial Shareholding Exemption (SSE)Subject to certain conditions, companies disposing of a substantial (broadly at least 10%) shareholding in qualifying trading companies after 1 April 2002 will be exempt from chargeable gains. The quid pro quo is that companies will similarly not be able to claim capital losses on their substantial shareholdings.Unlike other tax reliefs mentioned above the SSE is available to companies officially listed on the PLUS-listed market, as well as PLUS-quoted companies.1011There are a number of criteria that must be met for a PLUS-quoted company’s investors to qualify under the EIS, CVS and VCT schemes. For qualifying companies:(i)The shares on which EIS and CVS relief can be claimed must be eligible shares, which are:-new ordinary shares,-with no present or future preferential right to income or to assets on a winding up, and -with no present or future right to be redeemed.The shares must be subscribed for wholly in cash and be fully paid up at the time of subscription.A VCT ’s investment can be in:-new ordinary shares, and/or-preference shares or loans with a minimum term of five years.If a company is to remain as a qualifying holding it must do so throughout the period the investment is held by a VCT .(ii)The issuing company can be a single trading company or the parent of a trading group (the Group).(iii)For shares issued after 5 April 2006, the gross assets of the issuing company or the Group must not exceed:-£7m immediately before; and-£8m immediately after, the share issue.There are transitional provisions which allow the previous gross asset limits of £15m and £16m to apply to VCT investments where the funds were raised by the VCT prior to 6 April 2006.(iv)The issuing company must not have arrangements in place at the time of the share issue, to reduce the investors’ risk or pre-arrange the investors’ exit.Section 3-Criteria for qualifying companies underthe EIS, CVS and VCT schemes(v) For EIS and CVS purposes, when the shares are issued, the issuing company must be unquoted andthere must be no arrangements in place for it to become quoted. In the case of VCT investee companies that later become quoted they are deemed to be unquoted for these purposes for a further 5 years. Shares that are quoted on the PLUS-quoted market are unquoted for this purpose.(vi)The issuing company (or one of its subsidiaries) at the time of the share issue must exist to carry on aqualifying trade and must either be:-carrying on a qualifying trade;-preparing to carry on a qualifying trade (which it must start within two years); or -carrying out research and development from which a qualifying trade will be carried on.(vii)During the issuing company’s qualifying period it must not be under the control of another companyand cannot itself control another company except for its qualifying subsidiaries.To be a qualifying subsidiary, the following conditions must be satisfied:-the issuing company must directly or indirectly own more than 50% of the ordinary share capital of the subsidiary;-no person other than the issuing company or another of its subsidiaries should control the subsidiary; and -no arrangements should exist whereby either of the above conditions would cease to be satisfied.In the case of the CVS, at least 20% of the ordinary share capital of the issuing company must be owned by individuals who are not directors or employees (or their relatives) of the investing company or a company connected with that company.(viii)In each case, the activity must be carried on commercially , and wholly or mainly (more than 50%) in the UK, ifit is to be a qualifying activity . A qualifying subsidiary can trade outside the UK. However , the company using the funds, which may be the issuing company or its directly held 90 per cent subsidiary , must trade mainly in the UK.(ix)The company must employ at least 80 per cent of the money raised for qualifying trading purposeswithin 12 months of:-the date the shares were issued; or-the company starting its qualifying trade, if this is later.1213The remainder must be employed within 24 months of these dates.(x)The company must carry on a qualifying trade.There is no definition of a qualifying trade, but non-qualifying trading activities must not be carried on toany substantial extent (more than 20%). These activities are:-dealing in land, in commodities or futures, or in shares, securities or other financial instruments;-dealing in goods otherwise 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 licence fees (Exceptions are made for intangible assets created by the issuing company or its subsidiaries);-providing legal or accountancy services;-farming and market gardening, woodlands and timber production;-property development;-operating and managing hotels and nursing homes;-coal production;-steel production;-shipbuilding; and-providing services to a connected person with one of the above trades.(xi)The company must have no more than 50 full time equivalent employees at the time of the share issue(xii)A company can raise no more than £2m in any 12 month period from a combination of the CVS, EISand VCTs investing funds raised post 5 April 2007.SIPPsPLUS-quoted shares are now eligible for inclusion in SIPPs (Self Invested Personal Pension). HMRC has undertaken a complete overhaul of the complex tax rules that apply to retirement provision. A single new tax structure was introduced from 6 April 2006 (A-Day) which allows registered pension schemes,including SIPPs, to invest in new asset classes. Unquoted shares, which include PLUS-quoted shares, are treated as a new asset class available for direct SIPP investment.In the 2008/09 tax year individuals will be able to benefit from tax relief on pension contributions up to 100% of their taxable earnings (subject to a cap of £235,000) and SIPPs will be able to invest these contributions directly in PLUS-quoted companies.Making claimsProvisional approval for EIS and VCT qualifying statusIt is possible to obtain provisional approval from HMRC that shares issued will be eligible shares for EIS purposes and will be a qualifying holding for a VCT and that the issuing company and its trade will be qualifying.Provisional approval is based on the information provided to HMRC and the approval only relates to the company and its trade (i.e. not individual investors). For this reason HMRC’s Small Company Enterprise Centre should be provided with full disclosure. Once provisional approval has been obtained this can be mentioned in the prospectus or other document provided to potential investors.Provisional approval is provided on a non-statutory basis and there is no specified period within which HMRC has to respond, although a response would typically be received within 30 days.CVS advance clearance noticePotential issuing companies can apply to HMRC for an advance clearance. HMRC’s clearance letter will confirm whether, based on the information provided, they are satisfied that the issuing company qualifiesSection 4-Other considerations1415and that the requirements are to be met in respect of both the shares and the money raised.This advance application process is similar to that described above in respect of the EIS and VCTs, but this advance clearance is dealt with under specific legislation rather than on a non-statutory basis. HMRC has a time limit of 30 days in which to either issue the advance clearance notice or request additional information.Procedure for obtaining EIS tax certificatesFollowing the issue of the EIS shares, or four months after the commencement of the company ’s trade (whichever is later), the company sends to the Inspector a completed and signed Form EIS attached to which are the details of the shareholders who wish to claim EIS relief. A separate Form EIS 1 is required for each EIS share issue. Various declarations are made by the Company Secretary or Director who completes and signs the Form EIS 1. Once the Inspector is satisfied that tax relief certificates should be issued, he will send to the Company a Form EIS 2 (authorisation) and EIS 3 Certificates to be completed by the company and the investors, as appropriate.Moving between UK public marketsMost of the reliefs outlined in the guide are only available for investments in unquoted companies.HMRC considers that shares quoted on the PLUS market are unquoted. Moving on to the Official List would have the following consequences:Enterprise Investment Scheme and Corporate Venturing SchemeThe legislation allows the shares of an unquoted company to be subsequently listed on a recognised stock exchange without resulting in any loss of tax reliefs, provided arrangements were not in existence at the time the shares were issued.Inheritance TaxIt is necessary to consider the status of the shares at the time of the transfer. If the shares have become listed on a recognised stock exchange then business property relief at 50 per cent would only be available in the unlikely event that the shares give control of the quoted company.Venture Capital TrustsAt the time of the VCT share issue the issuing company must be unquoted. If the issuing company later becomes quoted it is deemed to be unquoted for the purposes of the VCT rules for another five years.Overseas aspectsFor the purposes of the EIS, VCT and CVS legislation, the place of incorporation and the residence of the qualifying company (or in the case of the VCT scheme and the CVS, the company issuing the shares to the VCT or CVS company) have in themselves no relevance. However, a qualifying company must use the funds raised for a trade that company, or its 90% held qualifying subsidiary, carries on (or intends to carry on) “wholly or mainly in the UK”. For example, a foreign company could raise funds that are employed by its UK subsidiary provided the subsidiary’s trade is carried on mainly in the UK and the group as a whole is trading mainly in the UK.In determining whether a company is trading “wholly or mainly in the UK”, the total activities of the company must be taken into account. This would include, for example, where the employees carry out their duties, where the assets are held and where any purchasing, processing, manufacturing and selling is carried out. A company can carry out some activities outside the UK provided the activities take place “mainly”, that is more than 50%, in the UK. The test is an activities based test and therefore tax reliefs under the venture capital schemes are not denied for companies simply because they may import or export goods.16The PLUS-listed market is a Recognised Stock Exchange, so shares on the PLUS-listed market are“Quoted” for tax purposes and are eligible for investment by ISAs as well as SIPPs.They do not qualify for the EIS, CVS or for investment by VCTs.However,Entrepreneurs’ Relief is available, subject to the investor meeting the rules described at Section1(d), and Substantial Shareholding Exemption (Section 2(b)) can apply to PLUS- listed shares.Business Property Relief from Inheritance Tax (Section 1(b)) at a reduced rate of 50% may be available ona controlling interest in a PLUS-listed trading company, subject to other qualifying conditions.Section 5-PLUS-listed CompaniesBDO Stoy Hayward specialises in helping businesses, whether start-upsor multinationals, to grow. Through our own professional expertiseand by working directly with organisations and the entrepreneursbehind them we've developed a robust understanding of the factorsthat govern business growth. Our objective is to use this to help ourclients maximise their potential.BDO Stoy Hayward prides itself on developing an in-depthunderstanding of the issues affecting business growth. We havedeveloped an understanding of a number of business sectors, allowingus to add value to the services we offer and provide solutions basedon a strong sector insight. We regard the PLUS market, both from thestandpoint of the companies themselves and their shareholders, as animportant part of our market place. We consider that we have theright business assurance, tax and corporate finance skills to assistcompanies on the PLUS market and looking to move to a full listing.David BrookesTax PartnerBDO Stoy Hayward LLPKings Wharf20-30 Kings RoadReadingBerkshireRG1 3EXDirect Telephone: +44 (0)118 925 4445Email: David.Brookes@。