News

Experts issue warning over investment relief reforms
03 June 2015

Tax specialists have warned that planned changes to schemes designed to encourage investment in small and growing businesses could deter some investors from taking advantage of the reliefs.

The warning came from the Chartered Institute of Taxation (CIOT) following plans in the March 2015 Budget to reform Enterprise and Seed Enterprise Investment Schemes (EIS/SEIS) and Venture Capital Trusts (VCT). Key measures include:

• a requirement that all investments are made for the purpose of business growth and development
• a requirement that all EIS investors are independent from the company at the time of the first share issue (excluding founder shares)
• a cap on total EIS/VCT investment that an individual company can receive of £15 million, and £20 million for knowledge-intensive companies.

Andrew Gotch, chairman of the CIOT’s owner-managed business sub-committee, said on 19 May that while efforts to promote investment in higher-risk small and growing businesses were welcome, the CIOT was concerned that the reliefs – particularly EIS and SEIS – were already subject to a range of qualifying conditions that could be deterring potential investors.

He said: “These further changes and restrictions are only adding to the complexity of the reliefs. The proposed measures include the expectation that potential investors are ‘independent’ from the company at the time that their first share was issued. However, this may act as a disincentive because it would deny relief where a prospective investor already holds shares in the company.

“We believe a carve-out for existing shares obtained from personal relationships and a de minimis threshold to enable qualification for smaller investment holdings would help to mitigate this restriction on the category of investor who can take up EIS relief.

“The increase in the overall investment cap to £20 million is welcome but is being restricted to ‘knowledge intensive’ companies. It is being increased to £15 million for other qualifying companies.

“We are not sure why a growing manufacturing company, for example, should have a £15 million cap while a ‘knowledge intensive’ company, such as one in the IT or biotech sector, might be able to qualify for £20 million, whilst arguably both could bring benefits to the economy overall.

“We think that the new requirement that all investments under EIS are made for the purposes of promoting ‘business growth and development’ is problematic. This vague definition adds little to our understanding of what the new restriction is aiming at compared to the existing legislation.”

A government consultation on the proposals, to which the CIOT responded, closed on 15 May.

Link: The government consultation