The government is proposing introducing investment restrictions to both venture capital trusts (VCTs) and enterprise investment schemes (EISs).
The Treasury is seeking to cap the total amount of tax-advantaged investment that a qualifying VCT company may receive over its lifetime and has stipulated that investors must be independent from the companies they invest in via these schemes.
The annual cap for money raised under VCTs or EISs has been reduced to £12 million from £15 million announced in March. For so-called knowledge intensive companies this cap stands at £20 million.
The government estimates that 10% of companies currently eligible for VCT or EIS investment will no longer be eligible as a result of these new rules. The government also said some VCTs may incur one-off costs as a result of this implementation but that these costs are expected to be negligible.
New qualifying criteria will be introduced which limits relief on investments in companies that are labelled ‘knowledge intensive’ to within 10 years of their first commercial sale, and 7 years for other qualifying companies. This will not apply where the investment represents more than 50% of turnover averaged over the preceding five years
The government defines knowledge intensive companies that have research and development costs that amount to 15% of their total operating costs, create intellectual property and have 20% of their workforce with relevant Masters or equivalent higher degrees.
The Summer Budget also proposes new rules to prevent EIS and VCT funds being used to acquire existing businesses. This includes extending the prohibition on management buyouts and share acquisitions to VCT non-qualifying holdings and VCT funds raised pre-2012, and preventing money raised through EIS and VCT from being used to make acquisitions of existing business regardless of whether it is through share purchase or asset purchase.
These changes will be published in the Summer Finance Bill.
Tilney Bestinvest managing director Jason Hollands said the new rules were tough on VCTs and EISs.
'In my view these are potentially problematic changes and VCT and EIS groups will be anxious to engage with HMRC on the details. The Treasury have stated today they want to "ensure that the schemes target higher-risk companies",' said Hollands.
'The tighter requirements will inherently limit the range of investment opportunities available, so that may mean lower fund raising and more competition for deals.
'This isn't great news for long established, small companies with the scope to create jobs and wealth, who still need access to capital but will no longer be eligible for this form of financing because of greater restrictions. The age of company in itself has no relevance to a business's funding needs or its scope for fuelling jobs and economic growth.'
The Association of Investment Companies' chief executive Ian Sayers was slightly more upbeat on the development. He expects that VCTs will be able to adapt to these changes.
'We welcome the government’s commitment to secure the future of VCTs by ensuring that they gain European State Aid clearance,' said Sayers.
'The changes announced today affecting pension tax relief for high earners are likely to support increased demand for VCTs as a tax efficient way to save. They also have tax free dividends, which is important following today’s changes to taxation of dividends.'