The government wants Venture Capital Schemes to be focused on support for companies with high risk and high growth potential. In response to a previous consultation, it was suggested that a significant subset of EIS investments during 2016/17 was focused on low risk capital preservation.
Legislation in Finance Bill 2017-18 will introduce a new qualifying condition, ‘the risk to capital condition’.
The new condition introduces a principles-based test to determine if, at the time of the investment, a company is genuinely an entrepreneurial company, i.e. are the company’s objective to grow and develop, and is there a significant risk of loss of capital where the amount of the loss could be greater than the net return to the investor.
All relevant factors must be considered in the round when reaching a conclusion. The condition includes a non-exhaustive list of the types of factors that may be taken into consideration when arriving at the conclusion.
The changes will have effect for investments made on or after 6 April 2018.