Income Tax: streamlining the tax-advantaged venture capital schemes
Published 5 December 2016
© Crown copyright 2016
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Who is likely to be affected
This package of measures will affect companies using the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust scheme (VCT), EIS and SEIS fund managers and VCTs.
General description of the measures
The measures make amendments to the EIS, SEIS and VCT rules in three areas:
- for the EIS and SEIS, companies will no longer be excluded from qualifying for an investment if a right exists to convert the shares from one class to another at some future date (as long as the right is not exercised during the holding period)
- for VCTs, it clarifies the law that certain parent companies that have acquired another company which has previously received VCT funding (the subsidiary company) through an exchange of shares or securities will be able to use the funding history of the subsidiary company when considering if follow-on funding is permitted to fund the continuing activities of the subsidiary (the EIS rules already permit these arrangements)
- for VCTs, a power will be introduced to enable the Treasury to make regulations about the treatment of exchanges of non-qualifying investments
A consultation will also be held on options to streamline HM Revenue and Customs’ (HMRC) discretionary advance assurance service, which provides HMRC’s opinion on the eligibility of a company to receive an investment. A consultation document, including an assessment of impacts, is published separately.
Policy objective
The aim of this package of measures is to provide additional flexibility in the operation of the SEIS, EIS and VCT schemes.
Background to the measure
HMRC has been discussing the issue of share conversion rights with industry members and advisers for over a year to understand the implications of allowing companies to include share conversion rights in their articles of association and elsewhere.
The measures on follow-on funding and exchanges of non-qualifying shares and securities arise from technical discussions with advisers and VCTs following the introduction of additional rules by Finance (No. 2) Act 2015.
Detailed proposal
Operative dates
Share conversion rights under the EIS and SEIS: the measure will have effect for shares issued on or after 5 December 2016.
Follow on funding for VCTs: the measure will have effect for relevant investments made on or after 6 April 2017.
VCT regulation-making power: the measure will have effect for regulations made after Royal Assent to Finance Bill 2017.
Current law
Current law for the EIS and SEIS is contained in Parts 5 and 5A respectively of the Income Tax Act 2007 (ITA 2007).
Current law for VCTs is contained in Part 6 of the ITA 2007.
Proposed revisions
Legislation will be introduced in Finance Bill 2017 to:
- exclude a right to convert shares from one class to another being treated as an arrangement for the disposal of those shares within the no pre-arranged exits requirements for the EIS and SEIS under section 177(1) and section 257CD(1) ITA 2007 respectively
- enable a new parent company that meets the conditions in section 326 ITA 2007 to receive an investment from a VCT under condition A of the permitted maximum age condition in section 280C(4) ITA 2007 and the permitted company age requirement in section 294A(3) where a relevant investment was made in the parent company’s subsidiary before the restructuring under section 326 took place; the money raised may be used only for the activities of the subsidiary for which the follow on funding was anticipated
- introduce a power to enable the Treasury to make regulations for cases where, on an exchange of non-qualifying shares or securities, a VCT receives a non-qualifying investment. Draft regulations will be published for consultation before Public Bill Committee of the Finance Bill
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|---|
| 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
There is no impact on individuals and households.
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 consideration, the government has concluded that there are no significant impacts on groups of people sharing protected characteristics differently to other groups, and has not identified any equalities impacts.
Impact on business including civil society organisations
The overall change in administrative burden is expected to be negligible.
The changes to share conversions are expected to lead to a small reduction in administrative burden on certain companies. These companies currently need to change their documents to exclude share conversion rights so as to become eligible for investments under the EIS and SEIS.
Companies needing follow-on funding will be able to restructure themselves in certain ways to ensure they retain the right to secure follow-on funding.
The regulations that would be made under the proposed power are expected to reduce the administrative burden on VCTs. They will provide certainty to VCTs on how to deal with such exchanges without the risk of losing their VCT status or the need to confirm treatment with HMRC on a case specific basis.
Operational impact (£m) (HMRC or other)
Overall, the legislative changes should reduce the amount of HMRC operational and technical resource needed to check compliance with the rules.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The effect of the changes will be monitored. An evaluation of the EIS and VCT schemes will be carried out in accordance with the State aid evaluation requirements, with a published report anticipated by the end of 2019.
Further advice
If you have any questions about this change, please contact Cathy Wilson on Telephone: 03000 536678 or email: venturecapitalschemes.policy@hmrc.gsi.gov.uk.