A period of uncertainty has come to an end for advisers wishing to place their clients in Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS).
The products, which offer tax efficient methods to invest in unquoted companies, have been under the scrutiny of the EU since changes to UK rules were announced in the Finance Act, which was voted through in parliament in March this year.
The EU granted approval on 5 July, and the government has now announced the rule changes will be backdated to the start of the tax year.
Rules governing the EIS and VCT market were changed with funds now forced to invest in more "knowledge intensive" companies, rather than businesses that are perceived to be lower risk and where investments are made with "capital preservation" in mind.
The problem was that investments were being made, in the Treasury’s view, not with the specific aim that the value of the companies would rise substantially, but rather that the value would not fall, and the investor would generate a return through the tax breaks.
The Finance Act 2018 received Royal Assent on 15 March 2018 and also included provisions which increased the annual amount a qualifying knowledge intensive company can raise under the EIS and VCT schemes from £5m to £10m for shares issued on or after 6 April 2018.
However, these changes could only take effect when commencement regulations were made by HM Treasury and these were held back by a slow the EU approval process.
George Bull, senior tax partner at RSM, said: "The EIS/VCT comes under EU state aid rules and before commencement regulations can be made and the Finance Act 2018 provisions take effect, the UK needs approval from the EU."
He said this had left companies seeking to raise such capital in a difficult position, as they would be unsure whether the new rules would apply.
Mr Bull said: "Back in May, we warned about a shock lapse in the EU state aid approval for changes to enterprise investment schemes and venture capital trusts. This hold-up delayed advance assurances for companies seeking to exploit these changes for knowledge-intensive companies.
"The approval has now been granted but the resulting bottleneck in applications could cause delays.
"Companies can apply in advance of a share issue to HMRC for assurance that the company meets the conditions for SEIS/EIS/VCT status. Given that assurance may have been granted up to £5m whilst EU state aid approval was pending, we anticipate seeing a rise in advance assurance applications to HMRC requesting updated assurances taking account of the Finance Act 2018 provisions. This may well cause delays in receipt of EIS responses from HMRC.