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Venture capital schemes: risk-to-capital condition

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HMRC has published draft guidance on the risk-to-capital condition for venture capital schemes, as introduced in clause 14 of Finance Bill 2018, in its Venture Capital Schemes manual at VCM8500 (see Comments are invited on the draft guidance by 31 January. HMRC intends to publish a final version following royal assent to Finance Bill 2018.

The new condition, which is expected to come into effect following royal assent, seeks to ensure that relief under the enterprise investment scheme (EIS), seed enterprise investment scheme (SEIS) and venture capital trust (VCT) regimes is better targeted at growth investments by excluding investments that have ‘capital preservation arrangements’.

The condition has two parts, both of which an investment must meet to qualify for relief:

·         the company in which the investment is made must have objectives to grow and develop over the long term; and

·         the investment must carry a significant risk that the investor will lose more capital than they gain as a return (including any tax relief).

The government announced in its consultation response on changes to the advance assurance service for venture capital schemes, published alongside Finance Bill 2018, that HMRC will no longer give advance assurance for investments that appear not to meet the condition from the date the draft guidance was published (4 December 2017).

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