While it would be foolish for us to try and make any predictions about how Brexit will impact the UK economy and markets in general, we do know that the rules that govern UK’s tax advantaged venture capital schemes (EIS, VCT and SEIS) were recently tightened in order to comply with EU State Aid rules.

The Enterprise Investment Scheme Association (EISA), the British Venture Capital Association (BVCA) and the UK Business Angels Association (UKBAA) have all been working together in an effort to lobby both HM Government and the EU to reverse or amend some of these changes (more details on those changes below).

Brexit may well mean that the amendments these organisations were lobbying for will come to pass, allowing more capital to flow to small and medium sized businesses. This would be a boon for the tax-advantaged schemes, job creation and hopefully by extension the UK economy.

The Changes that were Made to Comply with EU State Aid Rules

Three rules in particular seemed to run counter to the schemes’ objectives of supporting economic growth:

• the age of business criterion,
• the cap on total investment and
• the limit on number of employees for the investee companies

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 companies 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 easy it can access finance.

There has also been controversy around how the EU & HMRC were defining some of the conditions of the new rules, most importantly on how a new product or new market is defined. See this article from Roger Blears of RW Blears for more detail: what-constitutes-a-new-product-market-for-the-purposes-of-the-eis-rules

Conclusions

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 break on economic growth and therefore they do not represent good value for money for tax payers.