A good day for high risk start ups?

Cliona Kirby, Tax Partner, CMS

We are delighted that the Government has recognised the need to encourage investment in high risk start up companies through proposed improvements to the EIS and VCT rules but the question is does it go far enough ?  The proposed changes should be beneficial for the creative and technology industries for whom access to finance continues to be challenging.   Whilst these measures alone will not solve the funding gap, this policy change fits neatly alongside the Government’s intention to create Digital Shoreditch. 

From 6 April 2011, individual investors will be entitled to 30% income tax relief on investments made into EIS companies (an increase from 20%) and able to invest from 6 April 2012 up to £1 million (double the current £500k limit).  Perhaps more importantly, from 6 April 2012, the amount of money that can be invested in an EIS or VCT company will increase from £2 million to £10 million which should have a significant impact.   It also appears that both schemes will be available for companies with up to 250 employees and with gross assets of £15 million before investment. All of this is of course subject to state aid approval which is why the EIS and VCT rules had been restricted to such low levels in the first place !

We would advocate further changes are made to reduce the current holding periods for qualifying shares (3 years for EIS and 5 years for VCT) and bring them more in line with other tax reliefs such as substantial shareholding relief and entrepreneur’s relief which only require a 1 year qualifying period.   Currently, some high tech start ups are discouraged from securing EIS  investment because they wish to have the flexibility to achieve an exit within three years.    Hopefully such issues will be addressed in the proposed consultation.    

Bad news (as expected) though for those EIS/VCTs looking to invest in certain renewable enegy projects such as  solar power (which involve the receipt of Feed-In Tariffs) which will be excluded from 6 April 2012.

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