Tax-efficient investments for companies
Individual taxpayers have many options offering income tax reductions in exchange for investing in the enterprise. Are there similar choices for corporate taxpayers and, if so, what form do the investments need to take?
NOT A level playing field?
There are a number of income tax friendly investment schemes sanctioned by the government – the EIS, seed EIS and VCT schemes to name a few – however, there is precious little available to your corporate investor clients. The old corporate venturing scheme closed in 2010. This could well be that as corporation tax rates are more generous than income tax rates, rewards for risk finance type investments for companies are not thought to be necessary. One option for investments that do provide relief is the community investment tax relief (CITR). This is not as flexible (in terms of potential investment targets) as the EIS because it is specifically aimed at encouraging investment in disadvantaged areas and communities.
In order to qualify for CITR, the investment has to be made into an accredited Community Development Finance Institute (CDFI). The criteria for being a CDFI are managed by the Department for Business, Energy and Industrial Strategy, which publishes a list of all accredited CDFIs . The CDFI will provide finance to enterprises (both profit-seeking and non-profit-seeking) in disadvantaged communities. Some “retail” CDFIs invest directly in enterprises in such areas. Other “wholesale” CDFIs provide finance to retail CDFIs that in turn invest in suitable enterprises. Provided the CDFI is accredited, it doesn’t matter which type you invest into – relief will be given.
Form of investment
You can subscribe for shares in the CDFI or make a loan to it. If the CDFI is a bank, making a deposit could be considered a loan if the terms are set carefully. If you opt for a share investment, there is a minimum holding period of five years. If the shares are sold before this time has passed, relief is withdrawn (subject to some exceptions). If the preference is for a loan to be made, it needs to be made available in full. However, a drawdown over a period of no more than 18 months is permitted. You will not necessarily miss out on relief if not all the funds are required straightaway. Note. In either case, if the investment yields income (such as interest or dividends), this is subject to corporation tax in the same way as ordinary business income. There is no exemption under CITR.
Conditions for the investor
In order to be able to claim relief, your company :
- must be the sole beneficial owner of the investment
- must not control the CDFI
- must not be a CDFI itself
- must not make the investment as part of a scheme to avoid tax.
In respect of the second condition, your company will be deemed to control the CDFI if anyone connected with you does, or if there are arrangements which may allow you (or anyone connected with you) to gain control. Note. The tax relief given counts as de minimis state aid, and so may need to be accounted for if you look to raise your own investment via EIS etc. Speak to us for more guidance
Once a qualifying investment is made and a certificate issued, the company can claim a deduction of the lower of:
- 5% of the amount invested; and
- the amount of corporation tax due
for the accounting period including the date of the investment, and the accounting periods in which the following four anniversaries of that date fall. If the relief is restricted because the corporation tax due is less than 5% of the amount invested, the unused relief can be carried forward and used in a future accounting period up until the period containing the fourth anniversary of the investment date. Any relief still not utilised by that period is lost. Note. Take particular care where there is a change of accounting date – as the first accounting period to the new date may not contain an anniversary. Example. Acom Ltd invested £150,000 in a CDFI on 1 July 2016. Its year end is 31 December. Relief available for the years to 31 December 2016 and 2017 is £7,500 per annum. The company decides to change its accounting date to 30 June, and makes up accounts for the six months to 30 June 2018. As no anniversary date falls in that period, no relief is given. Instead, a further £7,500 is available in each of the years to 30 June 2019, 2020 and 2021 respectively.
Return of value
Once invested, you can receive certain returns that will not affect relief:
- reasonable payment for goods, services or facilities provided
- interest or dividends that reflect a genuine commercial return
- payment for the acquisition of an asset that does not exceed its market value
- commercial payment of rent for use of property
- payments to satisfy ordinary trading debts.
Loss of relief
As mentioned above, if there is a return of value in excess of the permitted amounts, relief will be withdrawn in full. Relief will also be withdrawn if the investment is disposed of before the end of the five-year investment period. “Disposal” for these purposes means the same as it does for capital gains tax purposes, and therefore will exclude qualifying re-organisations etc. There are also specific disposals which mean relief will not be lost, including:
- a distribution of a loan during a winding up of the CDFI
- a negligible value claim
- a disposal of the investment after the CDFI loses accredited status.
For a List of accredited CDFIs contact us