Industry EIS and SEIS Managers and Specialists comment on announcements in this year’s Budget
The UK economy is reportedly growing faster than any other developed nation and over 765,000 new businesses have started since 2010. Alongside improved flexibility on annuity income options and further crackdowns on tax evasion and avoidance, the overall consensus amongst EIS professionals is that the 2015 Budget is positive for tax efficient investments. This of course refers to HMRC approved and government endorsed strategies, notably Enterprise Investment Schemes (EIS), Seed EIS (SEIS), and Venture Capital Trusts (VCTs), and not the much maligned tax avoidance schemes which are to be targeted and more Accelerated Payment Notices issued.
EIS are one of the few reliable tax breaks to have benefited from increased investment over the last few years, raising over £1bn pa in the last two years alone. This takes the sector to over £11bn since EIS were first introduced in 1994. The recent increase in popularity notably correlates not only to the increase in income tax relief from 20% to 30% in April 2011, but to the reduction in pension contribution limits also introduced in the 2011/12 tax year. New reforms that will free-up pension cash are expected to increase investment in the sector significantly.
Louise Farley, MD of City Alliance comments: “EIS already offer investors the potential for substantial tax-free capital gains and income tax relief - highly attractive propositions at a time when income from savings is low and interest rates are not expected to rise significantly in the short term. EIS and SEIS remain generous tax breaks for UK and resident non-domiciled investors, and are part of only a handful of legitimate tax-efficient investments to avoid the raft of anti-avoidance legislation of recent years.”
EIS regime to comply with state aid
The Chancellor’s commitment to secure the future of EIS by ensuring compliance with the latest European state aid rules are welcomed, and this is seen to be increasing support to high growth companies in the sector.
Clarity over investment structuring
The Treasury revealed changes to SEIS and EIS where the Government will explore options for the tax reliefs to apply where individuals make investments as convertible loans. There will also be moves to more effectively target high-risk investment and change the eligibility criteria of these schemes to avoid subsidising low-risk activities that already benefit from certain Government programmes.
Ian Warwick, MD Deepbridge Capital says “Tax reliefs are available via EIS in order to reward investors for providing funding which growing companies may otherwise struggle to attract. If there was no risk, there would be no tax relief, it’s as simple as that. However, there is a wide spectrum of risk within the EIS space. This is reflected in the potential tax reliefs offered, with early-stage Seed EIS investments attracting 50% income tax relief while EIS investments, which can invest in later-stage companies, attract 30% income tax relief. Although we have a duty to mitigate investors’ risk it is also our fundamental responsibility to invest in the spirit EIS was intended, which is to help businesses grow.”
The Government will make amendments to these tax-wrappers to ensure that the UK continues to offer significant and well-targeted support for investment into small and growing companies, in line with new EU rules. The Government will, subject to state aid approval:
• require that companies must be less than 12 years old when receiving their first EIS or VCT investment, except where the investment will lead to a substantial change in the company’s activity
• introduce a cap on total investment received under the tax-advantaged venture capital schemes of £15 million, increasing to £20 million for knowledge-intensive companies
• increase the employee limit for knowledge-intensive companies to 499 employees, from the current limit of 249 employees
• also smooth the interactions between the schemes by removing the requirement that 70% of the funds raised under SEIS must have been spent before EIS or VCT funding can be raised.
Death knell sounds on tax double dip with subsidies
In the Autumn Statement 2014, the Chancellor vowed to tackle the potential “misuse” of EIS and VCTs, in particular the use of “contrived structures to allow investment in low-risk activities that benefit from income guarantees through government subsidies”. As such, the doors will close to EIS, VCT and SEIS investment receiving environmental subsidies notably Renewable Obligation Certificates (ROCs), Renewable Heat Incentive (RHI) and Contracts for Difference (CfDs) with effect from 6 April 2015. This however does not mean the end of green EIS investments next year according to Ben Prior, MD of Earthworm Capital.
“As an operator of In-Vessel Compositing (IVC) plants, which process food and garden waste typically from local authorities, we will continue to launch investment opportunities under EIS, as they do not benefit from subsidies offered to the renewable energy sector and instead benefit from long-term contracted gate-fee revenues as our recycling plants are more cost efficient than dumping this waste at landfill. So this certainly is not the end for tax-efficient green investments as we see it.”
Where can ‘ethical’ investors can put their cash next?
There is an exception of community energy generation undertaken by qualifying organisations which will in future become eligible for the Social Investment Tax Relief (SITR). SITR is a tax relief for individuals who invest in social enterprises, which are defined broadly as community interest companies, community benefit societies or charities. The associated tax reliefs are similar to EIS, in that investors can invest a maximum of £1 million in qualifying social enterprises, they must hold shares for a minimum of 3 years and can claim to reduce their income tax liability by 30% of their investment, can defer capital gains tax liabilities, and any capital gains are tax-free upon disposal.
Kuber Ventures, the Multi-Manager EIS Platform believes this is an excellent opportunity and is seeking to launch a new SITR Portfolio in the next tax year. MD Dermot Campbell comments:
“We are receiving increased enquires from investors and financial advisers about SITR and we are sitting down with fund managers and Treasury in April to discuss the opportunities and how SITR can benefit investors. Under this new regime, investors can benefit from the same tax reliefs enjoyed under EIS, and will focus on businesses in social enterprises, such as doctor surgeries, care homes, schools, hotels etc. which are expected to show significant growth prospects.”
The Government will allow a transition period of 6 months following state aid clearance for the expansion of SITR before eligibility for EIS, SEIS and VCT is withdrawn.
Big data development
George Osborne also promised to invest £40 million to develop science and innovation including backing ‘Internet of Things’ technologies through large scale demonstrator programmes, business incubator space and a research centre. The funding will focus on healthcare, social care and smart cities.
Auriol Stevens, Director at technology merchant
bank Restoration Partners adds:
“This is great news for the technology industry. We are currently raising EIS and SEIS funds encouraged by their fantastic tax incentives into high-growth industries, and now that the science and innovation sectors are receiving increased support it is an even bigger result.”
Britain - the cultural centre of the world
Increased support has also been given to the creative sector and media, with Mr Osborne citing Britain to be “the cultural centre of the world”. The government has introduced new tax reliefs for high-end television, video games, animation and theatre, and has expanded the film tax relief. These reliefs have been highly successful in encouraging investment.
Adrian Wilkins, CEO of CHF Enterprises, the team responsible for shows including Danger Mouse, the Wind in the Willows, the BFG and recent EIS show now on CH5’s Milkshake - Pip Ahoy! comments:
“UK animation tax credits have been a huge driver to increasing investment into our media fund which is a hybrid EIS and SEIS. It benefits not only from the combined reliefs associated with these schemes, but also is supported by a further 20% from animation tax credits. Unlike environmental government subsidies, our industry is IP based, and deemed to be higher risk, therefore the effective underpinning from this government subsidy is well within the spirit of the legislation. The addition of new tax reliefs for high-end television, video games, animation and theatre, and the expansion on the film tax relief will continue to encourage investment and job creation in this area.”
Pension reforms confirmed in the Budget freeing up investable cash, alongside the continued government support and backing of EIS will allow the scheme to continue to play an increased role in giving investors an opportunity to back British businesses. This not only will provide SMEs with essential finance critical in the UK’s continued economic growth, but also gives investors genuine tax-efficient options to invest some of what would have gone into pensions previously.
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