Changes to Venture Capital Reliefs

EIS and SEIS Schemes update for Angel and Alternative Investment Investors

The Finance Act 2018 included important changes to EIS and SEIS schemes. This Insights blog highlights some changes for you.

(A) Amendments to venture capital relief’s for high tech industries with high growth potential. November 2015, saw the emergence of “knowledge-intensive company” (KIC) to provide a longer window for EIS fundraising.

If a company meets two conditions it is a KIC.

(a) One or both operating costs conditions, and
(b)(i) Either the innovation condition, or
(ii) the skilled employee condition.

(a) The operating cost conditions for relevant R&D or innovation expenditure.
(i) In one of the three preceding years at least 15% of operating costs; or
(ii) In each of the three preceding years at least 10% of operating costs.

(b)(i) The innovation condition
(i) The company is engaged in the creation of intellectual property at the time of the share issue; and
(ii) It is reasonable to assume that within 10 years of the issue of the shares the greater part of the company’s business will be the exploitation or use of the IP.

(b)(ii) The skilled employee condition
20% of the company’s employees are qualified in the field and engaged in R&D activities.

The Act has enhancements to the relief for KIC’s to increase the investment limits, as follows:

(a) An individual can invest up to £2m in EIS’s subject to at least £1m is in KICs;
(b) A KIC can raise up to £10m a year, with a lifetime limit of £20m; and
(c) A KIC can elect for the 10-year maximum age test to start from when the annual turnover exceeds £200,000.

(B) The capital condition will now impact on the types of companies able to raise money under venture capital schemes.

The new rules target growth companies. The Act now excludes arrangements designed to provide capital preservation for investors.

The new growth requirement is likely to prevent many SPV’s, whose objective is to fulfil a specific project, from raising capital under venture capital schemes. Companies will need to demonstrate their growth potential to be eligible to issue EIS qualifying shares. Examples of growth potential could be increasing employees or turnover.

In addition, the activities of the company must place the money raised at genuine risk. The design of this new provision is to prevent companies from raising money under venture capital schemes with mechanisms to protect capital.

The provision of the above information is for general information only. You should not rely upon the above information. You should seek independent professional advice for your case.

HMRC’s aim is to target the reliefs for innovative companies with significant growth potential.

You can contact us to discuss your enterprise investment tax credits or your offer to your investors.

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