AB17: Tax Advantaged - Venture Capital Incentives | KPMG | UK

Autumn Budget 2017: Tax Advantaged - Venture Capital Incentives

AB17: Tax Advantaged - Venture Capital Incentives

Government increases investment allowance and incentives for knowledge-based start-ups but narrows relief for low-risk investments.

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Autumn Budget 2017: Tax Advantaged - Venture Capital Incentives

The Government has made a number of announcements relating to tax advantaged venture capital incentives, particularly impacting Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).

Most of the changes announced form part of the Government’s action plan in response to the outcome of the Patient Capital Review. The review formed part of the Government’s industrial strategy to increase productivity and drive growth by breaking down obstacles to getting long-term investment into innovative firms.

Subject to State Aid approval, the Government will:

  1. Increase investment limits for individuals investing in knowledge-intensive companies under EIS to £2 million;
  2. Double the amount knowledge-intensive companies can raise from EIS and VCT to £10 million;
  3. Relax the rules determining whether these companies meet the maximum age requirement so that that the three year rule starts from when the company achieves an annual turnover of £200,000, rather than the date of its first commercial sale; and
  4. Amend the definition of a ‘relevant investment’ to include all risk finance investments made before 2012 when counting towards the lifetime funding limit for companies receiving investment under these schemes. This will also apply to Social Investment Tax Relief.

A knowledge-intensive company needs to meet additional conditions relating to the research, development or innovation it carries out. The above changes (apart from 4) will apply to new qualifying investments made on or after 6 April 2018.

In response to the evidence gathered from the ‘Financing Growth in Innovative Firms’ consultation, the Government will also introduce a new condition to all tax advantaged venture capital incentives to exclude investments perceived to provide ‘capital preservation’. The condition will have two parts:

  1. The company must have objectives to grow and develop over the long-term; and 
  2. There is significant risk that there could be a loss of capital to the investor of an amount greater than the net return.

This condition will come into force from 6 April 2018 on all new qualifying investments.

A number of changes have also been announced regarding VCTs. Specifically, the Government will:

  1. Increase the proportion of VCT funds that must be held in qualifying holdings from 70% to 80%; 
  2. Double the time VCTs have to reinvest qualifying holding disposal proceeds from six to 12 months;
  3. Require 30% of funds raised in an accounting period to be invested in qualifying holdings within 12 months after the period end; and
  4. Remove certain ‘grandfathering’ provisions from 6 April 2018.

The Government has also made a number of other announcements of interest:

  1. Introduction of an accreditation system to allow investment in care homes under the Social Investment Tax Relief scheme; and 
  2. The Government will consult on a new knowledge intensive EIS fund structure in response to the Patient Capital Review

Overall, the above changes will be welcomed especially the doubling of the amount knowledge-intensive companies can raise and increasing investment limits for individuals. The Chancellor has set the direction of travel for tax incentive schemes by taking a clear step towards ensuring the schemes are not used as a shelter for low-risk investments, particularly, the new condition to reduce investments perceived to provide ‘capital preservation’.

For more details, please contact:

Jo Bateson

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