Overview of the changes
The new rules introduced by F(2)A 2015 cover the following areas:
- An investor in a company must be independent of that company when they first invest under a risk finance measure. An investor who has already invested in a company without needing an incentive to do so will not be expected to need an incentive in future because they will already have access to the information needed to decide if the company is worth investing in. The new rule applies only to the EIS because VCTs, as regulated financial intermediaries, are considered to be independent.
- The total amount of risk finance investments a company may receive or benefit from in its lifetime is limited to £12 million (or £20 million for knowledge-intensive companies). The rules provide a higher funding limit for knowledge-intensive companies in recognition of their need for more funding before they may be able to establish themselves in the market.
- A company must receive its first risk finance investment no later than 7 years after its first commercial sale (10 years for knowledge-intensive companies) unless, exceptionally, it meets certain conditions. The rules provide a longer period of time for knowledge-intensive companies in recognition of the extra time innovative companies usually need to need to establish themselves in the market. Companies may continue to receive risk finance investments after the end of the 7 or 10 year period.
- The old rules preventing money from being used to acquire the shares of companies are extended to clarify that risk finance investments may not be used to acquire an existing business, whether or not through acquisition of shares. A company seeking to acquire an existing business should be able to attract finance from the market, based on the track record of that business. If the market is not prepared to finance the acquisition of the business it would not be appropriate for State aid to be used either. The rules help to ensure that the money is used for the organic growth and development of the investee company, and maintain the integrity of other rules.
- A specific requirement has been introduced to clarify that the money received from EIS and VCT investments must be used to promote the growth and development of the company (or group).
- The new rules apply to all investments made by a VCT in a company, regardless of when the VCT received funds from its investors and regardless of whether the investment is a qualifying holding or not. While VCTs are not required to invest all their funds in qualifying holdings at any given time, and need some headroom to allow for liquidity management purposes, all the funds within a VCT are tax-advantaged and must be used in line with the new rules.
F(2)A 2015 also introduced two changes to the rules regulating the interaction between the EIS and Seed Enterprise Investment Scheme (SEIS):
- The requirement for at least 70% of money raised under the SEIS before money can be raised under the EIS has been repealed for investments made on or before 6 April 2015. However investments cannot be raised under the SEIS and EIS on the same day. EIS investments must be raised at least one day after any SEIS investments. This change applies to investments made on or after 6 April 2015.
- EIS investors will not lose entitlement to relief where an SEIS investor redeems their shares before the end of the three year holding period, provided the SEIS investor repays any tax relief on the redeemed shares. This change applies to redemptions made on or after 6 April 2014. See VCM15090 for how the rule works.
Note, the changes to the EIS and VCT rules described later in this section of the manual do not apply to the SEIS.