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18/08/2015

The Budget on 18 March contained an announcement of changes to the EIS and VCT rules which Nomads and brokers need to be aware of.

The key change is that the company receiving the investment must be not more than 12 years old, or have made its first commercial sale less than 12 years before, except where the investment leads to a substantial change in the company’s activity, which will be where the funding exceeds more than 50 per cent of the company’s average turnover for the last five years.

Previously there was no “age” requirement impacting the company’s eligibility for the application of the EIS or VCT rules.

This change has been made to comply with the EU rules on State Aid. State Aid is a notoriously complex subject but, very broadly, EU law prohibits aid from a Member State to an undertaking which potentially distorts competition within the EU. Fiscal schemes giving tax breaks or exemptions to undertakings are often treated as State Aid. The EIS and VCT regimes have been notified to the Commission which has confirmed its approval of the regimes, subject to conditions. The changes announced in the Budget take account of changes in the Commission’s thinking regarding approval of the EIS and VCT regimes.

However, the EU rules are that State Aid should not be available in respect of an investee company where it is more than seven years after the company made its first supply – not the 12 years specified by the Government in the Budget.

The changes announced in the Budget are subject to the Commission’s approval and, for that reason, were not contained in the Finance Bill 2015. The legislation will not come into force until later in the year, possibly in a second 2015 Finance Bill to be introduced after May’s General Election – assuming the Commission has given its approval by then.

In the meantime, the position is unclear. There is a risk, if the Commission does not give approval, that it could seek to “claw back” unlawfully granted State Aid, i.e. the relief on investments made in companies with a trading history of more than seven years. It would not be the Government that has to pay the money back, but the beneficiary of the unlawfully granted State Aid.

Client companies and investor clients will need to be made aware of the risks, and Admission Documents and related documents will need to contain appropriate disclaimers of the risks.