Despite some commentators predicting a narrowing of relief under the risk capital schemes (Seed Enterprise Investment Scheme (SEIS) Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT)), the Government’s stated focus was on stimulating growth in early-stage businesses taking advantage of these schemes.
There were a number of provisions announced; some in the Budget itself and some in the Treasury’s response to the patient capital consultation Financing Growth in Innovative Firms, which was also published on Budget day.
The key tax announcements were:
A number of announcements were made about VCT relief which all have different effective dates:
This new measure seeks to deny relief under the risk capital rules where the investment represents a limited risk to the original investment and therefore the tax relief given represents most of the return for an investor.
Companies will need to demonstrate in their assurance applications their growth and development objectives over the long-term (it is already a requirement for companies to show how the investment will help with its growth and development). Additionally, they need to show that there is a ‘significant’ risk that the investor will lose capital.
Although the change does not apply until the Finance Act 2018 comes into effect, HMRC will not give advance assurances for companies that they believe will not meet this test. The Treasury seem to be think that this will reduce their advance assurance workload by 80% (though it’s not clear if it means 80% of previous applications would be refused or if these lower risk applications are more time consuming than those for ‘classic’ high risk companies).
EIS strategies focussing on capital preservation will undoubtedly be affected. We would expect high risk technology companies to continue to pass this test but exactly how it will work in practice is yet to be seen so there may be unforeseen consequences.
Knowledge intensive companies (those that spend a minimum percentage of turnover on IP for exploitation by the company) will be able to receive up to £10 million per rolling 12 month period from EIS and other risk finance investments and investors will be able to invest up to £2 million per year into a knowledge intensive company (we assume this means £4 million if the EIS carry back facility is used). This doubles the current annual limits placed on companies and investors under the EIS. The lifetime limit for a knowledge intensive company does not appear to have changed.
The responses to the patient capital consultation paper also suggests a new age limit for knowledge intensive companies receiving their first risk finance investment will be introduced. Such companies will be able to choose between:
In addition to a number of other initiatives aimed at supporting early stage companies, the Government is setting up an arm of the British Business Bank which will be dedicated to investing in early stage companies. The fund will be established with £2.5 billion.
The consultation on whether, and if so how, HMRC will continue to offer their assurance service in relation to SEIS, EIS and VCT investment is due to be published on 1 December.