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This analysis is part of the Lexis®PSL Tax team’s summary of the Autumn Budget 2017. Some of the links require a LexisPSL subscription. If you are not a subscriber, you can take a free trial here.
Venture capital schemes—risk to capital condition
Following the consultation Financing growth in innovative firms (to which a response document has been published today), the government has announced its intention to include a new condition for relief in the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) regimes to ensure that the relief is better targeted at growth investments and to exclude ‘capital preservation arrangements’.
Taking a different approach to the past (where it has excluded particular types of low-risk investment such as energy generation), this measure takes a ‘principled approach’ requiring all relevant factors to be taken into account in determining whether, on a ‘reasonable view’:
A non-exhaustive list of factors to be taken into account will be provided in the legislation. The response to consultation suggests it will include:
while making it plain that the presence of any given factor does not necessarily cause a failure of the condition. The document also indicates that the use of special purpose vehicles or outsourcing of staff where they are common in the industry (such as in film and media production companies) will not necessarily prevent the condition from being met. The documents published do not indicate whether a factor of tax motivation will be included in that list.
Legislation will be included in FB 2018. The documents published contain conflicting information on the effective date: the OOTLAR and the response to consultation state that it will have effect for investments made on or after Royal Assent of FB 2018, but the TIIN gives a specific date of 6 April 2018 (in either case, subject to obtaining state aid approval).
The government has stated that it will issue detailed guidance on the new measure shortly after the publication of FB 2018 and that HMRC will cease to give advance assurance for investments that appear not to meet the condition from that date. Since advance assurance is not a condition for relief to be obtained, it will still be possible for an individual to obtain relief on an investment made after the guidance is issued (but before the effective date) but the issuing company will not be able to use the marketing advantage of stating that advance assurance has been obtained.
See: OOTLAR (para 1.7), TIIN: Venture capital schemes - risk to capital condition and Consultation response: Financing growth in innovative firms.
Venture capital schemes—encouraging investments in knowledge-intensive companies
Measures were included in Finance (No 2) Act 2015 to enhance relief under the EIS and VCT schemes where investments are made into Knowledge Intensive Companies (KICs). Following the consultation Financing growth in innovative firms, the government has announced further measures to encourage investments into such companies and to loosen some of the conditions for KICs, specifically:
The measures will be included in FB 2018 and take effect for investments made on or after 6 April 2018 (subject to obtaining state aid approval).
See OOTLAR (para 1.9) and TIIN: Enterprise Investment Scheme and Venture Capital Trusts - encouraging investments in knowledge-intensive companies.
Encouraging more high-growth investment through VCTs
A number of additional measures are to be introduced to ensure that the VCT regime is targeted to high-growth companies.
Three substantial changes are to be introduced:
Certain grandfathering provisions will come to an end with effect from 6 April 2018, namely:
The measures will be included in FB 2018 (subject to state aid approval).
See OOTLAR (para 1.8), TIIN: encouraging more high-growth investment through Venture Capital Trusts and Consultation response: Financing growth in innovative firms.
Venture capital schemes—relevant investments
A lifetime limit on the total amount of risk finance investment a company may have was introduced by Finance (No 2) Act 2015 to the EIS and VCT regimes of £12 million for most companies (increasing to £20 million for KICs). When it was introduced it relied on the definition of ‘relevant investments’ to determine the types of investment included in the lifetime limit, which had the effect (as a result of the various changes that had been made to that definition as used for the purposes of the annual limit since 2007, with associated transitional provisions) of excluding some investments made at earlier stages. This was an unintended effect and the definition of relevant investment (presumably only for the purposes of the lifetime limit) will be amended to include all risk finance investments, whenever made. The measure is also expected to apply for the purposes of Social Investment Tax Relief.
The measures will be included in FB 2018 and take effect for investments made on or after 1 December 2017.
See OOTLAR (para 1.10) and TIIN: Venture Capital Schemes: relevant investments.
VCTs—limiting the effect of anti-abuse provisions on commercial mergers
Following the introduction of an anti-abuse measure to prevent individual investors refreshing income tax relief on investments into VCTs by disposing of VCT shares and reinvesting the proceeds in new shares (either by bed and breakfasting or through the merger or restructuring of the VCT), the government is now making a retrospective change to the measures (with effect from 6 April 2014 — the date the original measure came into effect), to ensure that the measure applies as intended and does not capture commercially driven mergers.
Legislation will be introduced in FB 2018 to amend the parts of ITA 2007, s 264A that deal specifically with mergers or restructurings of VCTs so that it does not apply where:
See OOTLAR (para 1.6) and TIIN: Venture Capital Trusts - limiting the effect of anti-abuse provisions on commercial mergers.
LexisPSL subscribers can access all analysis and insight on the Autumn Budget 2017. If you are not a subscriber, you can take a free trial here.
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