As expected, the draft Finance Bill 2012 enhances the EIS and VCT schemes by increasing the funds allowed to be raised under these schemes  and the size restrictions on qualifying companies. However it also attempts to refocus the schemes with some unfortunate consequences.

Baker Tilly analysis

As expected, the draft Finance Bill 2012 proposes enhancements to the EIS and VCT schemes for shares issued by qualifying companies on or after 6 April 2012 by increasing the amount of funds a company can raise to £10 million p.a. and doubling the maximum investment by individuals to £1 million.

Importantly the new size restrictions will also apply to investments from VCTs which raised their funds prior to 6 April 2012, which will remove the requirement for separate share issues in many cases.

However, an unfortunate consequence of an attempt to outlaw management buyouts as required by EU State Aid provisions is that ALL acquisitions of shares in target companies utilising EIS or VCT funds are prohibited. We believe this is a serious blow to companies that wish to expand not only organically but also by acquisition.

We will certainly be raising these issues in the 12 week consultation period intended.

In detail

Enterprise Investment Scheme and VCTs

The Draft Finance Bill includes clarification of provisions already announced in the March 2011 Budget:

1. For shares issued by qualifying companies after 6 April 2012:

• Gross Assets restriction increased from £7million to £15 million before investment and £16 million* after - increased from £8million.
• Limit of investment under the VCT and EIS schemes increased from £2 million to £10 million per annum per company*.
• Employee limit before investment raised from below 50 to below 250*.
• Trades including the benefit of  Feed in Tariffs will be excluded.

The above relaxations will also apply to VCTs which raised their funds prior to 6 April 2012 and thus simplify many transactions.

    2.   Now seen for the first time are details of the following, hinted in a recent HMRC consultation:

• A single VCT will no longer be restricted to investing only up to £1m p.a. in any one company.
• Certain preference shares will now be allowed to be issued under the EIS (as for VCTs).
• Loan stock will no longer be included in the 30% EIS connected persons test.
  EIS or VCT funds will not generally be eligible for purposes of making acquisitions of other companies or their trade and assets.
• Companies set up which procure EIS or certain other venture capital schemes tax benefits for parties to such an arrangement, or where the business could arguably be carried on as part of another business, will not qualify.