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Business Finance: Peter Harrup says a sigh of relief is in order following the Budget

PUBLISHED: 17:37 05 December 2017 | UPDATED: 17:37 05 December 2017

Peter Harrup of BDO

Peter Harrup of BDO

Elm Studios

In his first Autumn Budget, the Chancellor announced welcome changes to venture capital tax reliefs for knowledge-intensive companies (KICs).

From April 6, 2018, the amount these companies can raise from the Enterprise Investment Scheme (EIS) and from Venture Capital Trusts (VCTs) will be doubled to £10m per year.

For individuals, the good news is that the amount you can invest each year in EIS companies has been doubled to £2m from April 2018, provided any amount over £1m is invested in at least one KIC.

The rules on the maximum age of a company to be eligible for EIS and VCT investment are also being relaxed. KICs will be able to elect to measure their age from the point at which their turnover reached £200,000 per year, rather than from their “first commercial sale”. These changes should help boost EIS and VCT investment in innovative, high-tech, research-driven companies, but how do you qualify as a KIC?

Aside from the usual EIS qualification tests, to qualify as a KIC the company must meet conditions on how much of its operating costs are spent on R&D and conditions on creating intellectual property. However, even if a company does not meet the intellectual property test it may still qualify as a KIC if 20% of its staff are highly skilled (Masters degree level or higher) and are actively engaged in R&D throughout the three year qualifying period.

To ensure entrepreneurial companies with high-growth potential benefit most from venture capital tax reliefs, a new “risk to capital” condition will be introduced, with the aim of disqualifying companies where there is low risk to the investors’ capital. The Government also announced some technical changes to rules for investment by VCTs and rules for ‘relevant investments’ for EIS and VCT purposes.

Following the Patient Capital Review, there were concerns that the EIS and VCT schemes would face major restrictions. Cuts in the rate of relief, an extension of the qualifying period to five years and more “excluded trades” were all rumoured to be in the pipeline. However, the changes announced were mostly positive and should help the UK’s innovation sector raise the equity finance it needs to grow.

For help and advice on how venture capital reliefs could help build your business, please contact peter.harrup@bdo.co.uk.

•Peter Harrup is a tax partner at the Ipswich office of BDO LLP.

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