EC state aid approval for EIS and VCT changes

October 26, 2015

The European Commission has given State aid approval for the latest EIS and VCT rule changes in the Finance Bill. Further technical amendments will be tabled at Report Stage and the Government has announced its intention to introduce regulations at a later date to allow the use of 'replacement capital' within EIS and VCT schemes.

On 9 October, the European Commission gave its initial notification of State aid approval to the latest rule changes for the enterprise investment scheme and venture capital trusts contained in Finance (No 2) Bill 2015 (Schedules 5 and 6).

The changes include:

  • A requirement for companies to raise their first investment under EIS, VCT or other risk finance investment within seven years of making their first commercial sale, or ten years for knowledge-intensive companies.
  • This age limit will not apply to companies raising an investment where the amount of the investment is at least 50% of the company's annual turnover, averaged over the previous five years.
  • A new cap of £12 million on the total amount of investments a company may raise under EIS, VCT or other risk finance investment, or £20 million for knowledge-intensive companies.
  • A new rule to prevent companies from using EIS and VCT investments to acquire a business, whether through asset purchase or share purchase, also applying to non-qualifying VCT holdings.
  • Removal of the requirement to spend 70% of seed enterprise investment scheme money before EIS or VCT funding can be raised.

In the Finance Bill Committee debate on 13 October 2015, the Financial Secretary to the Treasury signalled further technical amendments would be introduced at Report Stage to ensure the rules work as intended. It is not yet clear whether the Commission's approval is backdated to 1 January 2015, or whether it only applies from the date on which the amended legislation is effective.

He also announced the government's intention to introduce regulations at a later date, subject to State aid approval, to introduce some increased flexibility into the schemes by allowing the use of 'replacement capital' within EIS and VCT schemes, i.e. the purchase of shares from existing shareholders "when the amount invested in newly issued shares is at least equal to the amount invested in secondary shares".