How is the market changing?
1. Enterprise Investment Scheme (EIS)
Since the changes to the EIS legislation which took effect following the Finance (No 2) Act 2015, initial rounds of EIS investment have increasingly been provided to companies at a very early stage of their development. The type of company that typically benefits from EIS investment is changing too. The emphasis this year has been on entrepreneurial sectors such as software, tech and advanced manufacturing.
2. Venture Capital Trust (VCT)
Recent reforms to the pensions rules now permit far greater freedom in retirement planning. Tax efficient occupational pensions are subject to ever more stringent financial limits. At the same time, new higher rates of SDLT (stamp duty land tax) have been introduced for investments in residential property, together with restrictions on tax relief for interest payments on buy-to-let mortgages.
As a result of these changes, VCTs have found a new market in investors seeking tax-efficient ways in which to diversify their portfolios, or whose pension funds have already reached £1.5 million.
How are the rules changing?
1. New law - Finance Act 2016
The Finance Act 2016 received Royal Assent and became law on 15 September 2016. This year's changes are intended to provide some much needed clarification in respect of the more substantive amendments made last year.
In 2015, an age limit was introduced for the business activities of investee companies. The limit is seven years in most cases, extended to 10 years for a "knowledge-intensive company". The period begins to run on the date of the first relevant trading transaction.
The definition of a 'knowledge intensive company' is complex. The extended age requirement is in part conditional on the company's operating costs. This year, there has been a welcome clarification of this condition. However, some uncertainty remains in relation to the definition of a knowledge intensive company and precisely how this may be interpreted by HMRC in particular circumstances. We will continue to watch the market and take note of any changes as HMRC's practice evolves.
The age limit does not apply if, for example, the total value of EIS or VCT finance investment made in the 30 days up to and including the investment date (including the investment in question), is at least 50% of the average turnover. The 2016 Act also determines more clearly the period over which average turnover is calculated. It will end immediately before the start of the investee company's last accounting period.
These changes apply to all investments from 6 April 2016 and to investments between 18 November 2015 and 5 April 2016, except where the investee company elected to apply the previous rules.
2. New Reporting Requirement
A new reporting requirement has come into effect as a result of the EU State Aid enquiry into enterprise tax reliefs. From 1 July 2016, an investee company that receives any form of investment in excess of €500,000 that is considered to be state aid will be required to report this to HMRC. This includes both EIS and VCT investments.
For more information about SEIS (seed enterprise investment scheme), EIS or VCT relief, or for help and advice if you are considering being a party to a first or subsequent investment round in which one or more of these reliefs may apply, please contact a member of our enterprise tax team. We can assist with initial advice, transaction structuring, applications for HMRC clearance and subsequent reporting obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
