Implications for Tax Efficient Venture Capital investing and Parkwalk in particular
The most significant change announced was that the rate of the R&D tax credit payable to loss making small and medium enterprises is being increased from 11% to 14.5%. This is a significant boost to all the companies in our universe and will help our investment pound stretch further.
The Budget announces that the Seed Enterprise Investment Scheme (SEIS) will be made permanent, and that the capital gains tax reinvestment tax relief, which provides relief on half the qualifying gains that individuals reinvest in SEIS qualifying companies, will also be made a permanent feature of the scheme. As you might have picked up from the speech, the scheme has now raised over £135m in funding for more than 1600 start-ups.
The Budget also announces some other changes to the tax-advantaged venture capital schemes (Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs)), to ensure that the tax relief continues to be well-targeted to encourage individuals to make investments into higher risk companies that may not otherwise be able to access finance.
- From Royal Assent of the Finance Bill, the government will restrict scope for companies benefiting from government support under DECC Renewable Obligations Certificates (ROCs) and Renewable Heat Incentives (RHI) to also be eligible for tax-relieved investment under the Venture Capital schemes*. I’m sure many of you will be aware that the government took similar action to exclude investment into electricity generation companies benefiting from Feed-in-Tariffs in 2011.
- As the Renewables Obligation is due to be replaced with Contracts for Difference, and in order to avoid multiple future changes to the venture capital schemes, the government will consult on a broader approach to reduce investment into lower-risk companies already benefiting from other government subsidies.
- The VCT sector has been engaging in consultation on VCT share premium accounts, following announcements at Autumn Statement to limit the use of particular VCT buy-back arrangements. The Budget confirms that legislation will be introduced at Finance Bill to prevent VCTs from returning share capital to investors within three years of the end of the accounting period in which the VCT issued the shares. Distributions made from realised profits will not be affected by this change, and the measure will only apply to new shares issued. A full summary of the government’s decision is set out at https://www.gov.uk/government/consultations/venture-capital-trusts-share-buy-backs
Also on VCTs, a number of you have been in touch regarding the recent HMRC decision to withdraw approval from two of Oxford Technology VCTs. This is obviously a very unfortunate situation for those directly involved. Some commentary has questioned whether the decision here represents a change in government policy, which it does not. The HMRC decision simply reflects the current rules for dealing with those rare circumstances where there is a breach of VCT rules. The government remains supportive of the VCT regime and the other tax-advantaged venture capital schemes, and believes that the regime plays a key role in facilitating access to finance for smaller businesses with growth potential.
The Budget announced that the government will run a broader consultation and evidence gathering exercise over the summer. In particular, this will explore options for EIS and SEIS to accommodate the use of convertible loans. The evidence gathered from this consultation will also be used to support our negotiations with the European Commission as we bring our EIS and VCT schemes into line with the updated “risk finance” state aid guidelines.
Conclusion
Generally the budget indicates continued government support for the EIS scheme in general and those in technology investments in particular. The reining in of those investments (generally VCT) which looked to benefit from double tax incentives, may mean more funds looking to invest in our investment strategy.
