Section 27 and Schedule 8: Venture Capital Schemes
1.Section 27 introduces Schedule 8, which makes changes to the three venture capital schemes – the Enterprise Investment, Venture Capital Trust and Corporate Venturing Schemes (EIS, VCTs and CVS).
Details of the Schedule
Enterprise Investment Scheme
2.Paragraphs 1-5 of the Schedule make changes to Schedule 5B of the Taxation of Chargeable Gains Act 1992 (TCGA), which governs the deferral of capital gains under EIS
3.Paragraph 2 amends paragraph 1(2) of Schedule 5B. Currently 80 per cent of money raised by a share issue has to be employed by the company in a qualifying activity within 12 months of the issue of shares (or the time the trade commences, whichever is later) and the balance within a further 12 months. The paragraph replaces this rule with a condition that all the money must be employed within two years of the date of the issue (or commencement of trade if this is later).
4.In addition, the paragraph completely removes the conditions relating to employment of money raised from non-qualifying shares issued on the same day as qualifying shares.
5.Paragraph 3 makes changes to paragraph 1A of Schedule 5B (which deals with failures of the conditions), reflecting the new simplified conditions.
6.Paragraphs 4 corrects an anomaly concerning EIS reinvestment relief which can arise on the occasion of a share for share exchange.
7.Normally, share for share exchanges are not treated as a disposal of the old shares for taxation purposes. But where EIS deferral relief was attributable to the old shares, the rules in Schedule 5B prevent the share for share rules from applying, to ensure that the exchange is a chargeable event bringing the deferred gain back into charge.
8.However, this means that there is a disposal of the old shares for tax purposes, so that, in addition to the deferred gain being brought back into charge, a taxable gain can arise in relation to the old shares. As a result of the changes made by paragraph 4, on the occasion of a share for share exchange qualifying under sections 135 and 136 of TGCA, any deferred gain will be brought back into charge as before but no gain or loss will be brought into charge in respect of the disposal of the shares that form the subject of the exchange.
9.Sub-paragraph (2) amends paragraph 9(1) Schedule 5B to TGCA and inserts a new sub-paragraph (1A) in paragraph 9 of Schedule 5B to TGCA, so it can no longer disapply sections 135 and 136 of TGCA generally but can only disapply sections 135 and 136 for the purposes of the application of paragraphs 3 and 4 of Schedule 5B (which provide for the deferred gain under EIS to be brought back into charge).
10.Sub-paragraphs (3) and (4) make consequential amendments to other parts of paragraph 9 of Schedule 5B to TGCA to ensure that the existing provisions in paragraph 9 governing when sections 135 and 136 are disapplied operate in relation to the more limited scope of the effect of the disapplication provided for in new sub-paragraph (1A).
11.Paragraph 6 amends section 158 of the Income Tax Act 2007 (ITA) to remove the restrictions on investments in one year being relieved against income of the preceding earlier year (“carry-back”).
12.In particular, paragraph 6(2) removes the limitation that only the costs of shares purchased before 6 October may be carried back, and paragraph 6(3) removes the £50,000 limit on the amount that may be carried back, and the rule restricting carry-back to half of shares issued. Thus the only remaining restriction on carrying back relief is the overriding investment limit for any year.
13.Paragraph 7 amends section 175 of ITA. Currently 80 per cent of money raised by a share issue has to be employed by the company in a qualifying activity within 12 months of the issue of shares (or the time the trade commences, whichever is later) and the balance within a further 12 months. The paragraph replaces this rule with a simple condition that all the money must be employed within two years of the date of the issue (or commencement of trade if this is later).
14.In addition, the paragraph completely removes the conditions relating to employment of money raised from non-qualifying shares issued on the same day as qualifying shares.
Corporate Venturing Scheme
15.Paragraph 8 amends paragraph 36 of Schedule 15 to the Finance Act (FA) 2000, removing the 80 per cent condition from the CVS and again replacing it with a rule that 100 per cent of the money raised be employed in the qualifying trade within two years.
Venture Capital Trusts
16.Paragraph 9 amends section 293 of ITA to replace the current use of money raised requirement. The new requirement will be that the money raised should be wholly employed within two years of the issue of the relevant holding or, if the issue takes place before the commencement of the intended trade, within two years of commencement.
17.The three venture capital schemes are designed to assist smaller higher risk trading companies to raise finance by offering a range of tax reliefs to investors.
18.A consultation on the EIS was held in 2008 (The Enterprise Investment Scheme: A Consultation Document). The Government’s response was published in November 2008. The proposed changes to the EIS in the Finance Act were set out in that response document.
19.The changes to the CVS and VCTs parallel those made to EIS. The Government seeks to keep conditions aligned across the three Schemes where appropriate.
20.The schemes were approved as State Aid by the European Commission on 29 April 2009.