Policy paper

Statement of Practice 2 (2006)

Published 3 January 2006

Value of ‘gross assets’

The ‘gross assets’ rule

1. Taxes Act 1988 Sch 28B para 8 provides that a venture capital trust’s holding of shares, or of shares and securities, in a company cannot be part of its qualifying holdings for the purposes of Taxes Act 1988 s 842AA if the value of that company’s gross assets exceeds:

  • £7 million immediately before the issue of the holding in question or
  • £8 million immediately afterwards

2. Taxes Act 1988 s 293(6A) provides that a company cannot be a qualifying company for the purposes of the enterprise investment scheme in relation to an issue of eligible shares if the value of its gross assets exceeds:

  • £7 million immediately before the issue of the shares
  • £8 million immediately afterwards

3. Finance Act 2000 Sch 15 para 22, provides that a company cannot be a qualifying company for the purposes of the corporate venturing scheme in relation to any shares if the value of its gross assets exceeds:

  • £7 million immediately before the issue of the shares
  • £8 million immediately afterwards

4. The limits set out above apply with effect from 6 April 2006. Before that date the gross assets limits were £15 million immediately before the issue of the shares and £16 million immediately after. The previous gross assets limits continue to apply in relation to investments made out of money raised by a venture capital trust prior to 6 April 2006 or out of money derived from that money.

5. Income Tax (Earnings and Pensions) Act 2003 Sch 5 para 12 provides that a company cannot be a qualifying company for the purposes of the enterprise management incentives scheme, if the value of its gross assets exceeds:

  • £30 million at the date the option is granted (£15 million up to 1 January 2002)

6. Where the company is a member of a group of companies, the limits set out in the preceding paragraphs apply to the aggregate value of the gross assets of all the companies in the group. For this purpose, no account is taken if:

  • any assets which consist in rights against another company in the group
  • any shares in, or securities of, another such company

Valuation of assets

7. In applying these rules, HM Revenue and Customs’ (HMRC) general approach is that the value of a company’s gross assets at any time is the aggregate of the values of the company’s gross assets as shown in its balance sheet if the company were to draw one up at that time. ‘Gross assets’, means all the assets which would be shown on that balance sheet, without any deduction in respect of liabilities. This approach is subject to the proviso that the balance sheet would be drawn up on a basis consistent with that used in the accounts for preceding periods (if any), and in accordance with generally accepted accounting practice. (This is referred to later in this Statement as ‘the accounting practice proviso’.) This general approach is also subject to what is said in paragraphs 11 and 12 below.

8. So if the shares or securities in question were issued, or as the case may be, the option was granted, immediately after the date to which the company’s accounts were drawn up, the value of the company’s gross assets immediately before the issue, or grant, would be the value shown in the balance sheet (subject to the accounting practice proviso and to paragraphs 11 and 12 below). And if the shares or securities were issued, or the option was granted, immediately before the date to which the company’s accounts were drawn up, the value of the company’s gross assets immediately after the issue, or grant, would be the value shown in the balance sheet (subject to the accounting practice proviso and to paragraphs 11 and 12 below).

9. Where shares or securities are issued, or options are granted, at other times, the values will, in the first instance, be based on the values given in the company’s latest available balance sheet (subject to the accounting practice proviso and to paragraphs 11 and 12 below). However, these values should be updated as precisely as is practicable, taking into account all the relevant information available to the company (and, where applicable, to its subsidiaries). For example, where a company is able to ascertain the amount of trade debts owed to it at any given time, it would be reasonable to take the aggregate amount of such debts outstanding at the time of the issue or grant.

10. When accounts covering:

  • the accounting period in which the issue was made or the option was granted
  • if they were not available at the time of the issue or grant, those for the immediately preceding accounting period

become available, the values arrived at in the way described in paragraph 9 above may need to be reviewed in the light of the information contained in those accounts.

Payments in respect of shares or securities

11. HMRC will not regard the assets of a company immediately before the issue of the shares or securities in question as including any advance payment received by the company in respect of that issue.

12. Where shares or securities are issued partly paid, the right to the unpaid portion will be regarded as an asset of the company. That asset will be taken into account for the purpose of deciding whether the relevant gross assets rule is satisfied, whether it is shown in the company’s balance sheet or not.