VCTs pushed towards earlier-phase businesses

While there were no changes to the overall rates of reliefs available for individual investors, the government stated companies investing in certain types of projects will no longer qualify for relief under VCTs and enterprise investment schemes.

The proposed company “age limit” was drastically scaled back further with investment now to be directed to companies within seven years of their first commercial sale (10 in the case of “knowledge intensive” companies), clearly directing VCTs towards much earlier-phase businesses.

Current VCTs have backed companies that were first set up decades ago, but have helped them, often under new management, grow significantly.

Additionally, the lifetime limit for tax advantaged funding has been carved back from £15m in March 2015’s Budget to £12m in the Summer Budget (£20m for “knowledge intensive” companies), an adjustment that might partially reflect exchange rate changes, since these rules are being driven by Europe.

In a paper issued alongside the Budget, HM Treasury also confirmed that existing VCTs will no longer be able to reinvest monies raised from exits in businesses that were previously eligible at the time of funding (such as MBO backed deals) into similar transactions.

Therefore grandfathering of previous deal types looks set to end and therefore proceeds for exists will either need to be reinvested in companies meeting the new restrictions, or returned to shareholders as special dividends.

Additionally, there is a new proposal introducing greater restrictions on how monies are invested within a VCT’s non-qualifying portfolio, preventing for example support for management buy-outs.

Jason Hollands, managing director for business development and communications at Tilney Bestinvest, says these are problematic changes which will, over time, see VCTs refocus on earlier-phase businesses and inherently limit the range of investment opportunities.

He says: “That isn’t great news for long established, small companies with the scope to create jobs and wealth, who still need access to capital but will no longer be eligible for this form of financing because of greater restrictions.

“The age of company in itself has no relevance to a businesses funding needs or its scope for fuelling economic growth.

“We were already expecting many VCTs to seek much lower levels of new fund raising this tax year as a result of the previously proposed restrictions and, it should be noted, VCTs managed by leading group NVM recently chosen to return existing capital to shareholders citing a lack of opportunities and highlighting EC meddling as a concern.”

However Ian Sayers, chief executive of the Association of Investment Companies, is positive that VCTs will cope with the latest challenges the chancellor has thrown their way and reckons the changes to dividend taxation also contained in the Budget could make the vehicles more popular.

He says: “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.”

As this guide was published VCT managers were set to meet with HM Treasury officials to discuss proposals made in the Budget to changes the rules for VCTs.