Autumn Budget 2017: New EIS and VCT rules revealed to boost investment in higher risk businesses

Support for knowledge-intensive businesses

Chancellor Philip Hammond delivered his first Autumn Budget

Chancellor Philip Hammond has announced plans to double EIS investment limits for knowledge intensive companies, while as expected ensuring EIS vehicles are "not used as a shelter for low risk capital preservation schemes".

He said the government is publishing an action plan today to unlock over ￡20bn of new investment in UK knowledge-intensive, scale-up businesses.

The Chancellor aims to do this through a new fund in the British Business Bank seeded with ￡2.5bn of public money.

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According to the Treasury in its response to the Patient Capital Review, the bank will float or sell this once the fund has established a sufficient track record. By co-investing with the private sector, a total of ￡7.5bn of investment will be supported.

Knowledge-intensive businesses

Hammond also intends to "double EIS investment limits for knowledge intensive companies" by EIS investors from ￡1m to ￡2m, provided that any amount above ￡1m is invested in knowledge-intensive companies, a move not flagged before the Budget.

According to the Treasury, the annual investment limit for knowledge-intensive firms will be doubled from ￡5m to ￡10m through EIS and by VCTs.

Greater flexibility will also be provided for knowledge-intensive companies over how the age limit is applied for when a company must receive its first investment through the schemes. Knowledge-intensive companies will be able to choose whether to use the current test of the date of first commercial sale or the point at which turnover reached ￡200,000 to determine when the ten year period has begun.

In addition, a new knowledge-intensive EIS approved fund structure will be consulted upon, with further incentives provided to attract investment.

For SEIS, the Treasury said that evidence from the consultation suggests that it works well at incentivising investment into the earliest stage companies (under two years old), but some respondents also suggested it is contributing to valuation bubbles in some sectors. The government said it will continue to monitor this.

Low risk schemes

However, as expected, Hammond wants to "ensure EIS is not used as a shelter for low risk capital preservation schemes".

From Royal Assent of the Finance Bill 2017-18, a test will be introduced to reduce the scope for and redirect low-risk investment, together unlocking over ￡7bn of new investment in high-growth firms through EIS and VCTs, the Treasury said.

The new ‘risk to capital' condition depends on taking a ‘reasonable' view as to whether an investment has been structured to provide a low risk return for investors. This has two parts: whether the company has objectives to grow and develop over the long term (which mirrors an existing test with the schemes); and whether there is a significant risk that there could be a loss of capital to the investor of an amount greater than the net return.

HM Revenue and Customs (HMRC) will publish detailed guidance on this test alongside publication of the Finance Bill.

In addition, some respondents expressed concern about the activity of some EIS funds and VCTs, including the artificial inflation of share prices and use of structures involving liquidity preferences. The government said it will continue to monitor the market and take action against behaviours not in the spirit of the schemes if necessary.

VCTs

Meanwhile, the government will further target VCTs towards investment in higher risk areas of the market, while also responding to concerns that certain conditions currently placed on VCTs restrict their activities unnecessarily.

The changes are:

• from 6 April 2018 certain historic rules that provide more favourable conditions for some VCTs ("grandfathered" provisions) will be removed
• from 6 April 2018, VCTs will be required to invest at least 30% of funds raised in qualifying holdings within 12 months after the end of the accounting period
• from Royal Assent of the Finance Bill, a new-anti abuse rule will be introduced to prevent loans being used to preserve and return equity capital to investors. Loans will be have to be unsecured and will be assessed on a principled basis. Safe harbour rules will provide certainty to VCTs using debt investments that return no more than 10% on average over a five year period
• with effect on or after 6 April 2019 the percentage of funds VCTs must hold in qualifying holdings will increase to 80% from 70%
• with effect on or after 6 April 2019 the period VCTs have to reinvest gains will be doubled from 6 months to 12 months

Start-up support

Speaking in his second budget of the year, the Chancellor outlined how the government will plan to help start-up companies in the UK.

He said: "We have some of the world's best companies and a commanding position in a raft of tech and digital industries that will form the backbone of the global economy of the futre.

"We will harness this potential and turn it into high paid, high productivity jobs of tomorrow. We choose to embrace the future. A new tech business is founded in Britain every hour but I want it to be every half hour.

"Today, we invest over ￡500m in a range of initiatives from AI to 5g and full fibre broadband. We will support regulatory innovation with a new Regulators' Pioneer fund.

The Chancellor launched the Patient Capital Review earlier this year in an attempt to overcome barriers to access faced by start-up companies in the UK hoping to grow further.

Chaired by Sir Damon Buffini, the taskforce recommended a three-pronged approach to tackling the issue, which was expected to be welcomed by Hammond and Business Secretary Greg Clark at today's Budget.