While we wait on European State Aid Approval for the changes proposed in the 2015 Budget, we are left to speculate on the exact definitions. However, attending the EISA Spring Technical Seminar we heard from Kate Cornelius and Stephen Smith on what the PwC London tax team believe the amendments mean for the Enterprise Investment Scheme.

What are the proposed changes?

• Existing Shareholder Requirement – if an investor wishes to buy new EIS shares in a company for which they already hold shares in then they will only receive relief if the shares already held are:
  • part of an issue of shares of which the company has submitted a compliance statement, or
  • subscriber shares that have been held continuously since the issue, or
  • subscriber shares that were acquired by him when the company had not issued any further shares
• Age Limit – companies now must be less than 12 years old when receiving their first EIS or VCT investment except where the investment will lead to a substantial change in the company’s activity
• Lifetime Limit – total investment from venture capital schemes (EIS, SEIS and VCTs) will be limited to £15 million, except in the case of “knowledge intensive” companies where the limit will be £20 million
• Growth and Development – qualifying business activity has been extended to include that funding must also be to promote business growth and development and investors are independent from the company at the first share issue
• SEIS Money – removing the requirement that 70% of SEIS money be deployed before raising EIS
• Employee Limit – the number of FTE increases from 250 to 500 for “knowledge intensive” companies

What does this mean?

The changes have left a lot up to interpretation and we won’t know anything for certain until State Aid Approval, but here are the main points from PwC’s presentation:

• There is currently no definition on what is meant by “growth and development” but it’s believed this will change how companies will have to apply for advanced assurance with HMRC. This may include submitting a business plan and any plans for follow on funding
• The age limit should come into effect from the date of the first commercial sale, not from the day the business was formed. This could come to an advantage to technology companies that may spend several years developing a technology but have not made any commercial sales
• The age limit exemption for companies with a substantial change in activity should follow a 50% turnover test – the new activity must account for 50% of turnover averaged over the preceding five years
• Companies need to identify all the state aid risk capital they have received, this includes any former subsidiaries, which means tight record keeping
• HMRC has defined knowledge intensive as:
  • A company whose costs of research and development or innovation are at least 15% of the company’s operating costs in at least one of the previous 3 years, or at least 10% of the company’s operating costs in each of the previous 3 years and either
  • The company has created, is creating or is intending to create, intellectual property, or
  • The company’s employees with a relevant Masters or higher degree who are engaged in research and development or innovation comprise at least 20% of the company’s total workforce

While we wait…

There is some uncertainty about what will happen to investments made between 6 April and the date of State Aid Approval, and whether or not that and tax relief on investments made during this period may become repayable if they violate the new regulations.  However, investments made previously to 6 April will still be able to claim tax reliefs on existing shares.

The UK Government is continuing their support for venture capital schemes and tailoring them to fall more in line with EU regulations and increasing encouragement into the companies that these were originally created for. Advisers and investors need to be careful in these next few months and seek guidance from HMRC should they have any concerns.

PwC will be speaking on similar issues around VCTs at our VCT masterclass on the 26th June: VCT Masterclass | London | 26th June 2015