Since the changes to the EIS legislation which took effect
following the Finance (No 2) Act 2015, initial rounds of EIS
investment have increasingly been provided to companies at a very
early stage of their development. The type of company that
typically benefits from EIS investment is changing too. The
emphasis this year has been on entrepreneurial sectors such as
software, tech and advanced manufacturing.
2. Venture Capital Trust
Recent reforms to the pensions rules now permit far greater
freedom in retirement planning. Tax efficient occupational pensions
are subject to ever more stringent financial limits. At the same
time, new higher rates of SDLT (stamp duty land tax) have been
introduced for investments in residential property, together with
restrictions on tax relief for interest payments on buy-to-let
As a result of these changes, VCTs have found a new market in
investors seeking tax-efficient ways in which to diversify their
portfolios, or whose pension funds have already reached £1.5
How are the rules changing?
1. New law - Finance Act 2016
The Finance Act 2016 received Royal Assent and became law on 15
September 2016. This year's changes are intended to provide
some much needed clarification in respect of the more substantive
amendments made last year.
In 2015, an age limit was introduced for the business activities
of investee companies. The limit is seven years in most cases,
extended to 10 years for a "knowledge-intensive company".
The period begins to run on the date of the first relevant trading
The definition of a 'knowledge intensive company' is
complex. The extended age requirement is in part conditional on the
company's operating costs. This year, there has been a welcome
clarification of this condition. However, some uncertainty remains
in relation to the definition of a knowledge intensive company and
precisely how this may be interpreted by HMRC in particular
circumstances. We will continue to watch the market and take note
of any changes as HMRC's practice evolves.
The age limit does not apply if, for example, the total value of
EIS or VCT finance investment made in the 30 days up to and
including the investment date (including the investment in
question), is at least 50% of the average turnover. The 2016 Act
also determines more clearly the period over which average turnover
is calculated. It will end immediately before the start of the
investee company's last accounting period.
These changes apply to all investments from 6 April 2016 and to
investments between 18 November 2015 and 5 April 2016, except where
the investee company elected to apply the previous rules.
2. New Reporting Requirement
A new reporting requirement has come into effect as a result of
the EU State Aid enquiry into enterprise tax reliefs. From 1 July
2016, an investee company that receives any form of investment in
excess of €500,000 that is considered to be state aid will be
required to report this to HMRC. This includes both EIS and VCT
For more information about SEIS (seed enterprise investment
scheme), EIS or VCT relief, or for help and advice if you are
considering being a party to a first or subsequent investment round
in which one or more of these reliefs may apply, please contact a
member of our enterprise tax team. We can assist with initial
advice, transaction structuring, applications for HMRC clearance
and subsequent reporting obligations.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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After several months of consultation and deliberations, the Organisation for Economic Co-operation and Development rendered public a revised draft Guidance on Due Diligence for Responsible Business Conduct.
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