Important amendments to the EIS and VCT schemes
17 August 2011
The Government issued a consultation paper (the
“Consultation”) last month proposing big tax
changes to the UK’s venture capital scheme landscape, including
extension and simplification of the existing Enterprise
Investment Scheme (EIS) and Venture Capital Trust (VCT)
schemes.
What are the proposed amendments?
Budget 2011 proposed long overdue reforms to both of these
schemes, including raising the rate of EIS income tax relief from
20% to 30%. This change came into force in April this
year.
Subject to State Aid approval, the Consultation reiterates
welcome and important extensions to EIS and VCT reliefs,
including:
- increasing the annual funding limits for EIS and VCT investee
companies from £2m to £10m;
- increasing the qualifying EIS and VCT investee company limits
from not more than £7m gross assets to not more than £15m and from
not more than 50 employees to not more than 250; and
- increasing the cap on an investor’s annual EIS investments from
£500,000 to £1m.
If approved, these changes will take effect in April 2012.
In addition, the Consultation proposes a “simplification”
process, with smaller changes, which include:
- aligning the definition of a qualifying share under both the
EIS and VCTs to assist companies which receive investment, widening
eligible shares to include, subject to certain restrictions, shares
with preferential rights to income and assets; and
- potentially allowing certain anti-dilution arrangements;
and
- relaxing the rules around qualifying investors to allow
emergency funding from existing investors.
It is not all good news
The Consultation is broadly positive but the Government is
taking the opportunity to ensure the focus of the tax reliefs meets
its policy aim. EIS and VCT structures have been used by some
investors to maximise tax relief, but in ways aimed at minimising
the risk to capital. The schemes were meant to encourage capital
investment in riskier enterprises. The Government has proposed a
test to ensure that this is the case.
The Consultation reaffirms provisions announced in Budget 2011
about the exclusion of trade receipts from the feed-in-tariffs
scheme under EIS and VCTs, except in limited cases, broadly with
effect from April 2012.
It also promises a review of the excluded activities test, which
may prevent the use of EIS and VCT relief schemes in certain
sectors.
Responding to the Consultation
The Consultation gives a forum for investors, investees and
advisers to help shape the changes to the EIS and VCT schemes. The
Consultation closes on 28 September 2011. Field Fisher Waterhouse
LLP will be working with clients and responding formally to the
Consultation. If you would like more information or to join in our
response and contribute your views, please contact Andrew Prowse, Mark Gearing or Derek Hill.