The Future Fund – tax issues to consider

The Future Fund is intended to provide a source of funding for the growth companies, the future tech stars and the up and coming companies for whom the Coronavirus Business Interruption Scheme (“CBILS”) would not be available.

This is typically because many early stage companies are in a cash burn phase and so may not be able to show that they have a trading record which enables them to meet a mainstream banks “viability” test which is necessary for CBILS.

The funding, which will be provided under the Future Fund, is provided as a Convertible Loan Agreement (CLA) which is expected to convert into equity on a future fundraising or exit event. It can be repaid, but only at the lender’s choice, with the expectation being that the loan will convert at a future time into an equity stake with (hopefully for the Treasury) an increased value.

We have previously published the key terms of the Future Fund and these have largely been replicated into the final scheme.

We have also previously blogged about the fact that the Future Fund is incompatible with (co)investment by business angels who would want to use EIS and SEIS as a means of reducing their investment risk.

The Treasury and the British Business Bank have confirmed that the final design of the Future Fund is not compatible with EIS or SEIS. Therefore, whilst individuals can co-invest as part of a funding round which is matched by the Government under the Future Fund, the investment by the individual will not qualify for EIS or SEIS relief.

The Future Fund is open from 20th May 2020 to the end of September 2020 and so may provide a helpful source of funding for some businesses who cannot obtain funding elsewhere. However, it comes with an interesting comment in the Frequently Asked Questions in the detail within the British Business Bank’s website:

Will the CLA have tax consequences for the Investee Company, the Lead Investor and/or any Other Investor?

Entering into the CLA and/or undertaking any of the actions contemplated by it may have tax consequences for the Investee Company and/or any of the Lead Investor or the Other Investors, some of which could potentially be adverse. We would strongly recommend that the Investee Company and each Lead Investor and Other Investor seeks its own tax advice prior to entering into the CLA and/or undertaking any of the actions contemplated by it.

Why the warning of adverse tax consequences?

The Future Fund is complex and the method used to provide the funding (a convertible loan) brings a range of issues for tax purposes for the borrowing company and also existing investors.

One of the key requirements of the funding from the Future Fund is that the funding provided by the Government must be mirrored in the terms of the new funding from the other investors. So the investors who are funding alongside the Future Fund will have to use a CLA on the same terms.  Some of the tax issues arising from that are discussed below.

Before signing up for the Future Fund, any borrowing company should take detailed tax advice as the issues will be fact specific to the companies circumstances. We have set out below some obvious issues that need to be considered as part of the tax aspects of agreeing to funding via a CLA.

The “Frequently Asked Questions” on the British Business Bank’s website The answer on the British Business Bank’s website Our view of some tax issues to consider
Will the Convertible Loan Agreement (CLA) be SEIS or EIS eligible? HM Treasury and HMRC are responsible for all decisions on tax reliefs, including on SEIS and EIS. It is our understanding that the structure of the CLA does not meet existing rules for SEIS or EIS eligibility. Compatibility with tax schemes is a matter for HM Treasury and HMRC. Convertible loans are not qualifying investments under EIS/SEIS so funding on equal terms provided by an individual will not qualify for relief under EIS/SEIS. The press commentary relating to the Future Fund has stated that the Chancellor, and the Treasury, were trying to get State Aid approval to allow EIS and SEIS investors to provide funding alongside the Future Fund. Whilst State Aid approval would have been needed, so would changes to the UK’s existing tax legislation.      
Will entering into the CLA affect the SEIS or EIS compatibility of investments made prior to the CLA? HM Treasury and HMRC are responsible for all decisions on tax reliefs, including on SEIS and EIS. Compatibility of previous investments with the SEIS and EIS tax schemes is a matter for HM Treasury and HMRC. The government has confirmed that such previous investments will not be affected where the convertible loan converts into shares. Where the convertible loan note redeems, we have been alerted that the government intends to make changes to the rules to clarify that this is compatible with such previous investments.   Under EIS/SEIS (and also Enterprise Management Incentive Schemes) the rules require that the company obtaining the funding is not under the control of another company and arrangements cannot be in place where control could come into existence. The funding is provided by UK FF Nominees Limited and so for EIS/SEIS (and also EMI) purposes the company should check that taking on a convertible loan which can be, and are expected to be, converted into shares (in particular, with an undefined number) does not constitute arrangements whereby control could be deemed to be able to come into existence. Whilst in principle the fact that the Government would be expected not to own more than 50% of the company (due to the match funding) where funding has been provided in a single event by a group of investors (as would be the case here), the potential to control of that group as a whole can come into consideration. We would recommend that confirmation (by letter) from HMRC that any existing qualifying company status for EIS/SEIS and EMI is not jeopardised by a Future Fund convertible loan.   
Will entering into the CLA affect the SEIS or EIS compatibility of future investments? HM Treasury and HMRC are responsible for all decisions on tax reliefs, including on SEIS and EIS. We note that the British Business Bank haven’t made a statement that the Government will try to make the scheme compatible with future EIS/SEIS investments. 
When is the interest payable? The interest is only charged on conversion of a Loan into shares or an event of default by the Investee Company. Companies may elect to repay interest prior to conversion. Where interest on a CLA is not (typically) payable unless a conversion event occurs, then HMRC can deem that the interest is more akin to an equity return than interest and so the interest may be disallowable for tax purposes.
Are any terms of the CLA negotiable? The form of the CLA is a fixed, standard form document. However, certain terms of the CLA, including the interest rate, conversion discount, headroom amount and valuation cap are negotiable between the Investors (other than the Future Fund) and the Investee Company in advance of Application. However, the interest and discount rates cannot be lower than 8% and 20% respectively.  If there are other shareholders, then the impact of conversion into shares on the other shareholders should be considered. For example, an existing shareholder who has more than 5% of the company may be expecting to obtain “Business Asset Disposal” (aka Entrepreneurs’ Relief) on a sale and so the number of shares that the CLA converts into, and the dilution effect on existing shareholders, should be considered. 

The Future Fund is a welcome addition to the initiatives that the Government has brought on stream in response to COVID-19. However, any borrowing company should consider in detail the tax implications of any funding provided via a CLA on both the company, but possibly more importantly, existing investors and potentially staff too. Seeking (potentially urgent) confirmation from HMRC that they don’t see a proposed Future Fund CLA as a disqualifying event for EIS/SEIS and potentially EMI may be a sensible precaution.

Contact us

If you have any further queries, please contact Alastair Wilson at