Susanna Rynehart, Partner and Head of our Food and Beverage sector, comments on the implications of the new rules which ban venture capital firms from investing in existing companies.
Do pubs face further threats?
The Finance Act 2015 introduced new rules preventing Venture Capital Trust (VCT) investment to acquire businesses, which has caused considerable speculation that pubs in particular will be hit hardest. Why and how?
What is a VCT?
VCTs are investment vehicles which provide private equity capital for small businesses to help them grow. The advantages for those investing in a VCT is up to 30% income tax relief each tax year on investments up to £200,000 provided VCT shares are kept for at least five years, tax free dividends and no capital gains tax.
Why are pubs in particular under threat?
Many pubs have turned to investment from VCTs in order to stay afloat and combat ever growing competition from supermarkets selling cheap alcohol.
What are the new rules?
In summary, the rule that has caused the greatest concern is the prevention of VCT investment to acquire a business. This covers third party acquisitions and also management buy-outs.
However, investment in businesses is still permitted in the following circumstances:
• companies raising an investment where the amount of the investment is at least 50% of the company’s annual turnover; and
• new businesses and businesses that are owned by another company provided they receive their first investment from a VCT within seven years of the date of their first commercial sale.
A first commercial sale would be, for example, when a pub first opened its doors to customers and sold its first pint. Any time spent selling its produce and services during the market research stage would not count.
A new cap of £12 million has also been introduced on the total amount of investments a company may raise under VCT or other risk finance investment. Any risk finance investments used by a business previously owned by another company will count towards the total funding limit.
Why has the government changed the rules?
In the March 2015 budget, the government announced that it intended to implement measures to bring VCT schemes and social investment tax relief in line with current EU regulations.
VCT schemes are considered to be a form of “state aid” as they offer highly favourable tax-advantaged investment.
State aid is prohibited under EU law as it is believed to affect free trade between Member States.
The new rules are intended to ensure that investment by these trusts abides with European Commission guidelines, which generally encourages investment in small and medium businesses rather than those that are already established.
What is the real impact for businesses and are pubs the biggest victims of these changes?
The government has stated that the new rules should have a negligible effect on all businesses, not just those in the hospitality industry. A business can still obtain investment, but what is not permitted, is for VCT investment to be used to purchase the business.
More than 95% of the businesses which were eligible for VCT investment prior to November 2015 will remain eligible under the new scheme.
The only real impact the government predicts will be on individual VCT investors who had been expecting to make particular investments into companies, and will no longer be eligible for tax relief on certain investments.
The new rules do not appear to substantially affect the way in which VCTs work.
So, despite the concern, the impact appears to be a bit of a storm in a teacup. The government clearly understands that there is an important place for VCT schemes. The focus remains on investment in small and medium sized businesses.
Susanna Rynehart, Partner and Rahanna Choudhury, Trainee Solicitor, Employment, Thomson Snell & Passmore LLP