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Budget 2017: EIS/VCT crackdown - sensible or devilish?

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Budget 2017: EIS/VCT crackdown - sensible or devilish?

The chancellor has doubled the Enterprise Investment Schemes (EIS) investment limit for knowledge investment firms in the Budget. 

This means the maximum annual tax exemption on EIS investment would rise from £1 million to £2 million.  

As part of the government's Patient Capital review of support for small businesses, Philip Hammond said the investment limit would be raised, while ensuring EIS are not used as a shelter for low-risk capital preservation schemes.

According to the costings documents posted on the Treasury website, the government said it would increase the age rule for eligible Knowledge Intensive Companies will be amended to allow investment up to 10 years through EIS and seven years through VCTs from the end of the accounting period in which turnover exceeds £200,000.

Under the new proposals Knowledge Intensive Companies will be able to raise a maximum of £10 million, up from £5 million. 

Additionally, from 2018 HMRC will implement a 'capital preservation purpose test', aiming to exclude investments undertaken for capital preservation, which will apply to EIS and venture capital trust (VCT) investments that provide similar tax relief.

This new appropriateness test is a return to how the tax relief was originally envisioned according to Andrew Aldridge, head of marketing at Deepbridge Capital which operates EIS and VCT funds.

'As anticipated the consultation response to "financing growth in innovative firms" is seeking to return EIS/SEIS investments back to how they were originally envisaged, and the new principles-based "risk to capital" test is designed to ensure that the propositions only invest in those businesses which are deemed to be "knowledge intensive", have the capacity to grow quickly and are not simply low-risk tax shelters,' he said.

The government said it expected the change to add £7 billion to the total committed to early-stage enterprises.

Private equity firm IW Capital, which specialises in EIS investment, said that while the doubling of the investment limit was a 'welcomed revelation' that the 'devil was in the detail'. 

'How "knowledge intensive" and "low-risk" are quantified are yet to be seen...The underlying objective of protecting the EIS for its founding premise as opposed to its misuse as a tax-shelter is vital.

'[However] his [Hammond's] concerted prioritisation of small businesses as the backbone of the UK economy must be assessed against the small-print as opposed to the impressive broad-statements heard today, especially for areas such as the much-speculated asset backed EIS.' 

Awkward for investors 

The new terminology could prove awkward for some investors who had been marketing tax relief investment as a form 'safe investments', said Sacha Bright, CEO of businessagent.com.

'This makes it awkward for some investment managers for whom tax efficient investment in so called ‘safe investments’, where the risk to your capital investment is minimised as much as possible, has been highly profitable,' he said.

'In effect HMRC policing of the types of companies that are eligible for EIS and VCT funds will be stricter and this may put off many current investors who prefer some degree of reassurance from their high risk growth company investment.'

Meanwhile the EIS trade body described the move as a 'sensible' one.  

'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,' said Mark Brownridge, director general of the EIS Association.

'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.'

Graham Neale, Partner at Killik & Co, also welcomed the announcement, saying it closely echoed specific requests the company had lodged in response to the review.  

'We expected an announcement on lowering or eliminating the limits on lower-risk, asset-backed EISs,' he said,

'However, the government has been quite clever in that they are redirecting where investment should go by raising the limits on high-risk EISs.'

'The government always wanted to take it back to true, high-risk growth investments and put a stop to the capital preservation, lower-risk EISs, which are not in the original spirit intended for these tax reliefs

The chancellor also announced that he would allocate a further £2.3 billion for investment in R&D and increase the R&D tax credit to 12%.


Venture Capital TrustsIn order to make sure the Venture Capital Schemes are targeted at growth investments one measure the government will take is to move VCTs towards higher risk investments, which will be legislated in the Finance Bill 2017-18. This will be done by:·Removing certain 'grandfathering' provisions that enable VCTs to invest in companies under rules in place at the time funds were raised, with effect on and after 6 April 2018;·Requiring 30% of funds raised in an accounting period to be invested in qualifying holdings within 12 months after the end of the accounting period, with effect on and after 6 April 2018;·Increasing the proportion of VCT funds that must be held in qualifying holdings to 80%, with effect for accounting periods beginning on and after 6 April 2019;·Increasing the time to reinvest the proceeds on disposal of qualifying holding from six months to 12 months for disposals on or after 6 April 2019.


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