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We would expect it to have some impact
on the fundraising season in 2015. As
Jason Hollands, managing director at
Tilney BestInvest put it:
“Potentially lower fund raising activity
due to a narrower set of investment
opportunities ironically comes at a
time when potential demand for VCTs
from investors might otherwise have
been stronger than ever as a result of
the reductions in the lifetime pension
allowance and the tapering away of
pension tax allowances for higher earners”
However, investments that have
already been made into VCTs aren’t
impacted, and therefore a specific VCT
won’t initially look any different to the
shareholder after the legislation comes
into force.
Interestingly most commentators
feel that AIM VCTs won’t be impacted,
but with a seven year age limit for
investees, and firms needing to be at
least three years old to list on AIM,
it could narrow their investment
universe - but anecdotally we’ve been
told by providers that over 80% of the
investments they made over the last
12 months would have qualified under
the new rules. If this is true of the entire
AIM VCT industry, then compliance will
not require many changes.
Our view is that the driver for these
changes was of course complying with
EU State Aid rules, and that this is not
necessarily a positive for the economy,
as we posted in our blog:
“The government’s stated aim is to ensure
that the schemes continue to support
economic growth and provide value for
money for the UK Taxpayer. We’re not sure
that the:
Age of business criterion,
Cap on total investment, and
Limit on number of employees for the
investee companies
Serve either of these objectives.
An arbitrary seven year limit on funding
doesn’t seem to serve any logical purpose.
It penalises firms with long R&D periods,
or firms that have traded on a small scale
for a number of years but then identified
the potential to grow.
The cap on total investment penalises
firms where there is a need to raise very
substantial amounts of working capital
to finance a long term development
programme before investors see a profit,
or where expensive capital assets need
to be acquired in order to commence
business.
And the size of a company’s workforce will
be a reflection of the type of trade carried
on by the business, not an indication of its
stage of development and how easily it can
access finance.
Removing or amending these rules
could let more capital flow to where it
is needed – plugging the equity gap for
SMEs and helping to create jobs. At the
moment, the rules are putting a brake on
economic growth and therefore they do
not represent good value for money for
taxpayers.
However, these rules are not down to
the UK government’s decision making.
They are there to ensure compliance with
European State Aid rules. As the Policy
Network identified in its recent publication
“Supporting Investors and Growth Firms”,
although the UK’s schemes are well
regarded on the continent, politicians shy
away from them as they fear that they
will be perceived as giving tax breaks
to the rich at a time of austerity for the
majority”.
The changes were discussed in
Parliament on the 14th October 2015
and the Financial Secretary, David
Gauke MP, stated that:
State Aid approval has been formally
granted by the European Commission.
Full details of the Commission’s decision
will be published in due course, but it is
in line with the UK’s proposals and the
changes currently being legislated for in
the Finance Bill
The government is keen to introduce
increased flexibility for the schemes
to be used for ‘replacement capital’,
where the amount invested in newly
issued shares is at least equal to the
amount invested in secondary shares.
The intention is for this change to
be introduced through secondary
legislation at a later date, subject to
State Aid approval.
The Finance (No 2) Act 2015 made the
proposed changes law when it was given
Royal Assent on November 18th 2015.
RENEWABLE ENERGY
A more benign example of legislative
risk is the renewables story. For a
time, renewables that qualified for
government incentives such as Feed-
in-Tariffs or Renewable Obligation
Certificates were also eligible to be
held in VCTs (as well as other tax-
advantaged schemes such as EIS). This
dramatically lowered the risk profile
of these investments as revenues
were certain, provided the technology
worked (and renewables technology has
become very reliable) and there were a
number products developed that were
dedicated to the renewables sector.
This came to an end in April 2015 when
the government excluded companies
benefiting from the subsidies from
VCTs.
However, in this instance the change
was not unexpected and most
managers were prepared for it. This
was a change that had a much bigger
impact on the EIS industry, where
renewables had been a very popular
investment. One could argue that
this was an example of good policy -
incentives encouraged investment into
a new industry that the government
was keen to see develop, and once the
objective was achieved the incentives
were removed.
SUMMING UP
Though the VCT regime is subject to
frequent rule changes it is a versatile
and flexible industry that has always
found ways to innovate. From the
advisers’ point of view, they need to
have an awareness of how changes
might alter the business model and
risk profile of certain VCTs. Whenever
there is a change they need to ascertain
which managers and which VCTs are
impacted, what that impact is and how
severe it will be. Their best sources
“AIM is home to more than 1,000 small companies, including many that are well insulated from
potential shifts in public or fiscal policy - many young and dynamic, in emerging sectors or developing new
technologies, with growth potential irrespective of the UK’s political landscape”
Oliver Bedford, Hargreave Hale