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John Spiers: The trouble with tax shelters

by John Spiers on Jun 19, 2014 at 15:15

John Spiers: The trouble with tax shelters

Not so long ago people would openly boast of how little tax they paid; it was almost a badge of honour. Now only the very brave (or thick-skinned) would contemplate any kind of aggressive tax shelter.

Two avenues that should still offer near certainty of getting the relief without attracting public opprobrium are enterprise investment schemes (EIS) and venture capital trusts (VCTs).

Demand for both seems brisk. Bestinvest estimates total VCT capital raised last tax year was around £393 million – an increase of 44% – and EIS funding was significantly larger. This makes the total tax shelter market over £1 billion. However, chancellor George Osborne announced rule changes in the last Budget, designed to focus the reliefs more tightly, which might affect supply and demand this tax year.

A risky venture

EIS have generated a surprising amount of investment for high risk ventures, as well as considerable sums for supposedly low risk ventures designed to return the original capital plus a small uplift after three years.

Much of this has been employed in renewable energy projects but the legislation will outlaw activities that already benefit from government subsidies from July. So unless EIS promoters find another golden goose, we can expect future offers to be more traditional early-stage ventures.

Data on EIS performance appears non-existent, but inevitably there will have been many individual failures. If you think investing in small unquoted companies has been a goldmine, check out the long-term stats on the BVCA website. Its November 2013 review concludes ‘venture funds, taken in aggregate, have underperformed relative to the public market’ which, of course, is why the tax relief is available.

An absolutely critical element in maximising the success of small businesses is to provide high quality mentoring and the lack of this is a big drawback with most EIS opportunities.

When I review some of the EIS offers currently being promoted, I am surprised at the glib references to target returns.

For most of these schemes, any such target is pure conjecture. If you are considering investing, I suggest you completely disregard such comments.

The key to the success of any of these ventures is the quality of management. Check out their history and look for tangible signs of success, not generalist comments like ‘enjoyed a successful career in the financial sector’. Check their interests are aligned with yours and they have real skin in the game.

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