VCTs and the Budget

It looks like VCTs have escaped, but there is some tightening of the qualifications. We will need to read this in detail to see the outcome. There has however been a boost to EIS.

1.6 Venture Capital Trusts (VCTs): effect of anti-abuse provisions on commercial mergers

The government will legislate in ‘Finance Bill 2017-18’ to limit the application of an anti-abuse rule relating to mergers of VCTs. The rule restricts relief for investors who sell shares in a VCT and subscribe for new shares in another VCT within a six month period, where those VCTs merge. This rule will no longer apply if those VCTs merge more than two years after the subscription, or do so only for commercial reasons.

The change will have effect for VCT subscriptions made on or after 6 April 2014. This measure is subject to normal state aid rules.

TIIN: Income Tax: venture capital trusts – limiting the effect of anti-abuse provisions on commercial merger

1.7 Venture Capital Schemes: risk to capital condition

As announced at Autumn Budget 2017, in response to the Patient Capital Review the government will legislate in ‘Finance Bill 2017-18’ to ensure the Venture Capital Schemes (the Enterprise Investment Scheme (EIS), Seed EIS and VCTs) are targeted at growth investments. Relief under the schemes will be focussed on companies where there is a real risk to the capital being invested, and will exclude companies and arrangements intended to provide ‘capital preservation’.

The changes will have effect for investments made on and after Royal Assent of Finance Bill 2017-18. Detailed guidance will be issued shortly after the publication of ‘Finance Bill 2017-18’. HM Revenue and Customs (HMRC) will cease to provide advance assurances for investments that appear not to meet this condition on and after the date of publication of the guidance where it would be reasonable to conclude that a company appears to be intending to carry out capital preservation activities. This deadline will apply also to advance assurance applications received before that date.

This measure is subject to normal state aid rules.

TIIN: Income Tax: venture capital schemes: risk to capital condition

1.8 VCT: other reforms

In response to the Patient Capital Review the government will legislate in ‘Finance Bill 2017-18’ to move VCTs towards higher risk investments by:

• removing certain ‘grandfathering’ provisions that enable VCTs to invest in companies under rules in place at the time funds were raised, with effect on and after 6 April 2018
• requiring 30% of funds raised in an accounting period to be invested in qualifying holdings within [12] months after the end of the accounting period, with effect on and after 6 April 2018
• increasing the proportion of VCT funds that must be held in qualifying holdings to 80%, with effect for accounting periods beginning on and after 6 April 2019
• increasing the time to reinvest the proceeds on disposal of qualifying holdings from six months to 12 months for disposals on or after 6 April 2019
• introducing a new anti-abuse rule to prevent loans being used to preserve and return equity capital to investors, with effect on and after Royal Assent of Finance Bill 2017-18

This measure is subject to normal state aid rules.

TIIN: Income Tax: encouraging more high-growth investment through Venture Capital Trusts

1.9 EIS and Venture Capital Trusts: increased limits for investments in knowledge-intensive companies

As announced at Autumn Budget 2017, in response to the Patient Capital Review the government will legislate in ‘Finance Bill 2017-18’ to encourage more investment in knowledge-intensive companies under the EIS and VCT scheme.

The government will legislate to:

• double the limit on the amount an individual may invest under the EIS in a tax year to £2 million from the current limit of £1 million, provided any amount over £1 million is invested in one or more knowledge-intensive companies
• raise the annual investment limit for knowledge-intensive companies receiving investments under the EIS and from VCTs to £10 million from the current limit of £5 million. The lifetime limit will remain the same at £20 million
• allow knowledge-intensive companies to use the date when their annual turnover first exceeds £200,000 in determining the start of the initial investing period under the permitted maximum age rules, instead of the date of first commercial sale

The changes will have effect on and after 6 April 2018. This measure is subject to normal state aid rules.

TIIN: Income Tax: the EIS and Venture Capital Trusts: encouraging investments in knowledge-intensive companies

1.10 EIS and Venture Capital Trusts: relevant investments

The government will legislate in ‘Finance Bill 2017-18’ to ensure all risk finance investments, whenever made, will count towards the lifetime funding limits for companies receiving investments under the EIS and VCT scheme. The current rules exclude certain investments made before 2012.

The changes will have effect for investments made on and after 1 December 2017. This measure is subject to normal state aid rules.

TIIN: Income Tax: venture capital schemes – relevant investments

Cliff Weight 22 Nov 2017.