While we were only sitting in the Walkie Talkie building two weeks ago hearing from VCT thought-leader, Chris Moakes of PwC, about the proposed changes to venture capital schemes that will affect EIS, SEIS and VCTs, the Chancellor delivered even further changes on Wednesday during his Summer Budget.
The original age limit for companies proposed in March was 12 years, but has now been brought back to just 7 years of their first commercial sale (10 years for “knowledge-intensive” companies). This change brings the regulation in line with EU Commission regulations on State aid. The 50% turnover averaged over 5 years test will remain unchanged.
The lifetime limit was also changed from proposals in March. Originally set at £15m, it has been pulled back to £12m (£20m for “knowledge-intensive” companies). The EU regulations are currently set at a lifetime limit of €10m.
A new rule was introduced preventing EIS and VCTs from acquiring existing businesses, such as manager buyouts (MBOs) and share acquisitions to VCT non-qualifying holdings and VCT funds raised pre-2012. Monies raised through EIS and VCTs will be prevented from being used to make acquisitions of existing business, regardless if through share purchase or asset purchase.
We felt the changes would have a major impact of these schemes back in March and although they fell outside of the European Commission regulations, we were hoping to hear on State aid approval on them by late summer/early autumn.
The Office of Budget Responsibility (OBR) forecasted a negative £5 million in net borrowing for 2015-16 each year until 2019-20 based on the original changes, though it was unclear the exact number of companies that would lose access to this type of funding. Now the government is estimating that 10% of companies that are currently eligible will now be excluded through the new rules introduced yesterday. It will no doubt create more challenge for fund managers to source quality investment opportunities for investors.
Ian Sayers, Chief Executive of the Association of Investment Companies (AIC) was more optimistic about the changes, stating “VCTs have faced a number of rule changes in the past and the industry has effectively managed these changes. We are confident that the VCT sector can continue to accommodate changes to the scheme. We welcome the Government’s commitment to secure the future of VCTs by ensuring that they gain European State Aid clearance.
“The changes announced today affecting pension tax relief for high earners are likely to support increased demand for VCTs as a tax efficient way to save. They also have tax free dividends, which is important following today’s changes to taxation of dividends. VCTs invest in small companies which can grow into household names in the future, helping to create jobs and economic growth for the UK.”
Watch our interview with Ian Sayers from our recent VCT Masterclass event here.
Some other noteworthy changes
- Increase in the tax-free Personal Allowance from £10,600 to £11,000 in April 2016
- The dividend tax credit will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016 and tax rates on dividend income will be increased
- The family home will now be excluded from Inheritance Tax, adding to the existing £325,000 threshold, bringing the tax-free allowance for a surviving spouse or civil partner up to £1million by 2020-21. The allowance will also gradually be withdrawn for estate worth more than £2 million
- People earning more than £150,000 will have their amount they can pay tax-free into their pension reduce. For every £2 earned over £150,000 their tax-free contribution will drop by £1. Most people can contribute up to £40,000 a year tax-free