By Terry Smith
The Finance Bill which gained Royal Assent on 15th March contained changes to the reliefs available on Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS). The focus of the changes has largely been targeted on the softer end of the risk spectrum, but there are also benefits to be had with personal investment limits raised and increased relief for certain sectors.
The Chancellor believes that so called ‘asset backed’ or ‘downside protection schemes’ are not sufficiently high risk to justify the tax breaks investors receive. These investments offered as much of a guarantee as such schemes were permitted to do so; examples of which included businesses with assets which exceed the value of the investment sought or a film maker with a pre-agreed distribution agreement.
The changes are intended to direct money towards more 'knowledge-intensive' businesses and those seeking long-term growth, rather than low-risk capital preservation companies.
The good news is that for most businesses using VCT and EIS as a means of raising funds for new ventures, start-ups or research and development - where the investment is required for a longer term and the inherent risk profile is higher - there is little or no change. In fact in some cases the bill also included increased reliefs, especially within the tech sector. From a personal investor perspective, the Chancellor has also doubled the investment limit to £2 million, as long as anything over £1million is directed towards knowledge intensive, high growth companies.
The hope is that by increasing tax breaks and reliefs on investments within high-growth businesses new money will be unlocked. Initial reports suggest that it has indeed led to a wave of new investment, with individuals capitalising on the new tax breaks ahead of the tax year end.
Whilst capital preservation schemes have had their tax breaks removed (starting in 15/16 with renewable energy projects) the increases in other reliefs and limits suggest that EIS and VCTs remain a key tool for directing valuable funding into SMEs focused on innovation and growth. From a treasury perspective this will in turn support increased employment numbers and GDP growth.
Terry Smith is Tax Partner at Haggards Crowther