Some experts predict that the Autumn Budget will see changes made to Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Investor’s Relief (IR).
Venture Capital Trusts
A VCT is a highly tax-efficient investment scheme that provides private equity capital for small, growing firms, as well as income – by way of dividend distributions – and capital gains for investors.
VCTs were set up in 1995 by the Tories with the intention of boosting investment into high-risk start-ups and small businesses in the UK.
They offer tax relief for investors – those investing in second-hand shares are exempt from income tax on dividends in ordinary shares, and from capital gains tax on disposal of shares in VCTs. New share investments also get income tax relief of 30% on investments up to £200,000 in a tax year if they are held for at least five years.
Last November, the government launched the Patient Capital Review to identify barriers to access to long-term finance for growing companies. The idea was to look at whether tax reliefs were targeting the right investments and offering value for money for taxpayers.
The government was concerned that “capital preservation” was a focus of too many VCT investments, which does not meet the requirements set by policymakers.
It could mean the Autumn Budget will see the government create stricter regulation to bring the focus away from investing in asset-backed schemes – in particular those backed by property – and back towards riskier, newer businesses.
Enterprise Investment Schemes
EISs were launched in 1993 to help small, high-risk companies raise finance – and investors can put in up to £1m per tax year and receive 30% tax relief.
Capital gains tax does not apply if the shares are held for at least three years and income tax relief was claimed on them. Also, a ‘carry back’ facility allows all or part of the cost of shares acquired in a tax year to be treated as though they were acquired the preceding tax year.
The idea behind the scheme was to help mitigate the risk of investing in smaller businesses, and it has proven to be a success over the years – last year around 3,300 firms saw £3.6bn of funds raised through EISs.
It is thought the Autumn Budget will look at reforming the rules to target less risky businesses who are potentially abusing the system, using EISs to obtain tax relief as opposed to supporting genuine trade growth.
There is an issue with companies seeing EIS as a way of getting funding and minimising tax bills, rather than looking at the benefits of the actual investment.
Genevieve Moore, head of corporate tax at accountancy firm Blick Rothenberg, said: “The EIS reliefs should be preserved but a relaxation in some of the criteria for qualifying businesses would be welcomed. For example, that the business needs to remain qualifying at least until the EIS funds have been deployed in the business, rather than for three years. This should help ensure that we don’t end up with business progression being prevented whilst a business ‘waits out’ its 3-year EIS period.”
Investor’s Relief
A much more recent addition, IR was brought in in 2016 to allow investors to be taxed at a lower rate of 10% on lifetime gains up to £10m on share investments in non-listed trading companies.
The investments must be made after 16 March 2016 and held for at least three years. It was brought in as an addition to the existing Entrepreneurs’ Relief (ER), as IR is aimed solely at individual investors rather than those running the business.
However, despite its popularity, it is thought that the tax reliefs are costing more money than expected, after a report showed that ER cost £2.9bn in 2013/2014, which is three times more than expected.
Richard Godmon, tax partner at accountancy firm Menzies LLP, said: “Based on these figures, it would not be unreasonable to assume that Investor’s Relief, which has a similar threshold for claims, could cost the Chancellor a similar figure when it kicks in from April 2019 onwards.”
