We've previously reported on the shock lapse in the EU state aid approval for EMI schemes. It now seems that the recent changes to the enterprise investment scheme and venture capital trusts, which were extremely welcome to knowledge-intensive companies, are also being held up while the UK waits for state aid approval.
One of the unreported delays in EU state aid approval is in respect of the Finance Act 2018 changes to the Enterprise Investment Scheme (EIS) and Venture Capital Trust Scheme (VCT).
The Finance Act 2018 received Royal Assent on 15 March 2018 and included provisions which increased the annual amount a qualifying knowledge intensive company can raise under the EIS and VCT schemes. The annual limit was raised from £5m to £10m for a knowledge intensive company for shares issued on or after 6 April 2018.
This was welcome news for knowledge-intensive companies as they generally need substantial amounts of investment to fund their early research and development costs.
However, these changes will only take effect when commencement regulations are made by HM Treasury and these have yet to be issued.
The EIS/VCT comes under EU state aid rules and before commencement regulations can be made and the Finance Act 2018 provisions take effect, the UK needs approval from the EU. Unfortunately, as with the Enterprise Management Incentive Scheme, the EU approval process is taking longer than usual and at this point in time no one can confirm when EU state aid approval can be expected.
HMRC anticipates that the commencement will be backdated to 6 April 2018, although there is no guarantee of EU state aid approval or backdating of the commencement regulations.
This leaves companies planning to raise this level of investment in the next few months in a difficult position with their investors. I anticipate that if a company does raise the full £10m then they would be unable to submit the EIS1 form to HMRC to apply for the EIS certificates until the commencement regulations have been made and only be successful if they are backdated to 6 April 2018.
Prior to a company receiving EIS/VCT investment it can apply to HMRC using the advance assurance application process. Based upon the facts presented in the advance assurance application, this process is used to confirm that HMRC sees no reason why the company is not a qualifying company under the EIS/VCT.
This presents us with a problem where the new £10m is in UK legislation but due to awaiting the commencement regulations, HMRC is unwilling to give assurance where a knowledge intensive company states that it intends raising up to £10m in a 12-month period as the changes have not yet taken effect.
HMRC is, however, willing to give assurance for a £5m fundraise and then once the changes take effect give assurance on the full £10m fundraise. This could be useful in some circumstances to minimise risk for the company raising the funds.
This does not help a company undergoing a large fundraise in one issue, for example, when a company is intending to list on the Alternative Investment Market and intends raising the full £10m under the EIS/VCT. Among other risks, the company may find it harder to attract EIS investors or VCT funds to invest the full £10m when HMRC will only give assurance in respect of half of the funds the company intends to raise.
Hopefully, EU state aid approval for the EIS/VCT provisions will be granted soon and HMRC will confirm retrospective application of the regulations. We are keeping this under review and will issue an update once EU state aid approval is in place.
To keep up-to-date with the latest insights and events, please click here.