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Government sets out new rules for VCTs and EIS

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The Government has confirmed the lifting of the £1m limit that venture capital trusts can invest in a single company per year, with no new limit set.

Under draft financial services bill proposals, published today, the Government is removing this restriction other than where the company is a member of a partnership or party to a joint venture. The restriction that no more than 15 per cent of the total funds raised through a VCT can be invested in any one company will remain.

Association of Investment Companies director general Ian Sayers welcomes the new flexibilities but warns over a restriction to investing in buy-outs. He says: “Our enthusiasm for the positive measures is tempered by proposals which may restrict VCT investment in buy-outs.  These deals are invaluable in revitalising the commercial prospects of an SME when existing owners find themselves unwilling or unable to develop a business. . 

Sayers says it is likely this restriction has been forced upon the Government by EU rules.

The Government has also confirmed changes to VCTs and EIS announced in the Budget earlier this year. The employee number limit for the size of the company being invested in will be increased to 250 employees or fewer, up from the current 50 employers limit. The size threshold for a company will be lifted to £15m from £7m, and to £16m after investment up from £8m.

The maximum annual investment amount for qualifying companies is to be lifted to £10m from its current £2m, while the annual amount that an individual can invest under an EIS is set to double to £1m. The increases to company size and annual investment amount limits will take effect from April 6, 2012.

Lower risk companies for investment under an EIS or VCT will be vetted through a disqualifying purpose test, while share acquisitions in another company will no longer be a qualifying activity for schemes, nor will the feed-in tarrif or other similar subsidies.

In the draft financial services bill, the Treasury says: “Smaller, higher risk companies tend to face barriers in raising equity finance, and tax relief is given under the EIS and VCT schemes to incentivise such investment. If companies carrying out lower risk activities can obtain investment under the schemes, the schemes may fail to serve their purpose.”

However, electricity generated by companies operating in anaerobic digestion or hydro power, companies operated by community interest companies and cooperatives will not be affected.

 

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