Initial reaction

The Enterprise Investment Scheme (EIS) has received a huge vote of confidence from the government in today’s Budget.

The doubling of the investment limits for technology and other ‘knowledge intensive’ sectors demonstrate that the government recognises the power of EIS to help companies start-up and grow and is going to supercharge that in order to make the UK a leading worldwide power in the development of new technologies and innovative industries.

The EIS Association and its members put a great deal of work into making detailed representations to HM Treasury in the run-up to this budget. We did so because there had been suggestions that wide-ranging changes to EIS were under serious consideration. We are therefore extremely pleased to see that no changes to EIS tax reliefs or holding periods will be introduced, nor will there be any new exclusions for certain sectors.

We understand that within a consultation paper to be made available very soon,  a principles-based approach to assessing whether companies applying for EIS funding eligibility are genuine ‘risk’ investments, using a ‘reasonable person’ test, will be introduced and, pending sight of the detail in the document, we see this as a sensible way forward for ensuring that EIS investment is only directed at genuine, entrepreneurial, growth businesses.

Elsewhere, we understand that HMRC will commit to a 15 day turn around for companies applying for EIS eligibility Advance Assurance by spring next year, which should result in an end to the long delays and backlogs in the system and pave the way for more companies to receive EIS investment.

Tax changes announced in today’s budget

From April 2018 and in line with State aid rules:

A new knowledge-intensive EIS approved fund structure will be consulted upon, with further incentives provided to attract investment.

From Royal Assent of Finance Bill 2017-18, a principles-based test will be introduced into the tax-advantaged venture capital schemes. The new test will ensure that the schemes are focused towards investment in companies seeking investment for their long-term growth and development. The new test will not affect independent, entrepreneurial companies seeking to expand. Tax-motivated investments, where the tax relief provides all or most of the return for an investor with limited risk to the original investment (i.e. preserving an investors’ capital) will no longer be eligible. The government has published a note explaining how the test will work, as an annex to the consultation responseDraft guidance will be published by HMRC alongside the draft publication of the Finance Bill.

Changes will be made to the Venture Capital Trust (VCT) scheme rules:

The government will change the Entrepreneurs’ Relief rules to ensure that entrepreneurs are not discouraged from seeking external investment.

We will provide some commentary on the changes in due course.

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