The government is to exclude venture capital trusts (VCTs), enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS) from investing in all forms of energy projects. The move aims to focus these tax-efficient vehicles on the higher-risk investments for which they were originally intended.
VCTs, EISs and SEISs are already largely prevented from investing in energy activities: they have not been able to invest in renewable energy schemes such as anaerobic digestion and hydroelectric power since 6 April 2015, and have also not been able to invest in solar and wind schemes since July 2014, with the exception of community energy projects.
The provision of reserve energy-generating capacity and the generation of renewable energy benefiting from other government support by community energy organisations have not been qualifying activities since 30 November 2015.
The government will exclude all remaining energy-generation activities from VCTs, EISs and SEISs from 6 April 2016, as well as social investment tax relief. This affects energy generation that is not benefiting from subsidies such as feed-in tariffs, renewable obligation certificates or contracts for difference, and potentially overseas generation, including renewables.
Replacement capital
The government will also introduce increased flexibility for replacement capital within EISs and VCTs, subject to state aid approval. Using replacement capital involves purchasing the shares of existing shareholders.
When businesses grow it can be helpful to buy out shareholders who are no longer contributing to growth. "Being able to do this would make VCTs better equipped to meet the real needs of growing companies, and would increase the quantity and quality of capital deployed by VCTs by creating a larger pool of suitable opportunities," explains Mark Wignall, managing partner at Mobeus Equity Partners.
The investment rules for VCTs and EISs have been tightened up so that since 18 November they have not been able to invest in management buyouts (MBOs), as well as having limits on the age of the companies they invest in and a cap on the total risk finance a company can receive from them. A number of generalist VCTs had favoured investing in MBOs, including the Maven, Mobeus, Northern, Baronsmead and British Smaller Companies funds.
Mr Wignall says: "Relaxing the replacement capital rule would at least reduce the impact of the way in which the new regulations will restrict the universe of opportunities that VCTs can invest in."
Philip Rhoden, director at discount stockbroker Clubfinance says: "This is good news for MBO-focused VCTs, but we still expect greatly reduced capacity in terms of offers from VCTs with this type of investment strategy this tax year."
Over the 2014-15 tax year VCTs raised £429m in total, according to the Association of Investment Companies.
Mobeus does not plan a fundraising this year. "We want to be satisfied with the pace and quality of new investment that we complete within these new rules before we move to raise more capital," says Mr Wignall. Last year the Mobeus VCTs raised £39m.
Baronsmead VCT (BDV) and Baronsmead VCT 2 (BVT) plan to merge because the new limits on the amount of funding companies can receive from VCTs have removed the commercial advantage of having multiple VCTs. If this goes ahead the merged vehicle will raise funds. Baronsmead VCT 5 (BAV) plans a fundraising of about £3.5m in 2016.
Maven Income and Growth VCT 6 (MIG6) plans to raise up to £15m in 2016. "While MBOs will be off the table, we have a national business across six cities that sees a large number of development capital-type deals so we are well placed to deploy funds under new money rules," says Bill Nixon, managing partner at Maven Capital Partners.
In August 2015 the Maven VCTs suspended their dividend investment scheme due to the recently introduced investment restrictions. Instead dividends will be paid to shareholders by cheque or direct bank transfer.
The Northern VCTs have also suspended their dividend investment scheme in light of the investment restrictions.
British Smaller Companies VCT2 (BSC) plans to raise about £3.5m, which will only be available to existing shareholders until 31 January. British Smaller Companies VCT (BSV) also hopes to complete a fundraising of £3.5m before the end of the current tax year.
