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This publication is available at https://www.gov.uk/government/publications/income-tax-the-enterprise-investment-scheme-and-venture-capital-trusts-encouraging-investments-in-knowledge-intensive-companies/income-tax-the-enterprise-investment-scheme-and-venture-capital-trusts-encouraging-investments-in-knowledge-intensive-companies
Who is likely to be affected
Companies and individuals using the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs), fund managers and other promoters and advisers associated with the EIS and VCTs.
General description of the measure
This measure increases investment limits and provides more flexibility for knowledge-intensive companies receiving investments under the EIS and VCTs rules. The annual limit for individuals investing in knowledge-intensive companies under the EIS will be increased to £2 million, provided that anything above £1 million is invested in knowledge-intensive companies. The annual EIS and VCT limit on the amount of
tax-advantaged investments a knowledge-intensive company may receive will be increased to £10 million. Greater flexibility will be provided with respect to the rules for determining whether a knowledge-intensive company meets the permitted maximum age requirement.
These changes are intended to provide significant additional support to knowledge-intensive companies, which evidence suggests face the greatest difficulties in accessing growth investment. The tax-advantaged venture capital schemes are intended to encourage individuals to invest directly or indirectly in small, high growth-potential trading companies that would otherwise struggle to access the funding they need to grow and develop.
Background to the measure
This measure forms part of the government response to the Patient Capital Review consultation.
The government published a consultation, ‘Financing growth in innovative firms’ on
1 August 2017 which considered the effectiveness of EIS, VCTs and the other
tax-advantaged venture capital schemes. The government’s response document was published on 22 November 2017.
For EIS the changes will apply to shares issued on or after 6 April 2018.
For VCTs the changes will apply to new qualifying investments made on or after
6 April 2018.
The current EIS legislation is contained in Part 5 of the Income Tax Act (ITA) 2007.
The current VCT legislation is contained in Part 6 of ITA 2007.
Legislation will be introduced in Finance Bill 2017-18:
- section 157 ITA of 2007 will be amended to increase the EIS investment limit for individuals to £2 million provided that that any amount over £1 million is invested in one or more knowledge-intensive companies
- sections 173A and 292A of ITA 2007 will be amended to increase the annual investment limit for a knowledge-intensive company to £10 million
- the changes described above will include amendments to the operating costs conditions in sections 252A and 331A of ITA 2007 (definition of a knowledge-intensive company) for companies that have existed for less than 3 years
- the permitted maximum age rules contained in sections 175A, 280C and 294A of ITA 2007 will be amended to allow a knowledge-intensive company to use the date from which its annual turnover exceeded £200,000, instead of the date of its first commercial sale, when determining the date from which the end of the initial investing period is calculated
These changes are all subject to state aid rules.
Summary of impacts
Exchequer impact (£m)
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These figures are set out in Table 2.1 of Autumn Budget 2017 as ‘Patient Capital Review: reforms to tax reliefs to support productive investment’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2017.
This measure is not expected to have any significant macroeconomic impacts.
The costing accounts for behavioural responses to the changes, whereby a proportion of capital preservation investment excluded is reinvested elsewhere through these schemes and the new incentives to invest in knowledge-intensive companies result in increased investment in those.
Impact on individuals, households and families
Increasing the annual investment limit to £2 million means that some individuals will be able to claim higher amounts of tax relief if they invest in one or more knowledge-intensive companies. It is estimated that approximately 4,000 individual investors are likely to benefit from this measure annually.
The measure is not expected to impact on family formation, stability or breakdown.
The measure may influence individuals to invest more in knowledge-intensive companies. They may benefit from the measure.
Impact on business including civil society organisations
The measure is expected to attract more investment in smaller innovative companies carrying out research and development and other activities to develop intellectual property that the company will use for its future trading activities. The measure is expected to have a negligible impact on businesses administration burdens. One-off costs include familiarisation with the application of the extended definition of a knowledge-intensive company. Approximately 80 VCTs which are currently active will also bear small one-off familiarisation costs with the new investment limit and the rules for determining a knowledge-intensive company. It is not expected there will be any
There is no impact on civil society organisations
Operational impact (£m) (HMRC or other)
Implementing these changes will incur operational costs for HM Revenue and Customs (HMRC) in the region of £700,000 for updating the self-assessment form SA101 for individuals who claim for EIS investments higher than £1 million.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through applications from companies to HMRC under the schemes, and by the amount of funds raised by companies using the EIS and VCTs.