Far from cracking down on venture capital trusts (VCT) and enterprise investment schemes (EIS) as feared, the chancellor put the tax-advantaged schemes centre stage in his first Autumn Budget as he sought to generate a £20 billion ‘action plan’ for investing in Britain’s future.
Wealthy individuals will now be able to double their investments in an EIS to £2 million provided the extra money goes to a business defined as ‘knowledge intensive’.
Similarly, the amount of investment that that such high-tech and potentially high-growth firms can receive through either an EIS or VCT has been doubled to £10 million.
Flexibility has been introduced to the rule banning investments in companies over 10 years old, with firms now able to choose their first commercial sale or hitting annual turnover of £200,00 as their official starting point.
However, there is a sting in the tail as the government continues its clampdown on low-risk capital preservation schemes the Treasury believes are abusing the lucrative income tax and capital gains reliefs on offer.
A new ‘risk to capital’ test will be included in the government’s Finance Bill to ensure that tax reliefs in EIS, VCTs and also newer seed enterprise investment schemes (SEIS) are only used for genuine growth companies where there is a significant chance of investors losing their money.
A Treasury consultation paper on ‘financing growth in innovative firms’ states that independent, entrepreneurial companies looking to expand will not be affected.
‘Tax-motivated investments, where the tax relief provides all or most of the return for an investors with limited risk to the original investment (ie, preserving an investor’s capital) will no longer be eligible,’ it states.
VCTs, which invest in a portfolio of small unquoted businesses, have been the subject of numerous rule changes over the years. These look set to continue with the Treasury announcing several more changes to target the funds towards higher-risk investments.
The Finance Bill will contain a new anti-abuse rule preventing the use of loans to preserve and return equity capital to investors.
From 6 April next year, more favourable historic rules that some VCTs have continued to use under a ‘grandfathering’ clause will be removed. From the new tax year, VCTS will have to invest at least 30% of their funds in qualifying holdings with 12 months.
In another rule tightening, by 2019 VCTs will have to hold 80% of their assets in qualifying companies rather than the current 70%.
Patrick Reeve, managing partner at Albion Capital, welcomed the Treasury’s moves, which he said recognised the contribution venture capital had made to the economy by backing small businesses and creating thousands of jobs.
‘We are highly supportive of innovation and committed to finding and backing more ambitious businesses in areas where we see excellent growth potential, such as digital healthcare, automation, cyber security and data analytics,’ he said.
The Association of Investment Companies was pleased that private investors in VCTs would continue to receive their tax-breaks but was more cautious on the proposals.
AIC chief executive Ian Sayers said: ‘The chancellor has announced significant VCT rule changes and we need to consult with our VCT members, their managers and the government to ensure that they are workable within the commercial reality of funding small businesses.’