Changes to EIS, SEIS and VCT Investment Rules

Following initial planned changes to the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Schemes (EIS) announced in the Chancellor’s budget back in March, further amendments are currently in the process of being implemented as the Finance Bill 2015-2016 makes its way through parliament. The way that Venture Capital Trusts (VCT’s) invest their money has also come under scrutiny.

The Enterprise Investment Scheme (EIS) was set up to provide tax incentives in the form of a variety of income tax and capital gains tax reliefs to investors who invest in smaller, unquoted, trading companies. The Finance Act 2012 then subsequently introduced the Seed Enterprise Investment Scheme (SEIS), a scheme like EIS but for start-ups.

Amongst several of the EIS amendments, there are a number of different limits that relate solely to knowledge-intensive companies (those companies that fulfil certain requirements relating to higher spend on R&D, meeting an innovation condition and skilled employee’s condition).

Below is a summary of these changes:

• Companies must be less than 7 years old (10 for knowledge-intensive companies) in order for an investor to qualify for EIS, except where the investment will lead to an extensive change in the nature of the business or there has been a previous issue of shares under EIS/VCT/SEIS.
• There has been an increase in the employment limit from 249 to 499 employees for knowledge-intensive companies only.
• A lifetime limit for the issuing company will be introduced to cap the maximum amount it can raise under the venture capital schemes – this limit is £12 million for most companies (lower than the £15m originally suggested in the Budget)  and an ‘enhanced’ £20 million for knowledge-intensive companies.
• EIS/VCT will no longer be able to be used to fund the acquisition of an existing company or trade.
• A restriction on existing shareholders claiming relief will be introduced, stopping them from making a further investment into a company where they already hold shares. This means that investors now have to be in from the start and companies seeking to attract investment will need to make the application for qualification at the earliest opportunity. Exclusions apply if all of the existing shares:
  • were issued under EIS, SEIS or SITR
  • are subscriber shares (i.e. the original shares issued on incorporation)
• The requirement that 70 per cent of the funds raised by companies under SEIS must have been spent before they can raise EIS or VCT shares has been removed.
• Venture capital trusts (VCTs) will no longer be able to invest in management buy-outs (MBOs). VCTs previously got round the ban by putting money raised prior to April 2012 into MBOs, and using money raised after that for non-MBO investments. Also when a VCT exited an MBO investment, the money from that has been able to be invested into another MBO. Under the new rules, this will be no longer possible.
• Investors in reserve energy generation are to be locked out of both EIS and VCT’s. In the government’s view, these activities are asset-backed and benefit from a guaranteed income stream so mainstream financing is typically already available which removes the need for tax-advantaged investment. The change will apply to investments made on or after 30 November 2015.
• There is a new additional “intention to grow and benefit a business” hoop to jump through to qualify for EIS relief i.e. if an investor wishes to be involved in a company in an official capacity, they must first invest (in order to obtain their SEIS or EIS tax relief) and then, afterwards, become a director.

Whilst it may appear that access to EIS, SEIS and VCTs has in, some cases, become more restrictive, the overriding consensus is a more targeted approach to focusing on those companies that need the investment most.

It is also important to note that EIS, SEIS and VCTS are usually aimed at investors with significant investment portfolios or experience who can afford to take a long-term view and are comfortable with the risks of investing in smaller companies. EIS, SEIS and VCTs are therefore not suitable for all investors.

If you would like more advice on how to invest using any of these avenues, please contact your Finura Partners advisor.

Sources: http://www.investorschronicle.co.uk/2015/07/09/funds-and-etfs/vcts-and-eiss/summer-budget-vct-and-eis-changes-8E4zVeaOeUzwsCEETpJLQM/article.html, http://www.gannons.co.uk/tax-law/changes-to-eis-and-tax-relief/, http://www.rossmartin.co.uk/companies/seis-eis/560-enterprise-investment-scheme-eisand http://www.osborneclarke.com/connected-insights/blog/reserve-power-capacity-and-generation-investors-be-excluded-tax-advantaged-eis-and-vct/