VCT vs. EIS – what’s the difference?

The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) are Government backed investment programmes for companies. Offering generous tax relief to private investors, these programmes raise new money for businesses in need of growth investment. Since its introduction in 1994, EIS has helped over 32,000 businesses raise more than £24 billion in investments and in 2020/21, investors used VCTs to purchase a record £668 million of shares in up and coming companies.

Clearly, these programmes are more than popular, but at first glance, they appear to be the same thing – both encourage investment in young companies, and both provide tax relief to individual investors. However, beyond these similarities, there are significant differences between the schemes. To get the best from either programme, it’s important that business owners and investors understand the variables and know the pros and cons.

Unlike its sister programme SEIS (the Seed Enterprise Investment Scheme), which supports startups and very new businesses, EIS supports larger and more established organisations – those with up to seven years trading history and 250 employees. (See the full rules and conditions). Businesses seeking to raise capital with EIS should first secure proof of their eligibility for the scheme by obtaining Advance Assurance from HMRC. This will assure investors that the company they are investing in is eligible for the scheme. If it’s not, they will not get their tax breaks. Individual or corporate investors can invest up to £1 million per tax year and the company can accept up to £5 million per tax year and no more than £12 million EIS funding total.

EIS has different criteria for Knowledge Intensive Companies – (KIC) – which are typically those with high research/development costs and requirements. These companies can accept EIS funding within ten years of trading and may have up to 500 employees. Individual or corporate investors can invest up to £2 million per tax year in KIC businesses which may accept up to £10 million per tax year and up to £20 million EIS funding total.

In both cases, only individual, private investors may claim a tax break. Corporate investors may invest under EIS, but they are not eligible for tax relief.

Treading the same path as EIS, VCT’s support larger and more established organisations – those with up to seven years trading history and 250 employees. (See the rules here). However, beyond this similarity, the VCT path soon diverges from EIS. In a Venture Capital Trust, the investor subscribes for shares in the VCT, not in the underlying high-growth companies. Effectively, VCTs act as an investment hub – pooling investor cash that is re-invested in young companies – which is why VCT investment is called indirect instead of direct investing. The VCT fund managers obtain Advance Assurance for each company they invest in to assure investors that the business is eligible for tax relief under VCT rules. Individual or corporate investors can invest up to £200,000 per tax year and the companies in the VCT pool can each accept up to £5 million per tax year and no more than £12 million VCT funding total.

VCT also has different criteria for Knowledge Intensive Companies – (KIC). With VCT, these companies can accept funding within ten years of trading and may have up to 500 employees. Individual or corporate investors can invest up to £200,000 per tax year in KIC businesses which may accept up to £10 million per tax year and up to £20 million VCT funding total.

In both cases, only individual, private investors may claim a tax break. Corporate investors may invest under VCT, but they are not eligible for tax relief.

Firstly, there’s the yawning gap between the investment caps on both schemes. EIS will allow up to £2 million investment per investor, per tax year, whereas VCT will allow only £200,000 per investor, per tax year. However, beyond the numbers, the biggest difference is in the management of the investments.

With EIS, the investor is largely on their own. They pick the company, they allocate their funds, they observe the performance of their investment, and they make the call on when to exit from the opportunity It’s a hands-on affair. Alternatively, with VCTs, the investor places their funds in the care of a Venture Capital Trust – an investment company listed on the stock exchange that buys shares in high potential, unquoted businesses. Think of VCTs as adventurous money managers – they seek high-potential investments, allocate client funds to those opportunities, observe progress, and then decide when to step out of the deal. Apart from choosing their fund manager, the investor does very little with a VCT. They still invest in high potential businesses, but most of the footwork and paperwork is done for them – and of course, they pay management fees for the convenience. According to the government, there were 40 active VCTs in the UK raising funds and 57 VCT’s managing funds in 2020/21.

In addition to the fact that EIS will allow ten times the investment compared to VCT, and that one scheme is fully managed, and one is not, there are other differences in the structure of the schemes:

EIS and VCT can provide young businesses with an opportunity to turbo-charge their growth. In a company’s early years, profits and cashflow are typically erratic and income is swallowed up by everyday operations, leaving little room for good things like R&D, new product development, expansion plans, or technology investment. EIS and VCT can unlock a pool of cash to pay for all the things a business wants to do, but is unable to do, without incurring expensive debt. This is good news for businesses and investors alike.

There’s an old saying in industry that good business is where you find it, but most of the time, good business is where you grow it. If you’re an SME seeking funds, register with Swoop to find out more about the Enterprise Investment Scheme and Venture Capital Trusts and how you can use them to take your company or your investment income to the next level.