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Budget 2017: expansion and restriction of EIS/VCT reliefs

Posted: 29/11/2017


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:

  • the doubling of the annual investment limits under the EIS for ‘knowledge intensive’ companies; and
  • the announcement of additional requirements for qualifying investments to prevent investments in low risk companies from qualifying for relief under the EIS. This additional test is intended to redirect investment money back to the high-risk/high-growth companies that the EIS is designed to help.

VCTs

A number of announcements were made about VCT relief which all have different effective dates:

  • the introduction of a new requirement that 30% of the funds raised in an accounting period  be invested in qualifying holdings within 12 months of the end of that accounting period (for accounting periods starting after April 2018);
  • the narrowing of the ability for VCTs to make loans to the company that it invests in. Loans must be unsecured and the return on the loan itself must be limited so that it represents no more than a commercial return (returns under 10% pa on average over five years will be considered to be commercial) (from the date that Finance Act 2018 comes into effect). This is another measure designed to target reliefs at higher risk investments though the government’s view of a commercial return on loans to high risk companies is on the low side;
  • an increase in the  proportion of VCT funds that must be held in qualifying holdings from 70% to 80% (not until April 2019);
  • doubling the re-investment period allowed for gains made from qualifying disposals of investments from six to 12 months (but only from April 2019).

EIS additional requirement - 'Risk to Capital'

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.

Annual limits for knowledge intensive companies

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:

  • first commercial sale test – this is the current test which provides that a risk capital investment must be made in the company within 10 years from the first commercial sale;
  • turnover test – the 10 year countdown will apply from the date that turnover reached £200,000.

Patient Capital investment funds

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.

Advance assurance process

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. 


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