The Finance (No.2) Act 2015 has now received Royal Assent. Within the Act are arguably the biggest raft of changes to the enterprise investment scheme ('EIS') and venture capital trust ('VCT') legislation since the schemes were introduced.
A high-level overview of the key changes is as follows:
- Investors who already hold shares in a company and are looking to claim EIS relief on a further share subscription will now only be able to do so if, broadly, the shares they already hold are EIS shares or subscriber shares.
- A new lifetime limit for a company or group of £12m of EIS, SEIS, VCT, Social Investment Tax Relief and certain types of State Aid investment has been introduced. This limit rises to £20m for companies which fit within a new definition of knowledge-intensive companies. This is an extremely complex test which involves looking at all companies in the group and also money raised by persons who have previously operated trades which have been acquired by the investee company or group.
- Subject to certain exceptions, a new age requirement that a company's first EIS or VCT investment must be made within 7 years (or 10 years for knowledge-intensive companies) from the company's first commercial sale has been introduced. This is another extremely complex test both in determining when the first commercial sale occurred (which involves looking at all group companies and any acquired trades) and also whether any of the exceptions to the test apply.
- EIS monies have not been able to be used to acquire share for a few years, but this prohibition has been extended both to all VCT money (thereby preventing VCT money from being used to undertake MBOs) and to using VCT or EIS funds for the acquisition of a trade and/or goodwill/intangible assets employed for the purposes of a trade. What HMRC views as a "trade" versus the acquisition or one or more assets is complex and will be key under the new regime.
- EIS or VCT money must be invested not only for the purposes of a qualifying trade but now also to promote business growth and development. This is likely to mean that detailed business plans have to be submitted to HMRC with any application.
The changes have fundamentally altered the way that VCTs in particular operate and the market is still trying to work out how deals will be structured in the future (it is likely that we will see far more transactions where VCTs and non-VCTs invest alongside each other). The impact on the industry has been increased by the fact that the key changes, in particular the ones prohibiting the use of VCT money to carry out MBOs, were not included as part of a consultation published earlier in the year.
These changes coupled with HMRC tightening their practice in certain areas over the past 12 months, e.g. in relation to the minimum subscription a shareholder has to make to obtain EIS relief; widening their interpretation of what constitutes a disposal for EIS purposes to include most share conversions and reorganisations; and restricting the rights which can be attached to such shares, have made an already complex area of legislation even more difficult to operate in both for clients and advisers.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.