Regulations for VCTs and EISs tweaked

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The Chancellor has announced further alterations around venture capital trusts and enterprise investment schemes.

Subject to state aid approval, companies deemed “knowledge intensive” will only be able to receive investments from VCTs, EISs or SEISs if they are less than 10-years old. This has been lowered from the 12-year limit announced in the March Budget.

The limit for other qualifying companies will be 7 years.

VCTs and EISs will also be prevented from acquiring existing businesses as “the investments are intended to support the growth and development of the company itself and not expansion by acquisition of existing companies or trades”.

The updated consultation paper states: “VCTs will not be able to use ‘protected monies’ under the grandfathering provisions to fund buyouts, or to fund the acquisition of a trade, whether or not the VCT’s investment would be a non-qualifying holding.”

Clubfinance director and co-founder Philip Rhoden says the prohibition on EIS and VCT investments to acquire existing businesses will have “little or no impact” for some VCTs.

He adds: ”For those previously focused on management buyout-type investments this will mean quite a change, and it will be interesting to see what impact this has on VCT fund-raising plans this tax year, potentially adding to existing concerns over limited supply.”

Among other changes, generally schemes can only invest in companies with a limit of 250 employees, but this increases to a limit of 500 employees for knowledge intensive companies, an incremental rise from the 499 announced in March.

Kingston Smith head of entrepreneurial tax Mike Hayes says: “This is a re-announcement of the arrangements he made in the March Budget but they did not make the Finance Bill before the election. The changes are mainly to bring the VCT rules in line with EU state aid rules. Greater care will need to be taken by investors to make sure these new conditions are met.”