Clampdown on EIS and VCT criteria

The government is tightening the rules on the enterprise investment scheme (EIS) and venture capital trusts (VCTs) in a bid to focus the initiatives more at higher risk companies.

The Draft Finance Bill 2012, which was published today, outlines legislation that will introduce a new disqualifying purpose test, and exclude share acquisitions in another company and the receipt of feed-in-tariffs (FiT) as qualifying activities for the schemes.

The new test will see companies looking for EIS or VCT funding vetted to ensure they qualify as high-risk companies, and disqualify companies set up simply for the purpose of accessing the tax reliefs.

Philip Hare, tax advisor at PricewaterhouseCoopers comments, ‘It is hoped that this will mean that more funds will be available for smaller, higher risk businesses which find it difficult to obtain finance.’  

The exclusion of share acquisitions as a qualifying activity means VCT and EIS funds will no longer be allowed to be used for buy-outs, as they previously had been.

Finally those benefiting from FiTs, which are government-guaranteed minimum rates for renewable energy, or similar subsidies will not generally qualify for EIS or VCT investment. However, there are some exceptions to this. Electricity generated by anaerobic digestion or hydropower, and projects that are operated by community interest companies and certain societies will still be eligible for investment under the schemes.

The draft bill states, ‘The aim of this measure is to focus the EIS and VCT schemes better on higher risk activities, preventing tax relief being provided for investment in companies or activities outside the purpose of the schemes and so helping smaller, higher-risk UK companies to obtain finance.’

Mark Payton, managing director of Mercia Fund Management, comments, ‘We welcome the crackdown on some of the schemes which operated outside the spirit of the existing EIS scheme.’

However, the new restriction on VCT and EIS investment in buy-outs has met with criticism.

PwC’s Hare says, ‘While we understand these measures may be necessary in order to help achieve continuing EU state aid approval, they could put VCTs at a disadvantage compared to other VC firms and private equity funds.’

Director general of the Association of Investment Companies (AIC) Ian Sayers remarks, ‘These deals [buy-outs] are invaluable in revitalising the commercial prospects of an SME when existing owners find themselves unwilling or unable to develop a business.

‘This is a natural and important part of the cycle of business development and can make a significant contribution to achieving the UK’s economic potential.’

Hare adds, ‘The unwanted effect may actually be to reduce the amount of funds available to assist management in driving businesses forward,’

These new measures will come into effect on April 6 next year, as will the other measures regarding EIS that George Osborne detailed in his Autumn Statement last week.

The Chancellor announced last Tuesday he was expanding EIS so that people who invest up to £100,000 in a new start-up business would be eligible for income tax relief of 50 per cent.

Todd Cardy

Todd Cardy

Todd was Editor of between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital.