The changes announced as part of this year’s Budgets relate to the amount invested, age of qualifying companies and use of investment funds.
The maximum amount a venture capital trust-qualifying company can receive over its lifetime has been limited to £12m, or £20m for knowledge intensive companies.
In order to be eligible for VCT investment, companies will normally have to have made their first commercial sale in the past seven years, or ten years for ‘knowledge intensive’ companies.
Also, the EU is keen to ensure that ‘state aided’ money, such as investments that qualify for tax reliefs, should be used where companies require funds for new growth, rather than to acquire existing shares or businesses.
As a result, the 2015 Finance Bill proposes that VCT money can no longer be used to fund management buyouts and acquisitions.
Paul Latham, managing director at Octopus Investments, says these changes do not materially effect the way in which VCTs work – indeed they help to ensure that high-growth and innovative businesses can continue to benefit from VCT investment.
The government launched a consultation on tax-advantaged venture capital schemes back in July 2014, which Mr Latham says he worked on closely with them, so the majority of the proposed changes were in line with expectations.
Mr Latham says: “As the largest provider of VCTs in the UK, we are used to the government making changes to VCT legislation.
“The range of companies that now qualify might be slightly smaller, but there is still a thriving and fertile market full of the type of fast-growing smaller companies that VCT managers like Octopus look for.
“We are satisfied there will continue to be a good pipeline of potential investment opportunities.”
As a result, Mr Latham says the changes to the legislation should have no impact on the investments already made by the VCT, and so there should be no immediate impact on those holding VCTs in their portfolio.
Finance Bill legislation comes into effect with Royal Assent, which at the time this guide was produced was expected this month or November, and managers will be assessing the impact on each of their VCTs at this point, according to managers FTAdviser spoke to.
Chris Hutchinson, manager of the Unicorn Aim VCT, says these proposals have potentially some quite serious implications for the VCT market.
He says: “The proposed changes are therefore likely to put the brakes on VCT fund raising this year, although to what extent remains to be seen.
“At this stage, it would seem unlikely that we will see funds raised this year reach anywhere close to the £429m raised last year, which co-incidentally is the largest amount raised since 2005 to 2006 as demand for VCTs continues to increase with the restrictions to pension allowances and tax relief for high earners forcing advisers and investors to look for alternatives.”
While the ultimate effect of these changes is not yet clear, Hugh Rogers, business development director at Puma Investments, says VCT managers will continue to innovate as they have done in response to previous changes to the industry.