Tax-advantaged venture capital schemes are subject to EU state aid rules, which were changed last year. As a result of the changes, a number of amendments needed to be made to the existing provisions governing investments in EISs, SEISs and VCTs eligible for tax reliefs (risk finance investments (RFIs)). The amendments were subject to consultation and draft legislation was published on 24 March 2015. The consultation closed on 15 May 2015.
A number of changes to the EIS, SEIS and VCT rules have now been proposed. Unless stated otherwise, the measures take effect from the date of Royal Assent.
- If an individual subscribes for additional shares in a company, the new shares will not be eligible for EIS relief unless the individual has either made an RFI in the company before Royal Assent, or the individual’s prior shares in the company (excluding founders’ shares) were an RFI.
- A new requirement will be introduced for the money to be used for the growth and development of the company (or subsidiary company).
- The rule prohibiting the use of money for the acquisition of shares will be extended to all investments made by VCTs on or after Royal Assent.
- A new rule will be introduced to prevent companies from using EIS and VCT investments to acquire a business.
- Companies must raise their first investment under RFI within 7 years of making their first commercial sale or 10 years if the company is a knowledge-intensive company (as defined in Summer Finance Bill 2015). However, no age limit will apply to companies raising an investment where the amount of the investment is at least 50% of the company’s annual turnover, averaged over the previous five years.
- In addition to the existing cap on annual investments of £5 million, a new cap will be introduced on the total amount of investments a company may raise under an RFI, of £12 million (or £20 million for knowledge-intensive companies). Any RFIs used by a business previously owned by another company will count towards the total funding limit.
- Knowledge-intensive companies are permitted to have up to 500 employees for raising capital by RFIs.
- Companies will no longer need to use at least 70% of SEIS funds before raising funds under EIS or VCT (with effect from 6 April 2015).
- EIS relief of investors in companies that redeem the shares of SEIS investors will no longer be reduced, so long as the SEIS relief on the redeemed shares is repaid (with effect from 6 April 2014).
- Farming outside the UK will not be an eligible activity for EIS, SEIS, VCT and Enterprise Management Incentives.
These changes have been introduced to ensure that the reliefs comply with EU state aid rules.