Business Investment Relief (BIR) was introduced in April 2012: it owes its genesis to the recognition that, whilst the remittance basis of taxation is generous in permitting resident non-domiciliaries (RNDs) not to pay tax on overseas income and gains providing they don't enjoy them in the UK, this benefit goes hand in hand with an unavoidable disincentive to using such income and gains to invest in UK business. This arguably paradoxical result is still recognised to be a problem: few advisers are confident enough in the relief to put it forward systematically to clients in its current form. The result is that only some 200-400 taxpayers per year make use of the relief and in nearly five years it has sucked in less than 2 billion into UK business. If it is true that (by some estimates) more than 8 billion in direct taxes are paid by RNDs annually, this investment pales into insignificance by comparison with the direct taxes the potential investors themselves account for.

Since the Treasury has an overarching objective to stimulate growth and encourage investment in the UK by onshore investment, it has acknowledged a need to overcome this continuing challenge, which arises largely out of the slightly clumsy architecture of the relief. A new consultation was announced in the 2015 Autumn Statement, aimed at discovering what improvements could be made to the relief to stimulate greater use and attract more funds into the country. The Government specifically asked what simplifications could be made, whilst preserving the purpose or policy objective (securing more investment into the UK) and the safeguards against abuse built into the relief (mechanical requirements designed to avoid the taxpayer benefitting from the funds without the tax charge which would normally follow).

The consultation gave full rein to the creativity of those responding and the Government states that it is continuing to look at some of the more far-reaching ideas proffered: what is disappointing is that the measures to be adopted first involve little more than a softening of the obstacles to the relief and are some way off amounting to a strengthening of the incentives which the relief could offer.

The first batch of changes to be adopted will take effect on 6 April 2017 (even if the Finance Bill doesn't receive Royal Assent till later in that tax year). Draft legislation was published in the Finance Bill text published on 5 December 2016. The following are the highlights.

EXTRACTION OF VALUE

The biggest obstacle to the use of the relief has been the socalled extraction of value rule: this is an "all or nothing" feature of the rules which entails a tax charge for the investor if a benefit flows to the investor, directly or indirectly from the investee company and any of its associates, whether or not there is a link to the investment. A common illustration of the problem involved the investment going into company A but the benefit flowing from its associate company B. Any breach means tax is due on the same footing as if the money had been brought into the UK for the normal expenditure of life, unless "appropriate mitigation steps" could be taken. The risk inherent in this feature is the main reason why there has been comparatively little take-up of the relief.

This feature is being changed: the new law will catch only benefits attributable, directly or indirectly, to the investment, i.e. the tax charge risk only arises where the link is made out. As well as adding wording to that effect, so that if a benefit flows which cannot be tracked back to the investment there is no charge, the changes will entail the welcome removal of the definition of an "involved company". Whilst the new wording remains loose, it appears better targeted at the potential mischief without catching benefits which cannot have been in the contemplation of the policy-makers (e.g. those which would have accrued to the investor anyway, irrespective of the investment). A missed opportunity here relates to discounting de minimis benefits, even if there is a link back to the investment which has been made out: this would have removed some pressure in the relief by cutting back the policing of minutiae.

SCHEME CRITERIA

Most respondents have criticised some of the mechanics of the relief, e.g. the 45-day rule for investment after the remittance of the investment funds. Most critics of the current relief agree that this time limit serves little purpose if the scheme is policed by a charge if the investor benefits. Of more concern however has been the rigidity of the qualifying criteria for the company and the maximum time which can elapse from investment to trade.

Under the new rules, a company can be a hybrid of a "stakeholder" and a trading company; previously it had to be one or the other.

An investor will also be able to acquire existing shares in a target, not simply new shares: this is a welcome development, since it would not be unusual for an investor to want to take over an existing business and the relief would currently only allow future investment to be relieved, not the cost of original acquisition. There seems no rational reason for such a distinction and it is clear that the Government has accepted the point.

Also, it may take up to five years to trade, up from the current two years; the grace period after a company goes nonoperational and before mitigation steps need to be taken will also be raised to two years. Again, this feels like a missed opportunity: for serial entrepreneurs whose efforts generate tax and employment opportunities through repeat business ventures, it seems heavy-handed when the mitigation steps accept the principle of reinvestment for that reinvestment not apparently to be wide enough to permit the retention of a single holding company throughout. Where a holdco (for example an onshore family investment company) becomes "non-operational" through ceasing to hold stakes in trading companies e.g. after a trade disposal of business one, it would be within the spirit of the relief to permit a reinvestment into a new trading opportunity (business two) without the rigmarole of despatching the funds offshore and liquidating only to bring them back again; the same "wait and see" principle already exists in (for example) business property relief from inheritance tax and is within the existing section's limited references to reinvestment.

Partnerships however remain a cause for concern to the Government, who will clarify that a target company which is a partner in a partnership will not qualify for relief purely qua partner even if the partnership is trading, so unless it is otherwise qualifying it fails the test.

POSSIBLE FUTURE WIDENING OF THE RELIEF

The Government states it will look at the introduction of possible actual incentives in future Finance Bills. These might include allowing partnerships or unincorporated businesses and sole traders or even quoted securities; the more adventurous suggestions include an idea that, after a period to be defined, the proceeds of an investment should be capable of being treated as clean capital which could stay in the UK (on the premise it has achieved the fiscal objective of stimulating investment and otherwise generating tax through the investment).

Given the spirit in which the consultation was approached, it is to be hoped that the Government will move rapidly to adopting some incentives to bolster the removal this time round of some of the unnecessary obstacles originally built into the relief. Watch this space.