Budget changes to Venture Capital Schemes

What are the Venture Capital Schemes?

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are two similar tax incentivised schemes intended to promote external investment in smaller trading companies. In each case, investment provides relief from income tax and capital gains tax, with gains made on the shares being exempt from capital gains tax if they are held for three years. (This is as long as the scheme rules are not violated.)  Any losses on the shares can be set against income.

The recent Budget provided increases to the qualifying investment limits available under the schemes.

The changes

From 6 April 2018:

  • The Annual investment limit for individuals is increased from £1m to £2m so long as at least £1m is in “knowledge intensive” companies (KICs).
  • The maximum amount of investment that a qualifying company can receive from combined venture capital schemes in any 12-month period will increase to £10 million for KICs.
  • KICs will be able to use the date when their annual turnover first exceeds £200,000 to determine the start of the initial investing period under the ‘permitted maximum age rules,’ instead of the date of their first commercial sale.

A KIC qualifies if, at the time that it issues shares, the company is carrying out research, development or innovation and it either:

  • Is carrying out work to create intellectual property and expects the majority of the company’s business to come from this within 10 years; or
  • has 20% of its employees carrying out research and development as well as having a relevant Master’s or higher degree.

The government wants the venture capital schemes which offer tax reliefs for investors to be focused on support for companies with high growth potential. So a new qualifying condition will be a principles-based test to determine if, at the time of the investment, a company is a genuine entrepreneurial company. The company will need to have objectives to grow and develop. Pure tax-motivated investments that preserve an investor’s capital will be excluded from the schemes.

For help or advice on any aspect of your business’ finances, please call our tax team on 020 8530 0720 or email paula.w@nordens.co.uk.