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No More Gov EIS Tax Relief for Community Benefit Broadband ISPs UPDATE

Saturday, January 26th, 2019 (12:01 am) - Score 1,755
b4rn small digger ftth volunteers

A new ruling by HMRC, which appears to say that UK broadband ISPs acting as a Community Benefit Societies (CBS) to build their own local networks can no longer make use of tax breaks under the Enterprise Investment Scheme (EIS), could have serious repercussions for “full fibre” projects in rural areas.

The situation first came to our attention last year (here) after the well-known and widely respected B4RN project, which since 2012 has been busy running a community built and funded 1Gbps Fibre-to-the-Home (FTTH) broadband network to rural premises in several counties, stopped processing new EIS1 forms for investments made into the ISP.

B4RN’s project has been a huge 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 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.

At the last count well over 5,000 connections had been made to the network and their approach has been copied by a growing number of other community FTTH builds across the UK. As part of this effort B4RN have also been a member of the Government’s EIS scheme since 2011, which offers tax breaks to individual investors who buy new shares in the company.

B4RN’s Community Focus

As a community benefit society B4RN must operate for the benefit of its defined community rather than for the benefit of its members and shareholders. B4RN can pay interest on its shares but only at a level necessary to attract and maintain the investment needed to fund the network construction and operation. Any surplus funds must be used to benefit the community and not be distributed to shareholders.

Anybody who invests in B4RN (usually community members) understands that the operator is all about encouraging communities to help build their own network. This in turn helps to make an otherwise hugely expensive process much more viable and that means fewer areas requiring state aid in the future. However their approach has now come into conflict with the new Finance Act 2018, which introduced some changes to the EIS scheme.

Last year HMRC announced that they would be testing B4RN’s compliance against these new conditions, in particular the “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.

At the time B4RN said they were “confident” of remaining eligible for EIS but in the meantime opted to play it safe by putting a pause on processing any new EIS1 forms for investments made into their company (covering the period from 15th March 2018 to present), at least until they knew the outcome.

After some delay (apparently due to one of HMRC’s people going off on long term sick leave) B4RN has now got their answer and it’s not good news. Effectively the provider has been told that, because their approach is “fundamentally uncommercial” (i.e. not setup to make a profit), they no longer meet the necessary conditions and can no longer benefit from the EIS.

Barry Forde, CEO of B4RN, told ISPreview.co.uk:

“The big thing about it is that they are now saying that Community Benefit Societies (CBS) don’t comply with the rules around trading which they define as having to make a cash profit, instead aiming to benefit the community, so not eligible for EIS tax relief.

As you know there are a load of CBSs setup or being setup to do the rural broadband stuff, similar to B4RN but in a much earlier phase where EIS eligibility is very much more important. It’s not really much of an issue for B4RN now as we would have hit the upper limits over the next year anyway so were factoring no EIS into our medium term plans. But for start-ups it could be a killer.

I really don’t think HMG has thought this one out. For the full fibre everywhere ambition to reach the last few percent community involvement is going to have to play a major part. If landowners are going to agree to laying ducts across their fields and waiving any wayleave charges they have to be convinced it’s a community project and no one is going to make any money.

The HMRC ruling means that this structure cannot be used if EIS is needed (and 30% tax relief is a big incentive). But if groups setup as anything that meets HMRC’s rules for profitability they wont get landowners support. So where we go from here is anyone’s guess.”

Barry’s expectation now is that if communities cannot do the roll-out through this approach then the only alternative is more government grants, which seems like a potentially much more costly solution than providing general support to help communities do it themselves. This seems unlikely to help the Government’s aspiration for “nationwide” coverage of full fibre by 2033.

We have asked the Government for a comment but the weekend is likely to delay their response until early next week. Meanwhile B4RN has kindly given us permission to re-print the letter below (bottom).

UPDATE 14th Feb 2019

After three weeks the HM Treasury has finally responded to provide a comment, which sidesteps the issue to talk about their voucher schemes instead. Vouchers a very different type of mechanism that creates a dependence upon direct public support, which is not as flexible. Operators like B4RN would naturally prefer to use both wherever possible, but for now the EIS route remains closed.

A Government Spokesperson told ISPreview.co.uk:

“We are committed to supporting community broadband schemes, which is why we subsidise broadband installation through our Better Broadband and Gigabit Broadband Voucher schemes, and allocated £200 million in last year’s Budget to pilot innovative approaches to deploying full fibre in rural locations.

The Enterprise Investment Scheme (EIS) is designed to encourage investment in high risk, early stage companies which face the biggest challenges in accessing the capital needed to grow and scale up.”

ORIGINAL LETTER FOLLOWS
b4rn eis hmrc letter 2019

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Mark Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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45 Responses
  1. Avatar Optimist

    The government have to get the £2 billion a month they hand out to foreign governments (net EU payments, foreign aid) from somewhere!

    • Avatar Mike

      One shouldn’t be surprised by the nature of this treacherous vichy government.

    • Avatar Stephen

      These community based installations are credit to the people. Nevertheless it’s still third world that we have to do this work ourselves to get us into the 20th century, let alone the 21st century. The Gov’ Regulators [quangos] are too soft with the major telecom companies. Essentially of course they are in bed with them and reluctant to slap them on the wrists because of the billions they have paid for Comm’s licences during each bid round.

  2. Avatar David Scrivens

    The government have put in place a scheme called Social Investment Tax Relief (similar tax breaks to EIS). If it is for the benefit of a community they should look into this rather than EIS which is aimed to grow profitable business where the tax is effectively recouped in the longer term through tax generated from a successful company.

    • Avatar Barry Forde

      Hi David,
      The problem with SITR is that it is limited to a maximum investment of £1.5M over the whole life of the enterprise. EIS has a much higher limit of £12M. We are already at about £6M so still inside the EIS cap but well above the SITR cap. But thanks for suggesting this. Perhaps there are some other ideas out there?
      Barry

    • Avatar davidj

      If its about taxes… Have you considered registering the organisation or part of it as a Charity or Trust… That way the donation/Public contribution side i believe can not be touched with regards to tax. The best way to screw our petty minded barsteward government is find legislation and use it against them.

  3. Avatar gerarda

    maybe the answer is to create new companies for each expansion stage and either limit the investment to £1.5m or use aims which would allow landowners and any one else subsidising the venture to have first call on profits before then allowing a dividend to the shareholders.

  4. Avatar chris conder

    What a shame the government stopped this great scheme, it was the best thing they ever did to aid the build out of rural broadband. Apart from the community side of the investment it was a great perk to get tax back and was a great incentive to raid your isa and help your village. hey ho. yes minister, you’ve fallen for it again, the civil servants rule ok.

  5. Avatar Gadget

    Surely the answer is to get the CBS scheme changed rather than rely on a scheme that was intended to help conventional business models rather than their innovative approach.

  6. Avatar Will Dehany

    Very short-sighted of the government. Instead of investing in B4RN and getting EIS relief, people are likely to invest more in SIPPs and get tax relief that way. Net result – the government doesn’t get any more tax. I am sure B4RN will adapt to the change and continue to do the good work of putting fibre broadband into rural communities.

  7. Avatar Andrew

    This isn’t just affecting community schemes, just been turned down for a new commercial venture as well.
    Good to know HMRC think fibre rollout is risk free – just waiting for the rush of eager venture funders now!

  8. Avatar chris conder

    B4RN is a rainbow. Too bad the government is colour blind and is gonna miss the pot of gold.

  9. Avatar Jose

    This Govt. ‘change of heart’ echoes the subsidy issue re. Solar and eEnergy business. Midnight Oil must have been burned to ‘unearth’ this profit issue. Not possible the Telcos or Others have been lobbying on this? Nah! So much for competition and access.

  10. Avatar Optimist

    So much then for bringing decent broadband to to whole country. Quiz your politicians about this when they come canvassing for votes.

    • Avatar chris conder

      The politicians know nothing about it and can do nothing. This is the civil service at its finest. Yes minister.They convince the politicians that fibre comes down phone lines and 98% of the country have access to superfarce, because that is what BT have told them.

    • Avatar Brian

      I makes it clear than no senor civil servants live in neglected rural areas with no access to or prospect of decent broadband

    • Avatar TheFacts

      Where did BT say 98% have superfast access? 27.2m UK homes and businesses.

    • Avatar davidj

      Doesn’t one of Openreaches pages claim Superfast is available to OR close to 27.2M premises? Which would indeed be around 98% of the country.

    • Avatar TheFacts

      Yes, CC suggests that might be incorrect.

    • Avatar GNewton

      @TheFacts: You don’t get it, what CC said, do you?

      Why don’t you tell us what alternatives there are for community broadband projects!

    • Avatar TheFacts

      @GN – CC said ‘They convince the politicians that 98% of the country have access to superfast, because that is what BT have told them.’ It there some doubt?

      And we have a situation where a major altnet has had to replan a number of projects having failed to meet the original timescales.

    • Avatar Robert

      If you look at TBB and their mapping there is some doubt. No stat from them currently reaches 98%. The best is England at around 96%, of which superfast provided by BT/Openreach is only about 90% when it comes to the likes Northern Ireland things are less rosy with coverage still in the high 80%’s.
      The average for the entire UK for superfast from Openreach/BT stands at about 90%.

      That stat also sounds far more likely than 98%, seeing as there are parts of London which Openreach still have not enabled with Superfast.

      There is no doubt coverage is high but 27.2M premises i doubt. 20-25M maybe.

    • Avatar Joe

      98% is expected H1 2020. At the moment it looks like they will slightly overshoot that leaving around 1.7% without superfast.

    • Avatar davidj

      So Chris and Robert are right 98% do not “currently” have access to Superfast from BT / Openreach available. That is what i also thought. No doubt it is high but 27.2M high already, Nah.

    • Avatar GNewton

      @TheFacts: You just don’t get it, do you?

      Last time I looked at the figures, it was something like slightly less than 700 000 FTTP premises passed by BT. Add to this a bit more from altnets like Gigaclear, Hyperoptic, B4RN. But in total, fibre coverage is a far cry from 98%, more like just a few percents.

      Unless you were brainwashed by the ASA to believe differently 🙂

      So what funding model do you suggest could replace the EIS Tax Relief?

    • Avatar Gadget

      But GN this initial comment and successive posts does not mention your pet topic of FIBRE (my emphasis) Broadband, only Superfast, or Superfarce as some folk call it.

    • Avatar TheFacts

      98% of properties have access to Superfast, as CC says, correct?

    • Avatar GNewton

      @Gadget: I was referring to CCs statement:

      “convince the politicians that fibre comes down phone lines”

      Also, it appears TheFacts genuinely believes that an alleged 98% coverage of superfast VDSL is an achievement, rather than a farce. But more to the point: He can’t come up with any better proposals for community broadband projects.

    • Avatar TheFacts

      @GN, @CC – please explain why Superfast is a farce when 98% of properties benefit. If the alternative was rolling out FTTP how many properties would have been reached by now? Resources are scarce as Gigaclear have shown.

    • Avatar davidj

      98% do not benefit Robert has already pointed that out. If Bt are claiming 98% or 27.2M that figure is wrong. It will no doubt reach that but currently at that NO WAY

    • Avatar TheFacts

      Benefit in it being available if they want it…

    • Avatar GNewton

      @TheFacts: Fibre is only available to a tiny number of premises! Why is that so hard to understand for you?

    • Avatar TheFacts

      @GN – is there doubt that 98% of premises have availability of Superfast access if they pay for it?

    • Avatar Robert

      98% from BT is what Chris said and as has been told to you not only in this story but i see others now in recent days from other 98% availability is WRONG.

      You can repeat your rubbish as much as you want it will not make you right.

  11. Avatar TheFacts

    @GN – the alternatives are the >100 companies with Code Powers.

  12. Avatar CarlT

    Changing these rules should give the government something to do once they’ve finished making a mess of our relationship with the EU and wider world.

    • Avatar davidj

      They have still got to finish f**king up the benefits system for those that truly need financial help. The public transportation system and awarding contracts to idiots that can not run trains. Oh and then private transport and taxing the car some more because they want us all to buy an electric car from Errrm Japanese or EU manufacturers car makers who are leaving our country due to the dumb financial decisions of our government.

      Im sure there is plenty more balls ups to be made before they shove a few million more in some monopolies pocket for telecoms and kill of the nasty wave of entrepreneur small network builders.

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