REV BN 10: Improvements To The Venture Capital Schemes
Who is likely to be affected?1. Investors whose shares qualify for relief under the Enterprise Investment Scheme (EIS), the Corporate Venturing Scheme (CVS), the Venture Capital Trust (VCT) scheme or for venture capital loss relief, and the companies in which they invest. General description of the measuresVCTs2. The rate of income tax relief for investments in qualifying VCT shares is to be increased from 20% to 40%. This will apply in relation to shares issued by VCTs in the tax years 2004/05 and 2005/06. 3. Capital gains tax (CGT) deferral relief will not be available for gains reinvested in VCT shares issued on or after 6 April 2004. 4. The annual investment limits in VCT shares, which apply in relation to the tax reliefs available to individuals, are to be raised from £100,000 to £200,000 with effect for shares acquired on or after 6 April 2004. EIS5. The annual investment limit for income tax relief under the EIS is to be raised from £150,000 to £200,000 with effect for shares issued on or after 6 April 2004. 6. The “same day rule” is to be relaxed to make it easier for investors seeking EIS reliefs to be issued with shares at the same time as other investors. The change will apply in relation to shares issued on or after today. 7. The rules for EIS income tax relief are to be amended. Subject to certain conditions, investors who have loans repaid to them by companies will not now be precluded from obtaining tax relief for subsequent investments in shares in the companies concerned. This is provided that the repayment of any loan before the date of issue of the shares is not made in connection with any arrangements for their acquisition. Amendments will also be made to the equivalent rule for EIS deferral relief so that the rule is the same. These changes will take effect in relation to shares issued on or after today. EIS and VCTs8. The EIS provisions in relation to the “active company” are to be amended so that during the relevant period it will be easier for groups to arrange which company carries on the activity for which EIS money is raised without jeopardising investors’ tax reliefs. A corresponding change is to be made to the equivalent VCT provision (“the trader company rule”). EIS, CVS, VCTs and venture capital loss relief9. The conditions which must be met by subsidiaries of companies for the companies to qualify for the EIS, CVS, the VCT scheme, and for relief under section 573 or 574 of the Income and Corporation Taxes Act 1988 (‘venture capital loss relief’) are to be amended. Any subsidiaries of EIS companies will need to be 51% subsidiaries, other than subsidiaries whose activities benefit from the EIS money and property management subsidiaries - these will need to be direct 90% subsidiaries of the EIS company. The same rules will apply to CVS companies, companies forming part of a VCT’s qualifying holdings, and subsidiaries of companies which qualify for venture capital loss relief. These changes will apply in relation to shares or securities issued on or after today. EIS, VCTs and CVS10. The EIS and VCT rules impose a requirement that the company carrying on (or preparing to carry on) the trade, or research and development which benefits from the money raised under the scheme, must be the company which issues the shares or securities concerned, or a 90% subsidiary of that company. This requirement is extended to the CVS in respect of shares issued on or after today. Operative date 11. Most of the new measures have effect from 6 April 2004, but some (detailed above) take effect from today. Current law and proposed revisionsTax incentives for investment in VCTs12. Under current VCT rules individuals can obtain income tax relief of up to 20% of the aggregate investment they make in new full-risk ordinary shares in VCTs up to a maximum investment of £100,000 in any tax year. Gains arising on disposals of investments in full-risk ordinary shares in VCTs (whether they were acquired new or second-hand) and dividends paid on such shares are exempt from tax, provided that the investments are held by individuals over the age of 18. These reliefs apply up to an annual investment limit of £100,000. These limits are to be increased to £200,000 with effect for VCT shares acquired in the tax year 2004/05 onwards. 13. Under the proposals announced today the rate of income tax relief will increase from 20% to 40% for investment in qualifying shares for a two year period. This is to apply to shares issued in the tax years 2004/05 and 2005/06 only. VCTs: CGT deferral relief14. Under the current VCT rules, individuals may defer a capital gains tax liability if gains are reinvested in VCT shares in respect of which they obtain income tax relief. The VCT shares must be issued in the two-year period which begins 12 months before the gain arose. Deferral relief will not be available for investments in VCT shares issued on or after 6 April 2004. The relief remains available in respect of gains arising in the tax year 2004/05 where the VCT shares in question were issued before 6 April 2004 but within the period of twelve months ending on the date the gain arose. EIS income tax relief15. Individuals who qualify for EIS income tax relief can obtain a reduction in their income tax liabilities of an amount up to 20% of the amount they invest in new full-risk ordinary shares in qualifying companies. This is subject to an aggregate investment limit of £150,000 per tax year. This is to be increased to £200,000 with effect for shares issued on or after 6 April 2004. “Same day rule”16. For tax relief to be available under the EIS in respect of an investment in shares, all the shares of the same class which the company issues on that day must be issued in order to raise money for the purpose of one or more qualifying business activities. With effect for shares issued on or after today, investors not seeking EIS reliefs will be able to subscribe for their shares otherwise than wholly in cash without preventing those investors who do subscribe wholly in cash from obtaining EIS relief. “Active company rule” and “trader company rule”17. EIS provisions have an “active company rule” which requires that the "active company” in relation to a qualifying business activity is determined at the time of the issue of the shares, and that company must remain the "active company" throughout a prescribed period (generally three years). The changes will relax this requirement so that during the relevant period it will be easier for groups to arrange which company carries on, at any time, the activity for which EIS money is raised without jeopardising investors’ EIS reliefs. A corresponding change will be made to the equivalent requirement for VCTs Emergency loan provision18. Currently, EIS anti-avoidance rules operate to prevent an individual making a loan to a company without the repayment of that loan jeopardising his or her ability to obtain EIS income tax relief in respect of shares issued by the company in the following twelve months. These loans are typically emergency funding to tide a company over a cash flow crisis. The change will relax this rule and thereby help a number of otherwise healthy companies survive. Subsidiaries rule19. Currently, the rules for the venture capital schemes permit a qualifying company to have subsidiaries but only if it, or another of its subsidiaries, owns 75% of the company concerned. There is also a requirement under the EIS and VCT schemes that the company that carries on, or prepares to carry on, the trade or research and development for which the money raised under the schemes is used is a 90% subsidiary. Under the new measures proposed today, the 75% requirement will be replaced by a 51% requirement except in relation to subsidiaries which hold and manage property – these must be 90% subsidiaries. The EIS and VCT provisions described in paragraph 10 above which apply in relation to 90% subsidiaries are extended to the CVS. Further advice20. If you have any questions about these changes, please call 029 2032 7400.
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