Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN14 Changes to the venture capital schemes and enterprise management incentives

Who is likely to be affected?

1   Investors under the Enterprise Investment Scheme (EIS), the Corporate Venturing Scheme (CVS) and the Venture Capital Trust (VCT) scheme, companies attracting investment under those schemes, VCTs and companies using Enterprise Management Incentives (EMI).

General description of the measure

2   For EIS, VCTs and CVS: New qualifying company rules will set limits on the numbers of employees allowed and the amount of capital a company can raise in any 12 month period. A change will also be made to extend the meaning of a "qualifying 90% subsidiary".

3   For VCTs: A change will be made to the 70% qualifying holdings condition to deal with cash realisations. Also, provision will be made for Regulations on 'inadvertent' breaches of the VCT approval conditions.

4   For EIS: The investment period in which a manager has to invest 90% of the funds raised by an approved EIS fund is extended from 6 months to 12 months.

5   For EIS, VCTs, CVS and EMI: A change will be made to allow the transfer of the qualifying trade of exploiting relevant intangible assets (RIAs) around a roup of companies.

Operative date

6   The measures will have effect on or after 6 April 2007 except that:

•   The change to the investment period for EIS approved funds will apply for funds that closed after 6 October 2006.

•   The employee test and investment limits will not apply in relation to investments made out of funds raised by VCTs before 6 April 2007, nor to EIS or CVS shares issued before the date on which the Finance Bill receives Royal Assent.

Current law and proposed revisions

EIS, VCTs, CVS: The employee test

7   Under current rules there is no restriction on the number of employees of a company raising money under the venture capital schemes (EIS, VCT and CVS).

8   New rules will require that a company (or group of companies) raising money under the schemes must have fewer than 50 full-time employees (or their equivalents) at the date on which the relevant shares or securities are issued.

EIS, VCTs, CVS: The investment limit

9   A new investment limit will apply to a company raising money under the venture capital schemes. For an "investment" to qualify for relief under the EIS or CVS, or be treated as a qualifying holding of a VCT, the company (or group of companies) must have raised no more than 2 million under any or all of the schemes in the 12 months ending on the date of the relevant investment.

10 If the limit is exceeded, none of the shares or securities within the issue that causes the condition to be breached will qualify for relief under the EIS or CVS, or rank as a qualifying holding for a VCT.

11 For the purpose of this test an "investment" will be any investment made by a VCT from funds raised on or after 6 April 2007. For EIS and CVS the new limit will apply to shares issued after the date on which the Finance Bill receives Royal Assent.

EIS, VCTs, CVS: 90% subsidiaries

12 Current rules require that where a qualifying trade is carried on by a subsidiary company that company must be a direct qualifying 90% subsidiary of the parent company.

13 Changes will be introduced to allow a qualifying trade to also be carried on by subsidiaries that are 100% subsidiaries of direct 90% subsidiaries of the parent, or 90% subsidiaries of direct 100% subsidiaries. This change will have effect on or after 6 April 2007.

VCTs: The 70% qualifying holdings rule

14 Section 274 of the Income Tax Act 2007 (ITA) imposes a requirement that a VCT must at all times have at least 70% by value of its investments in qualifying holdings to retain approval. In some cases a VCT may be unable to dispose of a holding without breaching this condition.

15 A new rule will be introduced so that when, on or after 6 April 2007, a VCT makes a cash realisation on the disposal of an investment that has been part of its qualifying holdings for at least 6 months, the disposal will be ignored for the next 6 months for the purpose of the 70% test. This will give the VCT up to 6 months to reinvest or distribute the disposal proceeds.

VCTs: Non-withdrawal of approval

16 Section 274 ITA requires a VCT to meet various conditions in order to gain and retain approval. The tax reliefs available to investors in VCTs are dependent on approval being retained.

17 A new power will be introduced to enable HM Revenue & Customs to make Regulations in respect of the non-withdrawal of approval in certain circumstances where those conditions are not met. These Regulations will be laid before Parliament and will replace the current "inadvertent breach" guidance.

EIS: Approved funds

18 If an EIS fund is approved under section 251 ITA investors can claim EIS income tax relief on their subscriptions as if those subscriptions had been made on the date the fund closed. Under current rules this is conditional on funds being at least 90% invested within 6 months of the closing date.

19 For approved funds with a closing date on or after 7 October 2006 this 6 month period will be extended to 12 months.

EIS, VCTs, CVS and EMI: Relevant intangible assets

20 The current rules restrict the transfer of a qualifying trade of exploiting relevant intangible assets (RIAs) around a group of companies.

21 New rules will be introduced to align the rules relating to the transfer of that trade with those currently relating to other qualifying trades so that RIAs can be moved around within groups without investors losing tax relief and EMI companies losing their qualifying status. This change will take effect from 6 April 2007.

22 Legislation to achieve all of these changes will be introduced in Finance Bill 2007.

Further advice

23 If you have any questions about the changes to the venture capital schemes please contact Malcolm White on 020 7147 3175 (email: malcolm.white@hmrc.gsi.gov.uk), or for EMI contact Chris Murricane on 020 7147 2818 (email: chris.murricane@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk