The Summer Budget contained changes to the rules for Enterprise Investment Schemes (EISs), Seed Enterprise Investment Schemes (SEISs) and Venture Capital Trusts (VCTs). These relate mainly to the criteria used to determine companies’ funding eligibility and levels of investment they could receive.
Subject to state aid approval, and with effect from Royal Assent to the Summer Finance Bill 2015, the Government will:
- Require that all investments are made with the intention to grow a business.
- Require that all investors are ‘independent’ from the company at the time of the first share issue.
- Introduce new qualifying criteria to limit relief to investment in companies that meet certain conditions demonstrating they are ‘knowledge-intensive’ companies within 10 years of their first commercial sale, and other qualifying companies within seven years of their first commercial sale. This will not apply where the investment represents more than 50% of turnover averaged over the preceding five years.
- Introduce a cap on the total investment a company may receive through EIS and VCTs of £20m for knowledge-intensive companies, and £12m for other qualifying companies.
- Introduce rules to prevent EIS and VCT funds being used in order to acquire existing businesses.
- Increase the employee limit for knowledge- intensive companies to 500.
The £12m funding cap for non-knowledge- intensive companies came as a surprise, owing to the March Budget statement proposing a £15m limit, but otherwise measures are in line with our understanding of the Treasury’s approach to venture capital.
The changes are designed to tighten up EIS, SEIS and VCT regimes to ensure funding is directed at the high growth-potential businesses that need it most.
Many of the details of the new rules are still to be fleshed out but their net effects will be most felt by companies seeking and receiving funding, and EIS, SEIS and VCT investment managers, as opposed to end investors and wealth managers.
It may be argued that EIS, SEIS and VCT funding will be directed at high-risk companies as a result of the changes, and that therefore the products based on these schemes and open to third-party investors will carry higher investment risks.
However, EIS, SEIS and VCT were always considered higher-risk investments compared with, say, equities listed on the FTSE 350, and the quantum of risk associated with them will not significantly increase as a result of these changes.
Risk factor
Mitigating investment risk is the job of the investment managers who operate in the EIS, SEIS and VCT sectors.
There are many with long and successful track records and their skills in selecting promising companies in which to invest – and in many cases playing a direct and active role in helping these companies grow – are in no way diminished by the rule changes.
