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This publication is available at https://www.gov.uk/government/consultations/isa-qualifying-investments-consultation-on-whether-to-include-investment-based-crowdfunding/isa-qualifying-investments-consultation-on-whether-to-include-investment-based-crowdfunding
At Autumn Statement 2014, the Chancellor announced that the government would consult on whether to allow crowdfunded debt securities to be eligible for inclusion within Individual Savings Accounts (ISAs). Budget 2015 extended this consultation to consider whether equity investments offered via crowdfunding platforms should also be included in the list of ISA-eligible investments.
1.1 About ISAs
An ISA is a tax-advantaged savings account within which any interest, dividends or capital gains that arise are tax-free for the investor. There are currently two types of ISA: a cash ISA and a stocks and shares ISA.
There are limits on how much investors can subscribe to an ISA in each tax year. The annual limit for 2015-16 is £15,240; this can be invested in either a stocks and shares ISA, a cash ISA, or a combination of the two. From April 2016 taxpayers will also be able to hold peer-to-peer loans through the Innovative Finance ISA1.
Not all types of assets can be held in ISAs. The assets that can be held in them are specified in The Individual Savings Accounts Regulations, 1998.
1.2 About Crowdfunding
Crowdfunding is the process by which individuals use an online platform to invest money in the debt of equity of a company, to pre-purchase a product or reward, or to support a social or charitable project.
The government is pleased to see the continuing success of crowdfunding in the UK and notes the impressive annual growth rates of 201% for equity crowdfunding and 63% for debt crowdfunding2.
Crowdfunding is an important source of alternative finance for small and mid-sized companies and a driver of economic growth. For instance, since securing funding from equity crowdfunding platforms, 70% of businesses have increased turnover and 60% have increased employment3.
The government is already supporting the growth of the crowdfunding industry through measures such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), but is keen to explore through this consultation whether additional support through ISA inclusion could help the industry to develop further while also meeting wider policy objectives around ISAs.
1.3 Policy objectives
As set out in its public consultation on including peer-to-peer loans within ISAs, the government wants to increase the choice of investments available to ISA investors while maintaining ISAs reputation as a trusted and effective savings product.
In addition, the government is committed to improving competition in the banking sector, including by making it easier for alternative finance providers to enter the market and grow, and diversifying the available sources of finance to businesses. Alongside peer-to-peer lending, the crowdfunding sector represents a small but growing source of finance for individuals and businesses that provides an effective alternative to more traditional sources of finance.
The government is therefore exploring the case for including certain investments made through a crowdfunding platform within ISAs. Inclusion within ISA would mean that an individual’s returns on these investments would be free from income and capital gains taxes.
This change would meet the government’s objectives to promote choice for ISA savers and encourage growth in the crowdfunding sector. The government’s decision over whether to proceed with this change will also reflect its overarching objective to maintain ISAs as a trusted and effective savings product.
1.4 Consultation scope and structure
This consultation is at stage 1 (setting out objectives and identifying options) of the government’s tax consultation framework. It reflects views and information gathered from informal consultation with stakeholders following the Autumn Statement and Budget announcements.
This formal consultation sets out core principles against which the government proposes to assess the case for making crowdfunded debt and equity eligible for ISA. It seeks interested parties’ views on these principles, and the extent to which investments made through crowdfunding platforms satisfy them. It also asks for information on the key characteristics and features of debt or equity securities offered through a crowdfunding platform.
Views are invited from a wide range of respondents, including individuals, companies, and representative and professional bodies. The government especially invites comments from crowdfunding platforms, individual investors, ISA managers and others involved in the investment industry, and representative bodies for the above groups. The views expressed will inform the government’s decision over whether to proceed with this change to the list of ISA-eligible assets.
Section 2 sets out proposed core principles against which to consider whether to extend ISA eligibility to crowdfunded investments. Section 3 asks for information on the defining characteristics of crowdfunding. Section 4, 5, 6 seeks respondents’ views and information on the extent to which crowdfunding platforms and the investments they offer meet the core principles set out in Section 2.
1.5 Responding to the consultation
This consultation will run from 8 July to 30 September 2015.
Please email enquiries and consultation responses, specifying in the subject line whether your email is an enquiry or a formal consultation response:
Alternatively, please address responses to:
ISA crowdfunding consultation
Pensions and Savings Team
1 Horse Guards Road, London
Further information on responding to the consultation is set out at Annex A. ### Next steps
Once this consultation has closed on 30 September 2015, the government will consider all responses and publish a ‘summary of responses’ document. This will review the responses received, and set out the government’s decision on whether to proceed to the next stage of consultation (determining the best option and developing a framework for implementation including detailed policy design).
2. Principles for inclusion in ISAs
ISAs are a popular and trusted savings product. Over 20 million adults in the UK have an ISA, with around 14 million making new subscriptions into their ISA in 2012- 13 (the latest year for which figures are available).
Shares and securities issued by a company may be held within an ISA where the company, the shares, or the securities in question are officially listed on a recognised stock exchange. In 2013, the list of ISA eligible assets was extended to include shares admitted to trading on small and medium enterprise (SME) markets in the European Economic Area (EEA). From 1 July 2015, this list has been further extended to include a wider range of SME securities (not just shares), including those admitted to trading on a recognised stock exchange, and certain bonds issued by a co-operative or community benefit society. The government has also committed to introduce the Innovative Finance ISA for peer-to-peer loans from 6 April 2016.
The government notes that crowdfunded investments do share some of the characteristics of investments that can already be held within an ISA. Notably, it is the case that debt and equity securities have already been approved to be held in an ISA under specific circumstances, such as when listed or admitted to trading on a recognised stock exchange. Crowdfunded investments are also subject to the same strict regulatory environment as other financial products and the platform itself is required to have specific authorisation by the Financial Conduct Authority, and must abide by relevant marketing restrictions and appropriateness tests.
Existing ISA-eligible assets all satisfy a set of core principles necessary to ensure that ISAs remain effective and attractive for savers, and affordable for the Exchequer. In deciding whether to include crowdfunded investments within ISA, the government proposes to consider the case against the following principles:
- Consistent with ISA’s reputation as a trusted savings brand: any proposed change must be consistent with the reputation of ISA as a trusted, flexible and appropriately-regulated savings and investment product, providing tax relief on cash, shares, securities or other financial instruments.
- Protects the consumer: consumers should be treated fairly, with a proportionate level of risk that is communicated fully and transparently. There should be market or regulatory safeguards in place to promote competition and prevent market abuse that could detriment the consumer.
- Supports a sustainable tax system: extending the list of ISA-eligible assets should not create substantial new opportunities for tax avoidance, or negatively impact the overall value-for-money, fair distribution and affordability of ISA tax reliefs. In particular, ISA investments should be transparent and widely available to suitable investors, and should not generally not offer enhanced returns to individuals because of factors such as their employment or any other connection with any company or individuals responsible for running the company.
- Simple to administer: any proposed change must be simple to apply, should provide certainty, and should not impose excessive administrative burdens on ISA managers or HMRC in terms of compliance, reporting and monitoring requirements. It should therefore be possible for ISA managers and investors to determine with certainty whether an investment is eligible for an ISA, at the time it is acquired.
Do you agree with the proposed principles for assessing whether to extend ISAs to equity and debt securities offered via a crowdfunding platform? Please provide any comments as appropriate.
3. Characteristics of crowdfunding
Crowdfunding is the process by which individuals contribute to or invest money in a company or project via an online platform. The purpose of this involvement can be: to benefit financially from owning a debt security or equity issued by the investee company, to pre buy a product or reward, or to support a social or charitable project. This consultation will exclusively focus on debt and equity based crowdfunding, collectively known as investment based crowdfunding.
The exact scope of debt and equity based crowdfunding has not been defined in legislation, and the government is not seeking to develop a legal definition at this stage. However, to inform further policy development and to help understand how a framework could be established for including in ISAs investments made through debt and equity crowdfunding platforms, the government would welcome respondents’ views on some the key characteristics of crowdfunding.
Specifically, could respondents provide views on the key characteristics of:
Debt-based securities offered via a crowdfunding platform; and
Equity-based securities offered via a crowdfunding platform
4. Protects the consumer
The primary means for protecting consumers is through financial regulation, which applies to financial products and services regardless of whether they are held within an ISA. The regulatory system works to ensure that customers are treated fairly and transparently when dealing in a range of investments, and can have confidence that regulated firms have their best interests at heart. The current ISA rules combine to support the scheme’s success as a popular and trusted savings product. Stakeholders have noted the benefit that including new types of assets within ISAs can have in terms of increasing their take-up by investors and managers, and promoting investor perceptions that they are mainstream investments. It is therefore important that safeguards are in place to ensure that consumers are not encouraged to take on disproportionate levels of risk as a result of the application of ISA eligibility.
Financial Conduct Authority (FCA) regulations
The FCA’s rules require firms operating crowdfunding platforms to act fairly, professionally and honestly in the best interests of their customers at all times, and to ensure that the content of their websites are fair, clear and not misleading so that investors have the right information to make decisions about their investment.
Firms are also obliged to comply with various provisions in the Financial Services and Markets Act 2000 (FSMA) which ensure that platforms have in place the necessary personnel, systems and controls to operate effectively. Firms are also required to comply with additional marketing restrictions around the promotion and sale of investments made through crowdfunding platforms. It should be noted that investments made through crowdfunding platforms are currently not covered by Financial Services Compensation Scheme (FSCS).
A full list of the requirements are set out in Annex A.
There are a range of general ISA conditions that provide safeguards for investors, including those concerning the management of the account by an appropriately regulated financial institution, and an account holder’s access to information in relation to their investments. ISA conditions also include the requirement that, where an investor requests the transfer, liquidation or withdrawal of some or all of their ISA holding, the manager must comply with the request within thirty days. This ensures that with notice an investor can choose to exit an investment or move it to another ISA manager. This provides a level of protection to the consumer, and promotes competition between ISA managers.
The government’s starting point is that new ISA qualifying investments must comply with existing ISA rules unless there are compelling arguments to adapt these rules or exempt the newly qualifying investments (for example, that the application of the existing rules to the investment would or might have consequences that are not in the best interests of the investor). In the case of peer-to-peer loans, the government has taken the decision to introduce the Innovative Finance ISA, where the modified rules regarding legal ownership and transferability will apply to reflect the distinct characteristics of peer-to-peer lending compared with existing ISA eligible assets.
In the case of investments made through a crowdfunding platform, it is understood that the sector operates on a similar basis to the peer-to-peer sector, with limited availability of secondary markets or similar arrangements meaning that crowdfunded investments are not always as liquid or transferable as investments that currently qualify for ISA. The government therefore envisages that, if admitted to ISA, there may be a case for including crowdfunded investments within the third ISA type. This may affect the ability of investors to exit an investment in a timely manner.
- debt-based securities; and
- equity-based securities:
offered via a crowdfunding platform meet the ‘protect the consumer’ principle? Would any additional safeguards be required if these securities became eligible for ISA? Please explain your answer.
5. Supports a sustainable tax system
In order to ensure that the ISA regime is not open to evasion, avoidance or abuse, it is necessary for ISA transactions to be transparent and to concern genuine investments – rather than artificial arrangements designed to deliver disproportionate tax benefits. Any extensions to the list of ISA qualifying investments should not create opportunities for individuals to benefit from new tax advantages on enhanced returns that arise because of their employment or other association with a particular company or individual.
The current range of assets eligible for inclusion in a stocks and shares ISA are either officially listed or admitted to trading on a recognised stock exchange, or subject to other requirements and safeguards that protect transparency and limit the scope for value manipulation and tax avoidance. These include provisions requiring disclosure of material transactions, and rules concerning related-party transactions.
Whether an exchange qualifies to be a recognised stock exchange for ISA and other tax purposes depends upon a number of factors. Relevant factors considered by HMRC include whether the exchange in question is undertaking the normal business of a stock exchange; whether it is regulated as an investment exchange in a major economy or a significant international financial centre; and whether the jurisdiction concerned has proper and effective arrangements for financial regulation, which meet internationally accepted modern standards in this area.
It is not clear to what extent these safeguards against avoidance would operate equally for all crowdfunding platforms, or to all debt or equity-based investments made through these platforms. Without appropriate safeguards being applied, the government believes that there is a risk that extensions to the list of ISA qualifying investments could present new opportunities for tax avoidance, leading to costs for the Exchequer and an unfair distribution of tax advantages.
How far are:
- debt-based securities; and
- equity-based securities
offered via a crowdfunding platform already subject to the safeguards set out above? Please explain your answer.
What additional safeguards, if any, would be needed to ensure that debt and equity securities offered via a crowdfunding platform are not susceptible to tax avoidance if made eligible for ISA?
6. Other issues
6.1 Administration and EU law
Any proposed change must be compatible with EU law. This means the rules governing the eligibility of investments for ISA must be applied equally across the European Economic Area (EEA).
The government wishes to ensure that ISAs, and the rules around the eligibility of investments for these accounts, remain simple for account managers and HMRC to administer. It envisages that, in the first instance, it will be for ISA managers to assess and monitor the eligibility of investments that are purchased for an ISA.
The responsibilities of ISA managers also include operating the ISA subscription limit; acquiring, transferring and selling ISA investments, arranging withdrawals from ISAs, making tax claims on behalf of investors and providing statistical and other information returns to HMRC. The government understand that a number of platforms are likely to seek approval to offer ISA in the event that the crowdfunding investments became eligible for this account.
In response to evidence presented by respondents to the public consultation on including peer-to-peer loans in ISAs, the government has taken the decision to create a third type of ISA, with special rules which apply in relation to the legal ownership and transferability of investments. In the event that the decision is taken to make crowdfunded debt and equity investments eligible for ISA, the government will assess the case for adding these investments to the list of assets that will be covered by the third ISA type.
Further issues concerning the administration of crowdfunded investments within ISA will be considered as part of a more detailed consultation on detailed design issues, should the government decide to proceed.
6.2 Interaction with other tax reliefs
Budget 2015 announced the introduction of a new Personal Savings Allowance from April 2016, which will mean that individuals will pay no tax on savings income of up to £1,000 for basic rate taxpayers and up to £500 for higher rate taxpayers (additional rate payers cannot benefit). This will mean that the vast majority of taxpayers will have no tax to pay on interest payments and other savings income they receive4.
Are there types of debt security offered via a crowdfunding platform that respondents believe will not be covered by the Personal Savings Allowance? Please provide examples.
Do respondents feel there is a compelling case for extending ISAs to equity offered via a crowdfunding platform in addition to existing tax reliefs?
7. Annex A: Regulatory rules with which firms running crowdfunding platforms must comply
The firms running the platforms are subject to over-arching requirements that include:
- the need for FCA authorisation to undertake regulated activity
- the FCA’s Principles for Businesses
- a requirement for appropriate systems and controls to address the risks of the business
- meeting minimum regulatory capital requirements
- ensuring staff are competent for their roles
- conduct of business rules including:
- communications must be fair, clear and not misleading
- firms must have processes in place to deal with complaints. If a complainant is unhappy with the firm’s response, they may be able to take the complaint to the Financial Ombudsman Service
- the Prospectus Rules, where a prospectus is required
- provisions in the Companies Act, such as the restriction on the public offer of private securities
In addition to these requirements, there are marketing restrictions for the direct offer financial promotion of non-readily realisable securities, including those sold on investment-based crowdfunding platforms. In summary, before making such a promotion, firms must check that the investor meets certain criteria. These are:
- professional clients
- retail clients who are certified or who self-certify as sophisticated investors
- retail clients who are certified as high net worth investors
- retail clients who confirm before a promotion is made that, in relation to the investment promoted, they will receive regulated investment advice or investment management services from an authorised person, or
- retail clients who certify that they will not invest more than 10% of their net investible assets in non-readily realisable securities
Where no advice has been provided to retail clients, firms must apply an appropriateness test, so all firms (both MiFID and non-MiFID) would need to check that clients have the knowledge or experience to understand the risks involved.
Although most debt and equity Crowdfunding is regulated by the FCA, some statutory exemptions apply and where they do there is no need for FCA authorisation or regulation. For example, if certain requirements are met, the FCA does not regulate Enterprise Schemes, or Co-operative or Community Benefit Societies marketing their own withdraw-able share issues.
To respond to this consultation please see Section 1.4
Further information is set out in the government’s response to its consultation ISA qualifying investments: consultation on including peer-to-peer loans ↩
Savings income for the purposes of the Personal Savings Allowance includes all interest on loans, deposits, bonds and similar instruments (whether paid by a financial institution such as a bank or building society, a company or any other person); returns that are interest-like (such as discounts on securities, profits accruing on the transfer of securities and distributions from some collective investment arrangements); and returns from certain annuities and insurance policies. It does not include company dividends and distributions. ↩