Back in July the new government announced significant changes to the VCT and EIS tax efficient schemes, potentially the biggest changes since these reliefs were launched 20 years ago
VCT and EIS funds will no longer be used to make acquisitions of existing businesses or trading assets, regardless of when the funds were raised. The new rules will impact the investment strategies of a number of EIS and VCT fund managers, in particular VCTs which had been specialising in management buyout transactions, as well as funds that focus on assets such as pubs.
Kin attended the HM Treasury meeting to discuss the changes post announcement and it was clear that the industry had not been expecting the changes. Some fund managers were also surprised that there was to be no consultation or negotiation available. The changes had apparently been driven by Brussels and the UK had little bargaining power if it wanted to stay within the state aid rules. These changes will take effect post Royal Assent, now expected to be mid-November. It will be interesting to see whether there are any significant changes but it seems unlikely.
As well as acquisitions, other changes to SEIS, EIS and VCT announced in the Summer Budget included funds not be able to invest in companies 7 years or older after their first commercial sale took place, and 10 years or older for ‘knowledge intensive’ companies. Also there will be a new ‘lifetime’ cap on the total SEIS, EIS and VCT investment that a company can receive of £12 million. Although for ‘knowledge-intensive’ businesses the limit is £20 million and a doubling of the employee limit to 500 (versus 250 for other companies).
The changes above will have a positive impact on the likes of our client Parkwalk EIS which focuses on the knowledge intensive sectors given the increased limits. In addition, as VCTs become more growth orientated, firms already specialising in that sector, such as our client Pembroke VCT, will benefit. We will also potentially see new entrants into the VCT market as they will be able to compete on a more level playing field – the ‘old money’ rule meaning that pre 2012 money could be used for acquisitions created an oligopoly which resulted in few new entrants (Pembroke VCT being the most successful over the last few years).
It is certainly an interesting time for the industry and these changes come at a time of accelerating investor demand – principally driven by the continued restrictions on pensions. When you factor in solar and other renewables no longer qualifying during last tax year, it is possible that demand for tax efficient investment opportunities will exceed supply. The obvious danger being that fund managers will raise funds without a clear idea where they are investing them.