Calculus Capital’s reaction to the Finance Act 2015

John Glencross, CEO and Co-Founder, Calculus Capital sums up his thoughts on the Finance Act 2015 and how it will affect the EIS industry and Calculus Capital.

“Our thoughts are that there is more complexity and that is unhelpful, but it does not materially impact the type of investments Calculus Capital makes for its EIS funds or VCTs.

The key changes are:

The shorter age limits (7 and 10 years) for companies raising EIS and/or VCT funds

The ‘seven and ten year’ rules are disregarded if the company raised any tax advantaged investment within those time scales. If so, they can continue to raise funds after those dates. They are also disregarded if the amount being raised is greater than 50% of the last five years’ average annual turnover and the funds will be used to launch new products or enter new markets (i.e. for more than just ‘business as normal’).
The prohibition of ‘trade and asset’ deals to go along with the prohibition on MBO ‘share acquisition’ deals.

Whilst it doesn’t materially impact our investment strategy, it is an EU and Treasury sledgehammer to crack a nut. It has collateral damage for both some sensible corporate decision making and scientific and technological research and development . If anything, it shows neither the EU Competition Commission nor the Treasury really understands modern business. Looking at the smaller companies’ sector, overall, one exceptionally short sighted action is to include within the ban on trade and asset acquisitions a prohibition on companies using EIS or VCT money to acquire intangible assets such as patents from other companies. The OECD has pointed out that modern companies spend more on acquiring intellectual property (IPR) than they do on fixed plant and machinery. A life sciences company, for example, may need to acquire rights to use a patent held by someone else to enable it to achieve some step in its own core research more easily.

The lifetime limit of £12 million (£20 million for so-called knowledge intensive companies)

The £12 million rule is not really an issue except in the life sciences sector which can be reliant on EIS and VCT investment for longer as they undertake expensive clinical trials although these companies are likely to qualify as ‘knowledge intensive’ companies .

Older VCTs (funds raised pre 2012), that were previously ‘grandfathered’ and could still do management buyouts, have now lost that freedom.

It levels the playing field for newer funds. The main unhappiness is from the VCT managers whose stated investment strategy is to invest in MBOs and MBIs (whether by share acquisition or trade and assets’ deals). Their investment model is challenged and the Stock Exchange Listing Authority of the FCA will not allow them to change their stated strategies without obtaining shareholder approval.

The Government has extended the ban on alternative energy projects that receive Government subsidies from also benefiting from EIS and VCT tax breaks to a include reserve energy generating capacity and community energy projects. These activities will also not be eligible for Social Investment Tax Relief (SITR). This makes sense as EIS and VCT investment is not intended for capital intensive projects which receive ongoing Government subsidies

More positively, the Treasury has accepted that replacement capital should be allowed within the VCT and EIS regulations. It’s recognised that it is often necessary to sort out shareholding structures in SMEs prior to a venture capital investment. It is likely to allow 50% of any investment to be in the form of replacement capital up to a maximum of £5 million total investment (of which half can be replacement capital) in any rolling 12 month period. Replacement capital was not allowed under the original scheme regulations but it was pointed out to the Treasury that the Global Block Exemption Regulations (GBER) – the overarching EU guidelines governing tax advantaged venture capital schemes in the EU – allow for replacement capital. The Treasury is therefore in discussion with the EU about allowing it for VCTs and EIS investment. The detail is yet to be settled and approval is likely to be sometime in 2016.

Overall, there is more complexity and, to that extent, it is unhelpful but it does not materially impact the types of investments Calculus makes. It is disappointing that they imposed a rather short sighted ban on the acquisition of patents and other IPR that a company need to make to achieve some aspect of its own product development more easily at a time when the OECD is pointing out that acquiring rights to use IPR is more important to modern companies than buying fixed plant and machinery.

On the other hand, some ability to use EIS and VCT money for replacement capital is a sensible and helpful step.”