HM Treasury has warned venture capital trust (VCT) managers could face more changes to rules on what is a permissible investment.
Donald Stark, head of investment tax at HM Treasury, said he appreciated VCT managers needed time to bed in the shake-up brought about following the Patient Capital Review but the government was closely monitoring whether risk to capital conditions were being met.
In last year's Budget Chancellor Philip Hammond introduced a new risk to capital condition to EIS, SEIS and VCT rules to exclude investments where the tax relief provided most of the return for an investor with limited risk.
The test meant companies would have to satisfy the Treasury they either had objectives to grow and develop over the long-term and that there was a significant risk there could be a loss of capital to the investor of an amount greater than the net return.
Speaking at the Association of Investment Companies' VCT conference today (November 7) Mr Stark said the Treasury was checking with companies to make sure managers were now directing investors' cash to ventures where there was a risk of loss of capital.
Mr Stark said: "The government is determined to make sure this country continues to be the best place for people to build up an idea.
"New and innovative companies and technologies are vital to our country's long-term financial health. These companies improve competition and in time will provide new jobs.
"We want to make clear that tax advantage money should be focussed on areas where capital (raising) issues are severest.
"[The risk to capital conditions] is not the last word on this situation.
"We are reviewing, with interest, whether the types of investments being made in 2018 and beyond are different from those that have been done in the past."
More than 100 investment specialists, gathered at RSA House in London today (November 7), were told the Treasury would also check companies weren't restructuring themselves so they pass the risk to capital test and attract VCT investment.
Guy Rainbird, public affairs director of the Association of Investment Companies, said the VCT sector had seen a slowdown in investment after the risk to capital changes were announced.
But he said VCT managers had got to grips with which companies passed the risk to capital test.
He said: "There is a compliance issue. If you don’t fulfil the requirements of the rules you can lose VCT status.
"There was a need to prudently assess what these new rules meant. After that slowdown there has been a significant learning experience from VCT managers and boards. This shift in behaviour to higher risk companies has happened."
But Mr Rainbird added there was still some uncertainty among managers and the Treasury could make it clearer what it wanted from VCTs.
He said: "We would like to see uncertainty resolved as much as possible so that managers can be confident on what they are investing in. There are issues to do with deal structures."