Background to the changes
The venture capital schemes are intended to help increase economic growth in the UK.
EIS and VCTs are both approved State aids. The European Union (EU) State aid guidelines permit countries within the single market to provide aid for risk finance investments, such as investments under the EIS and VCT, only where there is a market failure as a result of asymmetry of information between the company and the investor. A company that has little or no track record and little or no collateral will struggle to attract finance from the market to help it grow and develop. The aid is intended to help offset the extra costs of due diligence that a third party investor needs to carry out before deciding to invest.
It is expected that all companies will function in the market independently of government support in due course. Aid is provided to help companies access finance in their early stages/development before they have established a track record to attract investors from the market. Once established, if it is successful, the company should be able to access finance from the market without recourse to State aid.
State aid for risk finance investments is not intended to support struggling companies with a track record that the market is not prepared to support or for companies that need investments to maintain the status quo. The money must be used to support the growth and development of the company.
The changes introduced by F(2)A 2015 align with the Risk Finance Guidelines (RFG) (C(2014) 34/2) introduced in July 2014.
The EIS and VCT rules, including these changes, have been approved following detailed discussions with the European Commission (EC), based on evidence provided by the UK. These new EIS and VCT rules are more generous than ordinarily allowed under the General Block Exemption Regulation (GBER) (No 651/2014). The EC decision letter can be found on the EC website.
An independent evaluation of the impact of the schemes will be carried out in 2018. The evaluation will be published in 2019.