Policy paper

Income Tax: Venture Capital Schemes: relevant investments

Published 22 November 2017

Who is likely to be affected

This measure will affect companies, social enterprises, fund managers and individuals using the Enterprise Investment Scheme (EIS), Venture Capital Trusts (VCTs) and Social Investment Tax Relief (SITR).

General description of the measure

This measure amends the definition of a ‘relevant investment’ to ensure all investments, including all risk finance investments made before 2012, are counted towards the lifetime funding limit for companies receiving investment under tax advantaged venture capital schemes. The limit is £12 million for most companies and £20 million for knowledge-intensive companies.

Policy objective

This measure is intended to ensure that all risk finance investments that a company may receive are treated as relevant investments regardless of when they were made.

The definition of a relevant investment will apply for all purposes in the EIS and VCT rules and will also extend to the new lifetime limit for the Social Investment Tax Relief scheme.

Background to the measure

The definition of a relevant investment was introduced in the Finance Act 2007 as part of a new annual limit on the amount of EIS and VCT investments a company may receive. The definition excluded certain EIS and VCT investments to ensure there was no retrospective effect when the annual limit first applied. Finance Act 2012 amended the definition of a relevant investment to include ‘other risk finance investments”; but excluded investments where the change would otherwise have retrospective effect.

Finance Act (2) 2015 introduced new EIS and VCT rules to better target the schemes to support high-growth companies with little or no track record that would otherwise struggle to access finance to grow and develop. The changes included the introduction of a new lifetime investment limit, which depends upon the definition of a relevant investment. However the changes did not take into account the effect of the transitional provisions included in the Finance Act 2007 and the Finance Act 2012. As a consequence, certain investments received before 2012 do not count towards the lifetime funding limit.

Detailed proposal

Operative date

The changes will apply to qualifying investments made on or after 1 December 2017.

Current law

The current EIS legislation is contained in Part 5 of Income Tax Act (ITA) 2007.

The current VCT legislation is contained in Part 6 of ITA 2007.

The current of SITR legislation is contained in Part 5B Income Tax Act 2007.

Proposed revisions

Legislation will be introduced in Finance Bill 2017-18 to amend Parts 5 and 6 of ITA 2007 to define all EIS, VCT and other risk finance investments, regardless of when they were made, as ‘relevant investments’.

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
negligible	negligible	negligible	negligible	negligible	negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

We estimate that a maximum of 100 individual investors will be affected by this measure.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

The changes to the schemes are not likely to change the impacts of this measure on any group. After careful consideration, we have concluded that there are no impacts on groups of people sharing protected characteristics differently to other groups, and has not identified any equalities impacts.

From the data available it is reasonable to conclude that these changes will not have any further impact on those groups affected by equality legislation.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on businesses. Fewer than 5 companies have been affected by the provisions since November 2015. There will be an impact on:

• some companies may not be eligible to receive future investments under the schemes because the historic investments would result in the company breaching the lifetime limit on relevant investments
• some companies may become eligible for follow-on funding under the EIS and VCT schemes provided they can show that the follow on funding was anticipated at the time of the initial investment

There may be an impact on a small number of civil society organisations that are social enterprises and that received EIS or VCT investments before mid-2007. However most social enterprises using the EIS scheme were carrying out activities that are now excluded; others may still be able to use the EIS scheme.

Negligible one-off costs include familiarisation with the new rules. Negligible on-going costs may include making arrangements to obtain follow-on funding.

Operational impact (£m) (HMRC or other)

The costs to HMRC of implementing these changes are anticipated to be negligible.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through the amount of funds raised by EIS and VCTs.

Further advice

If you have any questions about this change, please contact Cathy Wilson on telephone: 03000 536 678 or email: cathy.wilson@hmrc.gsi.gov.uk or venturecapitalschemes.policy@hmrc.gsi.gov.uk.