After two rounds of consultation, the Government has now released its response setting out the changes to the EIS, SEIS and VCTs scheme rules which it proposes to make in Finance (No.2) Bill this year.
Following various earlier - and mainly expansionary - changes to the schemes, the starting point of the initial consultation (Tax-advantaged venture capital schemes: ensuring continued support for small and growing businesses) back in July 2014 originally involved a mixture of aims, which included ensuring that the schemes still fall within EU State aid rules, keeping the rules targeted, expanding the schemes to allow platform investments in SMEs and the use of convertible loan notes, and considering an alternative principled approach aimed at limiting the need for future rule changes.
The resulting changes now being introduced are, in the main, the more restrictive proposals aimed at making the schemes more targeted – reflected in the fact that the expected exchequer impact is now revenue increasing, rather than decreasing – although HM Treasury estimates that over 90% of companies which qualified under the old rules will still be eligible under the new ones.
The restrictions announced at Summer Budget are more stringent than those contemplated at Budget 2015, for example –
- The time limit on company eligibility to raise their first SEIS/EIS/VCT funding will now be 7 years (or 10 for "knowledge intensive companies"), and
- The lifetime cap on amounts raised will now be £12m (or £20m for "knowledge intensive companies").
And the previously announced new requirement that the investments are for the purpose of growth and development is also still being introduced (HMRC guidance is expected on this shortly), as is the investor independence requirement.
However, the changes do also include the removal of the requirement for 70% of SEIS funds to have been spent before money can be raised under the EIS or VCT rules, and the doubling of the employee limit for "knowledge intensive companies".
One particular point to watch is that the various measures come into force on different dates; for example, whilst the lifting of the SEIS funds 70% requirement takes effect for investments from 6 April 2015, the restrictions announced at Summer Budget will take effect from Royal Assent (provided State aid approval is obtained). Presumably also in light of the need for State aid approvals, revised draft legislation wasn't published.
Whilst the Government was initially aiming to find a solution which alleviated the need for ongoing changes to the rules, its principles-based suggestions were not, it seems, particularly appealing to the consultation respondents on the basis that they could introduce uncertainty. Likewise, the convertible loan notes proposal has not been taken forward. However, a new stakeholder forum is being introduced for ongoing formal engagement between stakeholders, HMRC and HMT – this could well lead to more changes to the rules in due course.
The full range of the recent government tax-advantaged venture capital schemes consultation documents is also available online at gov.uk.