Tweaks to the venture capital tax reliefs to meet EU state aid rules

In the Budget 2015, the Chancellor announced certain changes to the venture capital tax reliefs which are being introduced to ensure that the reliefs comply with new EU ‘State Aid’ rules and that approval can in turn be provided by the EU.

The changes proposed in the Budget today were addressed in an HMRC and HM Treasury joint consultation undertaken in July last year. It appears that the Treasury have taken on board the numerous representations made as part of the consultation and ensured that the reliefs remain available to the companies in need of support.

The changes introduced affect the companies seeking qualifying investment under the reliefs and introduces:

  • Age restriction – the company must be less than 12 years old when receiving its first EIS or VCT investment with an exception where the investment leads to a substantial change in the company’s activity.
  • Cap on total investment – introduction of a £15 million lifetime cap.  (£20 million for ‘knowledge-intensive companies’).
  • Increase to the employee limit – only applies to ‘knowledge-intensive companies’ from 249 to 499 employees.
  • The term ‘knowledge-intensive company’ is not something which has previously been a focus of in the sector and it is understood that it is derived from EU terminology. It will apply to companies where knowledge is what is being ‘produced’ and that knowledge is the service being offered. We expect more light to be shed on the businesses that will be affected when the Finance Bill is drafted.
  • The Government have stated that a requirement will be introduced such that the investment is made with an intention to ‘grow and develop the business’ and also require that all investors are ‘independent’ from the company at the time of the first share issue. It is currently unclear how these are to be measured and we expect to know more when the Finance Bill is released.
  • The Government has also introduced a welcome relaxation to the existing rules such that the funds raised under the early stage SEIS do not need to be 70% spent prior to issuing subsequent EIS or VCT qualifying shares.
  • The venture capital tax reliefs have seen numerous and substantial changes in recent years, but it is pleasing to see that responses to consultations have been taken on board and only minor amendments proposed this time around to the already complex rules.

Changes in respect of renewables and venture capital schemes are to be introduced as previously announced in the Autumn Statement.

If you need any advice on how these announcements might affect you please contact Chilton Taylor.