Revised Rules for EIS, SEIS & VCT – Resulting from the HMT Consultation with UKBAA

THE VENTURE CAPITAL SCHEMES (SEIS, EIS and VCT)
Many of you helpfully participated in the consultation and evidence gathering process on the tax-advantaged venture capital schemes that we held last summer. We are really grateful to everyone who provided us with comments, case studies, and suggestions for change.
In response to one of the key issues that was raised in that consultation, Budget announced that SEIS investment can now be followed immediately by EIS or VCT investment, removing the requirement that 70% SEIS funds must be spent before EIS funding can be raised to smooth the interactions between the schemes.

As I set out at Autumn Statement, one of the key aims of the consultation was to put us in the best possible position to engage with the EU Commission in light of their new State aid rules. These rules introduce new standard limits under the “general block exemption framework” (GBER) and guidelines for additional “risk finance” investment. The GBER criteria allow State aid to be provided to companies within 7 years of a first commercial sale, and up to a maximum total investment limit of ‚Ǩ15 million.

We have used the information provided to us through the consultation exercise to support our discussions with the Commission. The Budget announced a number of changes to the EIS and VCT scheme rules that are in line with – but more generous than – these new EU limits. These are set out below* and represent a set of changes that the government believes will improve the schemes and ensure that they are well-targeted, providing additional support to innovative companies and those going through change.

However, we remain in discussions with the EU Commission on these changes and they have not yet received State aid approval. In order for us to receive that approval we will need to provide the Commission with more quantitative and economic evidence conclusively demonstrating the extent of the funding gap in the UK for older SMEs, and innovative companies. We will be continuing to work extremely hard over the coming months to provide that information to the Commission. We hope to receive State aid approval in the next few months and will of course let you know as soon as we receive it. A full response to the consultation document will be published after the State aid position has been confirmed.

In terms of how these changes will take effect, our intention is that legislation is introduced in the Finance Bill that can take effect once State aid approval has been received. In the period from 6 April 2015 to the date of bringing in the new rules, we unfortunately cannot provide certainty that investments will continue to be “qualifying investments” for tax relief (or form part of qualifying holdings for VCTs) where they are outside the new standard EU limits i.e. where investments are made to companies that are more than 7 years old by reference to the date of first commercial sale at the point of the first EIS or VCT investment; or where they have received more than ‚Ǩ15 million EIS/VCT investment.

I appreciate that many of you will have questions about these changes and the way in which they will impact on investment; and that many of you offered to help us with additional evidence as and where you can. We will be holding a seminar next Wednesday 24th March so that we can discuss these issues. Places will be limited and therefore we will be giving priority to representative groups, larger funds, and advisors who are likely to be in touch with many investors/companies – please get in touch with me if you would like to attend. In any case, we will share minutes from the meeting more widely. In addition to this one-off event, the government will be launching a new industry forum to discuss the use and operation of the tax-advantaged venture capital schemes which will have its first meeting later this year. We will provide you with further details about that forum and how you can get involved in it nearer the time.

SOCIAL INVESTMENT
A number of you will also be interested in the Budget announcement that a new Social VCT will be introduced in a future Finance Bill, and that a transitional period for community energy schemes moving from tax-advantaged investment under the venture capital schemes to the social investment tax relief (SITR) has been confirmed. Community energy schemes will be allowed to access existing venture capital schemes for six months following EU state aid clearance of an enlarged SITR scheme. Eligible community organisations will then be able to access SITR only.

ENTREPRENEURS’ RELIEF
I know that many of you have an interest in CGT entrepreneurs’ relief and so wanted to point you to a few particular announcements. The government would like to ensure that academics and researchers are appropriately rewarded when they contribute towards valuable intellectual property used in spin out companies and will therefore review the availability of entrepreneurs’ relief on disposals by academics of shares in such companies.

The government will however address use of the entrepreneurs’ relief rules for tax planning which is not in keeping with the policy intention, targeting structures set up so that people with only a small indirect stake in a trading company can benefit from the relief. The government will also ensure that entrepreneurs’ relief on the disposal of personal assets used in a business is only available when someone is making a meaningful withdrawal from that business.

OTHER BUDGET ANNOUNCEMENTS
The full detail of the Budget is set out in the document, which you can see here https://www.gov.uk/government/topical-events/budget-2015
You may also be particularly interested to note:
• the launch of a pilot ‘Help to Grow’ programme to facilitate up to £100m finance for growing businesses,
• support for fintech businesses, and investment in tech incubators in Manchester, Leeds and Sheffield
• the launch of a wide-reaching business rates review
• the introduction of digital tax accounts for everyone over the next parliament, removing the need for annual tax returns – and moving to ensure that for businesses it will feel like paying one tax rather than many; and
• radical reforms to savings including the introduction of a tax-free allowance for income on savings the expansions to the range of ISA-eligible investments to include listed bonds issued by Co-operative Societies and Community Benefit societies, and all SME securities (not just shares) admitted to trading on a recognised stock exchange such as AIM or ISDX.