Tax Planning Consultation on 2012 Finance Bill

Posted on December 9, 2011

On 6 December the Government published its response to consultation on venture capital tax reliefs which should be incorporated in the 2012 Finance Bill. The consultation period runs to 10 February 2012.

The draft 2012 Finance Bill contains measures to:

1. Introduce a Seed Enterprise Investment Scheme (SEIS);

2. Simplify and refocus the existing EIS and VCT schemes;

3. Bring in an exclusion on the acquisition of shares in another company;

4. Allow larger companies to benefit from EIS (and VCT) investment; and

5. Exclude certain trades from which Feed-In Tariffs are derived from being qualifying trades.

Seed Enterprise Investment Scheme (SEIS)

From 6 April 2012, subscriptions by individuals for shares in new start-up companies which meet the qualifying conditions, will attract: income tax relief of 50 per cent for subscriptions for shares of up to £100,000 per annum, irrespective of the investor's marginal tax rate; exemption from capital gains tax on the disposal of such shares; and for investments made in the 2012/13 tax year only, an exemption from capital gains tax on gains also arising in 2012/13 which are invested under the SEIS (the draft legislation for this has yet to be published).

Companies that qualify for SEIS investment will be able to raise up to a cumulative total of £150,000 under the scheme. The rules that govern SEIS companies are similar to those for the EIS. The qualifying company must have gross assets of not more than £200,000 and must have fewer than 25 full-time equivalent employees before investment.

EIS

Connection rules

EIS income tax relief cannot be obtained by individuals who are “connected”to the investee company. The definition of “connection” is to be relaxed in one instance. The rule that an individual is connected with an EIS company because that investor (together with associates) holds more than 30 per cent of the combined issued share capital and loan capital will be amended to remove the loan capital element from the test.

Eligible shares

Currently, “eligible shares” are those without preferential rights to dividends or assets on a winding up, nor any rights to be redeemed. There will be a small widening of the definition which permits “eligible shares” to have certain preferential rights to dividends (the preferential rights must not be cumulative or subject to a decision by any person).

EIS (and VCTs)

Focus

For investments made on or after 6 April 2012, there will be a new "disqualifying purpose" test which is designed to exclude companies set up for the purpose of accessing the tax reliefs. Broadly, a trade will not qualify where there are arrangements for the whole or majority of the funds raised to benefit another party to the arrangements or where it would be reasonable to expect that the trade would otherwise have been carried on as part of another business.

Acquisition companies

There is to be an exclusion on the use of EIS (and VCT) funds for the acquisition of shares in another company. The change is designed to help achieve continuing EU State Aid approval, which prohibits State Aid from funding buyouts. It is not intended that the change should prevent subscriptions for new shares in subsidiaries which are at least 90 per cent owned by the investee company. The proposed change does not affect the purchase of a trade and assets. This change will apply to EIS investments made after 5 April 2012.

Size limits

As announced with the March 2011 Budget, subject to EU State Aid approval, for investments made after 5 April 2012, there will be:-

• an increase in the employee limit to fewer than 250 employees at the time of investment;

• an increase in the size threshold to gross assets of no more than £15 million before investment and £16 million immediately after; and

• an increase in the maximum annual amount that can be invested in an individual company to £10 million.

Feed-in Tariff businesses

As announced with the March 2011 Budget, companies whose activities consist wholly or to a substantial extent of the generation or export of electricity from wind or solar power which gives rise to Feed-In Tariff (or equivalent) income. The restrictions will apply to investments made on or after 23 March 2011, in companies which have not commenced the subsidised generation or export of electricity before 6 April 2012.