Much attention has been paid to the changes made to EIS investing and understandably so – they represent a step change for the industry. 

Less attention, however, has been paid to the changes made to VCT rules, which are far more significant than generally realised and the industry remains in a transition period. Until November 2015, most VCTs invested in smaller MBOs rather than being growth investors. The transition to being growth investors has been made more challenging for some VCTs by these changes.

The changes can best be understood by looking at the government’s particular concerns around VCTs:

  1. That they were sitting on too much cash from large fundraisings and disposals of investments and not investing fast enough;
  2. That VCTs were often adopting quite aggressive investment terms such as liquidity preferences and high coupon rates on any debt;
  3. This often meant that the VCT achieved a positive return regardless of the performance of the underlying investments and the Treasury wished to see greater alignment between the outcomes for entrepreneurs and investors.

These concerns are reflected in the changes.

  1. Removal of Grandfathering (meaning some older VCTs can no longer operate under old rules and are pushed towards investing a greater part of their funds in growth investments);
  2. 80%, rather than 70%, of funds have to be invested in qualifying companies;
  3. 30% of funds raised must be invested within the first accounting period following the fundraising;
  4. Changes to the terms under which VCTs can invest require any debt provided to be unsecured, with a coupon more in line with market rates

Impact of the changes

The changes may present challenges for some VCT managers to invest the funds they have raised and are likely to lead to smaller fundraisings going forward. All in all, the pressure on some VCT managers to put more money to work faster in growth investments has increased.

The need for greater alignment in investment structures between the entrepreneur and the VCT may also lead to greater volatility in returns.

Alongside the changes listed above, HMRC have suggested that they may restrict the ability of a VCT to seek advanced approval for investments which further raises the risk profile of some VCTs. Since Calculus usually invests its EIS and VCT funds alongside each other, we will have the comfort of having received Advance Assurance for our EIS funds which is a reasonable guide to qualification for our VCT, as well as seeking the opinion of our professional advisers.

Whilst HMRC have published some details around this change, it is still unclear and somewhat hazy as to how the criteria and controls will be imposed. As such, it raises just as many questions as it seeks to answer, only time will tell.

Calculus has always been a growth investor and invested within the spirit of the legislation, it’s going to become more important for advisers to look at the experience and history of the manager they are considering and their record in growth company investing, which is a different and specialised area.

John Glencross

The Calculus VCT is open for subscription – the deadline for the 17/18 tax year 3 April.

Contact the Investor Relations team for more information. Email: info@cc23.codewithfeeling.com   Call: 020 7493 4940