In the UK the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and the venture capital trust (VCT) rules allow companies to raise capital by providing income tax relief on a percentage of the investment in shares of the company or the VCT by individuals.
Following a consultation in 2014 and the publication of draft legislation in March 2015, legislation has been included in the summer Finance Bill 2015 to ease the operation of the rules, target them better and provide more help to knowledge intensive companies that have more difficulty raising capital.
The amendments will stop the use of EIS and VCT money for acquisitions of businesses. A rule will be introduced requiring the funds raised through the scheme to be used for the growth and development of the company (or subsidiary company). The rule preventing the use of money for acquisition of shares will also be extended to all investments by venture capital trusts (VCTs) including non-qualifying holdings.
If an individual subscribing for shares in a company under one of the schemes already has shares in that company the new shares will not be eligible for EIS unless the individual making the application has already made a risk finance investment (under EIS, SEIS or Social Investment Tax Relief) in the company before the date the legislation receives the Royal Assent, or the purchase of those shares (apart from founders’ shares) was a risk finance investment.
Companies will be required to raise their first investment under risk finance investment schemes within seven years of the date of their first commercial sale (or ten years for a knowledge intensive company). However this age limit will not apply to investments that amount to at least 50% of the annual turnover of the company averaged over the past five years. This age limit also applies to a business that was previously owned by another company.
A new cap will apply to the total investment raised by a company under EIS, VCT or other risk finance investment. This will be GBP 12 million (or GBP 20 million for a knowledge intensive company). Risk finance investments used by a business previously owned by another company will also be included in this limit. This cap will apply in addition to the existing cap of GBP 5 million on annual investments.
Other measures included in the Finance Bill are:
- For knowledge-intensive companies the maximum number of employees for eligibility for the scheme will increase from 250 to 500.
- The requirement that companies must use at least 70% of SEIS funds before raising funds under EIS or VCT will be scrapped with effect from 6 April 2015.
- With retrospective effect from 6 April 2014 EIS relief for individuals investing in companies that redeem the shares of SEIS investors will no longer be reduced, provided that 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 or management incentives.
The measures will take effect from the date of Royal Assent to the Finance Bill except where otherwise stated above. The measures are subject to the approval of the European Commission under the EU state aid rules.
