The government has announced changes to the investment rules for venture capital trusts (VCTs) and Enterprise Investment Schemes (EIS).
VCTs and EIS will no longer be able to invest in a company that is more than 12 years old, except where the investment will lead to a substantial change in the company's activity, or where where the total investment represents more than 50 per cent of turnover averaged over the preceding five years. This means that, for example, if a company older than 12 years old comes up with a transformative idea or innovation then it could still receive funding, according to Paul Latham, managing director at VCT and EIS provider Octopus Investments.
Mr Latham doesn't feel that this 12-year rule will affect many potential investments for VCTs and EIS, as they mostly invest in companies under 12 years old. This is also the view of Will Fraser Allen, deputy managing partner at Albion Ventures.
There will also be a cap on total investment that a company can receive from VCTs and EIS of £15m, increasing to £20m for knowledge-intensive companies. Again this is not expected to affect many prospective investments as there is already a rule which prevents VCTs and EIS investing in companies with gross assets of more than £15m.
The government also plans to increase the employee limit for knowledge-intensive companies to 499 employees, from the current limit of 249 employees.
And it will smooth the interactions between tax advantaged schemes by removing the requirement that 70 per cent of the funds raised by companies under Seed EIS schemes must have been spent before they can raise EIS or VCT funding.
The legislation will not be retrospective so it will not affect existing investments in VCTs and EIS. It will be implemented from the date of state aid clearance, which is likely to be at some point during the summer but could take longer.
As announced in the Autumn Statement, the government is looking to introduce social VCTs. It says that the rate of income tax relief for investment in these will 30 per cent, and investors will pay no tax on dividends received or incur capital gains tax on disposals of shares in social VCTs - as is the case with existing VCTs.
The government will legislate for social VCTs in a future Finance Bill.
