New legislation threatens VCTs, spares EIS funds

Amy King
05 April 2012

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Recent changes to VCT annual investment caps introduced by the chancellor during the UK budget announcement sparked controversy due to the ТЃ5m limit. More serious though is a change in legislation, unexpectedly deferred today, that could incurthe loss of VCT status if breached. However, the same sanctions do not apply to EIS funds. Amy King reports

As part of the recent budget, George Osborne announced changes to EIS and VCT regulation. To the disappointment of the industry, the chancellor revealed that the annual investment cap for VCTs will rise from £2m to £5m, half of the £10m cap originally proposed by the government a year ago.

Law firm Baker Tilly understands that this cap applies to funds raised by VCTs prior to 5 April 2007, which had previously been exempt from these limits. This retrospective legislation means that some VCT operators have had to rethink their investment strategy on these previously "protected" VCTs.

"Nobody saw this coming," said Chilton Taylor, head of capital markets at Baker Tilly and a specialist in the EIS and VCT legislation. "We are seeing Brussels interfering with the growth of UK companies, the very companies that need this stimulus. 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 added.

Given the potential repercussions, VCT managers will no doubt join the BVCA in welcoming this morning's announcement that the Treasury will defer changes to the regime for VCTs from the expected date of 6th April to the date the bill receives royal assent. The deferral will afford much-needed breathing space to iron out some legislative creases.

A source close to the matter revealed that according to the draft, should a VCT invest even £1 more than the capped amount in a single company, it would lose its VCT status.

Whereas in the past, that excess would simply not qualify for VCT status, the draft legislation would implement a far stricter regime. The loss of VCT status would mean all investors in the fund would lose the tax breaks afforded to them, sometimes over a number of years.

Before the announced deferral, VCT managers feared that an investment in excess of the current £2m cap could have spelt the loss of VCT status with the £5m pending but not yet introduced. However, since state aid approval on the cap limit has not come through yet and the legislation has been deferred, in reality the limit remains £2m.