Amendments are to be made to the existing Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) rules. Broadly, the changes are as follows:
– The first measure specifies the age of a company that is eligible for investment under EIS and VCT. Companies must raise their first investment under EIS, VCT or other risk finance investment within 7 years of making their first commercial sale or 10 years if the company is a knowledge-intensive company. 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. The age limit will apply also to any business that has been owned previously by another company.
– In addition to the existing cap on annual investments of £5 million, there will be a new cap on the total amount of investments a company may raise under EIS, VCT or other risk finance investment, of £12 million or £20 million for knowledge-intensive companies (see below). Any risk finance investments used by a business previously owned by another company will count towards the total funding limit.
– If an individual subscribes for shares in a company and that individual already holds shares in the company, the new shares will not be eligible for EIS unless the individual has made a risk finance investment in the company before Royal Assent or the individual’s shares in the company (excluding founders’ shares) were a risk finance investment. A risk finance investment is an investment under EIS, SEIS or Social Investment Tax Relief.
– There will be a new requirement 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 the operative date and will therefore apply to non-qualifying holdings.
– A new rule will prevent companies from using EIS and VCT investments to acquire a business.
– Higher limits are being introduced on total investment, age of company and number of employees to provide support for knowledge-intensive companies that are particularly likely to struggle to access finance. A knowledge-intensive company is a company:
– whose costs of research and development or innovation are at least 15% of the company’s operating costs in at least one of the previous three years, or at least 10% of the company’s operating costs in each of the previous three years and either
– which has created, is creating or is intending to create, intellectual property or
– which has employees with a relevant Masters or higher degree who are engaged in research and development or innovation and who comprise at least 20% of the company’s total workforce.
For knowledge-intensive companies, the limit on employees will be raised from less than 250 to less than 500 employees.
– The following measures will be introduced with the intention of smoothing the interaction between SEIS and EIS:
– companies will no longer need to use at least 70% of SEIS funds before raising funds under EIS or VCT respectively;
– the 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;
– the legislation will be amended to clarify that farming outside the UK is not an eligible activity for EIS, SEIS, VCT and Enterprise Management Incentives.
The measures will have effect from April 2014 for the change to the rule on redemption of shares of SEIS investors; 6 April 2015 for the provision removing the requirement for 70% of SEIS funds to be used before a company may raise funds under EIS or VCT; and Royal Assent for shares issued under EIS and for investments made by VCTs and for determining whether investments held by the VCT are to be regarded as qualifying holdings.
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