Enterprise investment scheme and venture capital trusts
The Government has announced a number of changes to the EIS and VCT rules. Most of these changes were included in the draft Finance Bill 2012 published in December 2011.
For EIS and VCTs, legislation has been included in the Finance Bill 2012 which will increase:
- the full-time employee limit to fewer
- than 250 (currently 50)
- the threshold of gross assets to no more than £15m immediately before investment and £16m immediately thereafter (current £7m and £8m respectively)
- the maximum annual amount that can be invested in an individual company in aggregate from EIS, VCTs and other state-aided risk capital measures to £5m (currently £2m).
Subject to state aid approval from the EU, these measures will apply for shares that are issued on or after 6 April 2012.
The amount that an individual can invest per tax year in EIS shares will also increase to £1m (currently £500,000) from 6 April 2012. This increase has already received state aid approval.
Other changes have been announced by the Government which will amend the current EIS rules for shares issued on or after 6 April 2012 by:
- relaxing the definition of when a person is connected to a company through an interest in its capital
- relaxing the definition of shares which qualify for relief (to bring this into line with the VCT rules)
- removing the £500 minimum investment limit.
For both EIS and VCT share issues on or after 6 April 2012, the following changes have been announced:
- the introduction of a 'disqualifying arrangements' test
- the acquisition of shares in another company will no longer be a qualifying use of funds raised (for VCTs this will apply to funds raised after 5 April 2012).
In addition, legislation will be amended to remove the £1m limit on investment by a VCT in a single company (except for companies in a partnership or a joint venture).
In respect of shares issued before 6 April 2012, as previously announced,
legislation has been included in the Finance Bill 2012 to prevent companies whose trade consists wholly or substantially of the receipt of feed-in tariffs (FITs) or similar subsidies from qualifying as EIS or VCT investments in cases where they did not start generating electricity before 6 April 2012. However, companies who issued EIS or VCT shares prior to 23 March 2011 will not be affected by this change. No EIS or VCT relief will be available for shares issued in such companies after 5 April 2012. This is likely to mainly affect companies generating electricity from wind farms and solar installations.
Most of the changes had been previously announced and are a welcome relaxation to the EIS and VCT rules. The measures should go some way to stimulating and boosting investment into 'smaller' companies and go towards plugging the so-called equity gap.
It should be noted that the Government originally announced that the annual aggregate venture capital funding limit per company of £2m would be increased to £10m. The 2012 Budget has only confirmed an increase of the annual investment limit to £5m, which is likely to have been the result of discussions with the EU. The overall increase is welcome, but the Government has restricted the likely impact of this change.
Seed enterprise investment scheme
Following the Government's announcement in the Autumn Statement, the Finance Bill 2012 has introduced the new seed EIS (SEIS) from 6 April 2012. The rules are summarised as follows.
- In order to qualify for the SEIS a company must be undertaking, or planning to undertake, a new business which has fewer than 25 full-time employees and gross assets of less than £200,000 at the time of the SEIS investment.
- Qualifying companies will be able to raise a total of up to £150,000 under the scheme, and funds raised must be used within three years. Once 75% of funds have been utilised, the company may raise funds under the EIS or from VCTs.
- The scheme offers up-front income tax relief of 50% for subscriptions of shares by investors of up to £100,000 (which can include directors). It should be noted that a claim for relief under SEIS may not be made until at least 70% of the money raised by the issue has been spent by the issuing company for the purposes of the qualifying business activity for which it was raised.
- The individual investor limit for SEIS will be £100,000 per tax year.
- There is also no CGT payable on the disposal of SEIS shares held for more than three years.
Furthermore, the rules provide for an exemption from CGT on gains realised from disposals of other assets in 2012/13 where the gains are reinvested through the new SEIS in the same year.
In addition to the above rules, and following recent consultation, the following changes have also been announced to the SEIS rules:
- companies can qualify even if they have subsidiaries
- eligibility is determined by reference to the age of the trade, rather than the company (any trade being carried on by the company at the date of the relevant share issue must be less than two years old at that date, whether the trade was carried on by the company or another person)
- the reference to holdings of other entities in calculating asset and employee tests has been removed
- the rules have been relaxed to allow past (but not current) employees to qualify for relief
- the rules have also been relaxed to allow directors who qualify under SEIS to continue to qualify under EIS (subject to time limits).
The new SEIS rules, and in particular the relaxations, are welcome and should be considered a positive step. However, as with the introduction of all new incentive arrangements, the take up of this scheme and benefit available to potential investors may be limited, especially given the financial limits.
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.