Tax efficient investment managers are set to meet with Treasury officials on Monday (13 July) to discuss proposals made in the Budget to changes the rules for venture capital schemes.
Paul Latham, managing director at Octopus Investments, confirmed the Monday meeting, ahead of the draft legislation being published on Wednesday (15 July)- which should give an opportunity for proper feedback and possible “tweaking” of the rules - before legislation goes to Royal Ascent in the Autumn.
On Wednesday (8 July), the chancellor announced in his summer Budget that the government will require that all investments are made with the intention to grow and develop a business and all investors are ‘independent’ from the company at the time of the first share issue.
With further detail expected in the Summer Finance Bill 2015, the Budget documents stated that new qualifying criteria would be introduced to limit relief to investment in companies that meet certain conditions demonstrating that they are ‘knowledge intensive’ companies within 10 years of their first commercial sale.
Plans were also laid to introduce a cap on the total investment a company may receive through the Enterprise Investment Scheme and venture capital trusts of £20m for knowledge intensive companies and £12m for other qualifying companies.
More new rules are set to prevent EIS and VCT funds being used to acquire existing businesses, including extending the prohibition on management buyouts and share acquisitions to VCT non-qualifying holdings and VCT funds raised pre-2012, along with preventing money raised through EIS and VCT being used to make acquisitions of existing business, regardless of whether it is through share purchase or asset purchase.
The government will also remove the requirement that 70 per cent of seed enterprise investment scheme money must be spent before EIS or VCT funding can be raised for qualifying investments made on or after 6 April 2015.
These measures are seen as yet another legislative hurdle to overcome for the VCT and EIS industry, with Tilney Bestinvest’s business development managing director Jason Hollands arguing that these “probematic changes” will over time see VCTs refocus on earlier-phase businesses and inherently limit the range of investment opportunities.
Tim Levett, chairman of NVM Private Equity, told FTAdviser that he was surprised by the government’s move, especially given the industry had been consulting with the Treasury and there had been assurances made during the March Budget around what changes were to be made.
Earlier this year, George Osborne said rules would require that the companies being invested in by VCTs or EISs “must be less than 12 years old when receiving their first EIS or VCT investment”, adding that there would be an exception where “the investment will lead to a substantial change in the company’s activity”.
Mr Levett did not want to comment much further on the situation, as he said that there is to be an explanation of proposals during a consultation meeting with the industry at the start of next week, ahead of the Summer Finance Bill’s publication.
Mr Latham, managing director at Octopus Investments, said that these issues have been subject to debate between the Treasury and the EU for a while now, as the UK moves towards getting state aid approval.
“It would appear they’ve come to a compromise with these proposals, but we’d been expecting changes for a while so have reassessed what we invest in accordingly; I fear some other firms may not be so flexible.”
Annabel Brodie-Smith, communications director at the Association of Investment Companies, admitted that in practice the changes could mean a lot more due diligence for providers, but added that the changes were not yet set and the Budget was not all gloom and doom for the sector.
“We have coped with many similar things in the past, plus there were several beneficial changes made, for instance a cut to higher earner pension tax relief will mean increased demand for VCTs and taxation of dividends are also likely to be supportive of the industry.”
peter.walker@ft.com
