Chancellor reneges on VCT investment cap

Amy King
22 March 2012

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As part of yesterdayтs Budget, the government has confirmed that previously announced changes to the Enterprise Investment Scheme and VCTs will go ahead. But a retrospective change to the annual investment limit spells trouble for the VCT community and will have serious repercussions for the very businesses it seeks to promote.

From April 2012, the EIS annual investment limit for individuals will double from £500,000 to £1m and the £1m limit on investment by a VCT in a single company will be removed. The maximum size of a qualifying company will rise from 50 to 250 employees and gross assets to £15m before and £16m after the investment.

Moreover, the government will also introduce a new disqualifying purpose test for both EIS and VCTs to exclude companies set up for the purpose of gaining financial relief, effectively removing decision-making on qualification from the public eye.

In order for the above changes to fit with the EU though, since this legislation falls within EIS State Aid Provisions, the annual investment limit for a qualifying company will in fact be £5m, not the £10m proposed by the chancellor exactly a year ago.

Moreover, HMRC states that this £5m annual limit applies to funds raised by VCTs prior to 5 April 2007, which had previously been exempt from any annual investment limit; retrospective legislation that will mean VCT operators are forced to rethink their investment strategy on what had previously been considered "protected" VCTs.

The concession will therefore have serious repercussions on the investment strategies laid out by funds that had banked on the £10m cap. "They will now have to invest in smaller fundraisings, limited to £5m. Moreover, the previously drafted legislation was not going to affect those VCTs which were going to remain unlimited. This therefore is effectively retrospective, and nobody saw this coming," says Chilton Taylor, head of capital markets at Baker Tilly and a specialist in the EIS and VCT legislation.

"What has gone wrong here is that the Treasury have no doubt agreed this, not realising that it takes several months to organise a fundraising. And there are fundraisings already in progress that will be affected as they won't have raised their funds prior to 6th April," says Taylor.

"We are seeing Brussels interfering with the growth of UK companies, the very companies that need this stimulus. This restriction in the annual limit negates the chancellor's previous optimism in last year's budget when the limit was to be £10 million. We are currently involved in a number of fundraisings which will now not qualify or be restricted due to what is effectively retrospective legislation," he adds.

"Arguably the greater growth sources to generate employment and growth in the economy comes from those larger companies that are looking for these sorts of amounts, which is why the limit was supposed to be raised from £5m to £10m," says Taylor. Alterations to the previously proposed £10m cap will, therefore, harm the very companies the scheme seeks to promote.