Changes To UK’s Enterprise Investment Schemes, Venture Capital Trusts – A Guide
John Glencross, Calculus Capital , Chief Executive , London, 8 February 2016
Enterprise Investment Schemes and Venture Capital Trusts are ways in which people can secure considerable tax breaks by putting money to work in start-ups, early-stage and specialist companies in the UK. It may come as a surprise to realise that they have been around for more than 20 years and have survived – despite the odd worry – Conservative, Conservative/Liberal Democrat and Labour administrations. Politicians like to boast (not always very convincingly) of their support for small business, but the reality is that as other forms of tax incentives have been eroded in some ways (such as for lifetime pension saving tax-free limits), structures such as the EIS have drawn new followers. This article is by John Glencross, chief executive of Calculus). He talks about recent rule changes, how they affect investors, and future points to consider. The editors of this publication are grateful to Calculus Capital for sharing these insights. As ever, they do not necessarily share all the opinions expressed and invite readers to react.
The Finance Act that came into law last November brought with it changes to the rules governing EIS and VCT vehicles. These changes relate mainly to the criteria used to determine companies’ funding eligibility and the levels of investment they can receive. They are ultimately designed to ensure that capital is targeted at the entrepreneurial growth businesses that need it most.
While we don’t believe the new regime should materially affect the attractiveness of EIS and VCT structures to suitable investors, they do add greater complexity to the VCT and EIS rulebooks, which is something investment managers must deal with.
In broad terms, the key changes mean that companies older than seven years will no longer will be able to receive EIS or VCT funding, nor will companies with more than 250 employees, and no single company will be able to receive more than £12 million in investment.
Knowledge intensive company rules
But there are exceptions. So-called “knowledge intensive companies”, which generally refers to businesses with high research and developments costs and highly skilled employees, are subject to slightly different rules. They have a ten year “age limit”, £20 million funding cap and limit of 500 employees. The seven and ten year age limits do not apply where the company has received EIS or VCT funding in its first seven years, nor where the EIS or VCT investment is more than 50 per cent of the average turnover of the investee company over the past five years – provided the new funds are used for new geographies or new products.
VCT capacity may be constrained in 2016
A further and significant change that will have an immediate impact on VCTs is the prohibition on using VCT funding to finance management buyouts or buy-ins. Many VCTs do this and some are not raising new funds this tax year as a result of this new restriction affecting their investment strategy.
For the full article on Wealth Briefing please see here.