1 March 2010
HMRC Consultation on State Aid approval of the Venture Capital schemes
The EIS and VCT received approval from the EC as State Aids on 29 April 2009. That approval was subject to a number of changes being made. The draft legislation included in this Note makes those changes.
In particular, it:
- Applies a new requirement that to qualify under either scheme, a company must not be in difficulty;
- Replaces the requirement that to qualify under either scheme a company must carry on its qualifying trade wholly or mainly in the UK, with one that the company must have a permanent establishment in the UK;
- Removes the requirement that a VCT’s shares must be included in the official UK List, replacing it with one that their shares must be traded on an EU regulated market; and
- Changes the rules governing the amount of a VCT’s investment that must be held as equity.
Size of businesses benefiting from the schemes
This Note also contains draft legislation applying a definition of a small business to companies benefiting from the schemes, based on the definition set out by the EC (see the Annex to Commission Recommendation 2003/361/EC of 6 May 2003).
The proposed new condition focuses on the substance of the economic activity comprising, or including, the company’s qualifying business activity, and requires that the enterprise engaged in the substantial economic activity is a small enterprise.
The venture capital schemes have always been focussed on smaller, higher risk businesses, in order to target support for investment at those businesses that find it most difficult to raise money. The new definition is proposed as a means of preventing larger businesses benefiting from the schemes and from investment that might otherwise go to those intended to benefit from the reliefs.
EIS companies in partnership
HMRC has also today published a separate Technical Note (“Enterprise Investment Scheme (EIS) and Partnerships”) setting out its current view that under section 183 of the Income Tax Act 2007, companies carrying on their qualifying activity in partnership do not qualify under the EIS.
HMRC recognises that this change of view may have adverse implications for companies who had intended carrying out a trade in partnership. HMRC now intends to consult with the EIS sector on the consequences of this for companies carrying on business in small partnerships, and in particular on whether there is now a need to cater for some partnership arrangements by revising the law.
While the attached draft legislation is not intended to directly address this issue, a possible approach would be to use the new definition to allow companies carrying on business in partnership to qualify, where the partnership is a small enterprise.
----
For full text of document in a downloadable version go to
www.hmrc.gov.uk/pbr2009/venture-capityal-1260.pdf
HMRC welcome comments on this issue by 12th March 2010.
Please send to:
David Harris
HM revenue and Customs Area 3/36
100 Parliament Street
London SW1A 2BQ
Email: David.harris@hmrc.gsi.gov.uk
If you are a member of BBAA, please also copy your reply to Anthony Clarke, Chair, BBAA anthony@bbaa.org.uk