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EIS and VCT - Changes to Venture Capital Schemes

A number of changes have been announced to the EIS and VCT regimes to make them more compliant with EU law as follows:

Qualifying conditions for the issuing company (EIS) or a qualifying holding (VCT)

For both EIS/VCT the requirements for the issuing company/qualifying holding are due to change as follows:

  • Importantly the current size limitations (gross assets of less than £7m and £8m before and after fundraisings respectively and less than 50 full time employees) are being removed and replaced with the EU small enterprise limits as follows:
    • Less than 50 employees; and either,
    • Turnover of less than €10m, OR
    • Gross assets of less than €10

With current exchange rates, this will effectively relax the current size criteria.

  • The company must not be in financial difficulties as defined in the EU community guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty (2004/C244/02).
  • The definition of a “qualifying business activity” for which money raised must be used within a two year time limit has been changed to remove the requirement that it be carried out wholly or mainly in the UK. Instead there must simply be a permanent establishment in the UK.

Changes affecting VCTs

  • To qualify for VCT relief, the shares can now be traded on an EU regulated market, whereas currently VCT shares have to be held on the official UK list
  • The amount of the company’s qualifying holding that must be held as equity has increased from 30% to 70%.

HMRC clarification regarding “EIS” companies operating through partnerships or LLPs

A separate note from HMRC has announced that companies carrying on their qualifying business activity in partnership or as a member of an LLP will not qualify for EIS. This is on the basis that the company will not be considered to meet the requirement of s183 ITA 2007, which requires that the issuing company or a 90% qualifying subsidiary must carry out the qualifying business activity.

HMRC have stated that this is a clarification of the existing legislation, but will not be applied retrospectively. In particular the new interpretation will not be applied where EIS certificates have already been issued. Nor will it be applied where shares have been issued based on a favourable preliminary clearance application, if that clearance application noted that the company would be carrying on a qualifying business activity through a partnership or LLP.

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