B4RN Suspends New EIS Investments into its UK FTTH Rollout

The B4RN (Broadband for the Rural North) project, which is deploying a community built and funded 1Gbps “full fibre” (FTTH) rural broadband network to homes in several counties, have taken the hopefully temporary decision not to process new EIS1 forms (Enterprise Investment Scheme) for investments made into the ISP.

So far B4RN’s Fibre-to-the-Home (FTTH) network has been a wonderful success, not least due to the way in which they’ve encouraged volunteers in each area to help build the network (usually in exchange for shares instead of cash). The model also relies on local landowners (e.g. farmers) being generous and agreeing to waive their right to payment under a wayleave (access) agreement, which enables the fibre to be cheaply dug through their land.

Overall more than 5,000 connections have been made to the network and their approach has been mirrored by a number of other community FTTH builds across the UK. As part of this effort B4RN have also been a member of the Government’s Enterprise Investment Scheme (EIS) since 2011, which offers tax reliefs to individual investors who buy new shares in the company.

However the new Finance Act 2018 has introduced some changes to the EIS scheme and as a result HMRC has announced that they will be testing B4RN’s compliance with the new “risk to capital” rule.

FA2018 Extract – Risk-to-capital condition

(1) The risk-to-capital condition is met if, having regard to all the circumstances existing at the time of the issue of the shares, it would be reasonable to conclude that-

(a) the issuing company has objectives to grow and develop its trade in the long-term, and

(b) there is a significant risk that there will be a loss of capital of an amount greater than the net investment return.

NOTE: The latter condition is to be considered for investors generally, rather than any specific investor.

The new rule applies from Royal Assent on 15th March 2018, however, since 4th December 2017 HMRC have refused to provide advance assurance if it does not appear that the risk to capital condition is met. B4RN’s boss already claims to have provided a “prompt and detailed response to HMRC’s enquiries” and they expect to learn the outcome early next month.

The provider has said they are “confident” that B4RN will remain eligible for EIS but in the meantime they’ve decided to play it safe by confirming that they will not be processing any new EIS1 forms for investments made into their company (covering the period from 15th March 2018 to present), until they know the outcome.

Barry Forde, B4RN’s CEO, said:

“In the interests of openness and transparency, B4RN’s directors have decided today to place this information in the public domain so that investors are fully aware of this situation.

Broadband for the Rural North Ltd was authorised by HMRC to issue Enterprise Investment Scheme (EIS) compliance certificates on the 2nd December 2011 making investment in B4RN withdrawable shares eligible for tax relief under the Enterprise Investment Scheme.

On the 14th October 2018 HMRC announced they would be testing our compliance with a new ‘risk to capital’ rule brought in as part of the Finance Act 2018. This rule came in to force on the 15th March 2018.

The rule states that for investors there must be a significant risk to capital greater than the net investment return. This test was introduced to avoid abuse of EIS by schemes that were structured to obtain tax relief but pose no real risk to investors.

B4RN have made a prompt and detailed response to HMRC’s enquiries and expect to receive a formal decision in early December 2018.

Whilst B4RN’s directors are confident that B4RN continues to remain eligible for EIS, HMRC have decided in the interim not to process EIS1 forms for investments made in B4RN after the 15th March 2018 until they have made their determination.

We will also be contacting investors who have invested in B4RN shares since the 15th March 2018 and who are waiting for EIS3 forms.”

If the worst did come to pass and B4RN were cast out of the EIS then it would not be the end of the world, although such an outcome would make it harder to attract future investment and grow. Hopefully that doesn’t happen as they’ve done some truly terrific work and we’d all like to see that pace of progress continue.