Risk & Economy » Budget: Changes to VCTs, EIS and IR

Budget: Changes to VCTs, EIS and IR

With the budget almost here, what changes can be expected for investment schemes?

With the focus on austerity continuing, concerns are growing that the Chancellor could remove some tax breaks intended to incentivise entrepreneurial investment. This could have disastrous consequences for the UK economy, according to accountancy firm, Menzies LLP.

Venture Capital Trusts

Venture capital trust schemes were set up to boost investment in higher-risk start-ups and small companies, by offering attractive tax breaks.

Investors receive income tax relief of up to 30%, if they hold the shares for five years and capital gains or income received from investments is also free of tax.

The aim is to get more investment in into riskier assets, but at present, tax breaks are the same for those who invest in conventional companies or small companies, so long as the company is not engaged in perceived low risk ‘excluded activities’, such as banking or property development.

The Treasury’s consultation Financing Growth in Innovative Firms was published this August as part of the Patient Capital Review, which is an ongoing review of capital markets that is looking into whether tax reliefs, including VCT tax reliefs, are targeting the right investments and are value for money for taxpayers.

One outcome of the consultation paper could be that the government tightens rules in order to focus investments on riskier younger businesses and away from asset-backed schemes, especially those backed by property, where it is thought that because of the underlying value of the asset, the risk to investor capital is low if the business itself goes badly.

Any changes announced in the Autumn Budget on 22 November would be the second set of new regulations with which the VCT sector has had to deal in as many years.

In 2015 the government decided that management buyouts and also investments in renewable energy would no longer be permitted into VCTs, as they were considered to not any longer be in need of risk capital to justify the tax breaks.

Enterprise Investment Schemes

Enterprise Investment Schemes (EIS) are under the same asset-backed investment scrutiny as VCT tax reliefs.

An additional change is that certain types of film and television finance may be added to the excluded list, because financing for a film that has already been sold to a broadcaster is not seen as high risk.

There will be changes to EIS legislation in the Budget, but it is hoped that any new restrictions are carefully targeted, in order to continue to create an environment where start-ups and SMEs can thrive.

Genevieve Moore, head of corporate tax at accountancy firm, Blick Rothenberg, said: “The generous tax reliefs provided by the Enterprise Investment Scheme (EIS) have contributed enormously to make a risk investment feel less risky, which has enhanced the opportunities for businesses to raise finance from investors to help grow the business.

“The EIS reliefs should be preserved but a relaxation in some of the criteria for qualifying businesses would be welcomed. For example, that the business needs to remain qualifying at least until the EIS funds have been deployed in the business, rather than for three years. This should help ensure that we don’t end up with business progression being prevented whilst a business ’waits out’ its 3-year EIS period.”

 Investor’s Relief

Since it was introduced in April 2016, Investor’s Relief has been welcomed as a tax break for those who want to invest in a trading company without being an employee or a named director.

The tax relief requires individuals to hold shares for a minimum of three years, which allows them to pay tax on eligible gains from share disposals at a discounted rate of 10%.

Richard Godmon, tax partner at accountancy firm, Menzies LLP, said: “When the former Chancellor first introduced this tax break in April 2016, it was intended to incentivise an important group of investors, who wouldn’t normally qualify for Entrepreneurs’ Relief because they aren’t remunerated by the business they are investing in.

“While it is too early to say how many individuals are expecting to benefit from the tax break, it is likely to be at least as many as currently claim Entrepreneurs’ Relief, and possibly more.”

Tax reliefs in this area have begun to attract more attention from the Treasury however, as they are costing more than expected. A report published by the National Audit Office in 2013 revealed that the cost of Entrepreneurs’ Relief was £2.9 billion in 2013/14, three times more than originally expected. Part of the increase was probably due to the fact that the annual threshold for Entrepreneur’s Relief claims has risen from £1 million to £10 million, but the NAO also wondered whether there was undetected avoidance.

“Based on these figures, it would not be unreasonable to assume that Investor’s Relief, which has a similar threshold for claims, could cost the Chancellor a similar figure when it kicks in from April 2019 onwards,” added Richard Godmon.

Uncertainty surrounding the future of these tax reliefs could create issues for some entrepreneurial investors because Entrepreneurs’ Relief and Investor’s Relief are mutually exclusive. It is possible that an individual has chosen to make certain investments, as a non-employee, with the expectation that they would be eligible for tax relief when disposing of the shares three years later. If this opportunity is removed, their tax liability would double.



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