Statistics released 27 April 2017 by HMRC* demonstrate a near 20% decline in the amount raised by companies using Enterprise Investment Scheme (EIS) tax relief, year on year.
The number of companies using EIS scheme has decreased slightly while the total amount raised fell by over £200 million.
“We are seeing the changes at the Summer Budget 2015 take effect. The alterations themselves weren’t too hard hitting but the constant tinkering with these government-backed tax schemes is causing uncertainty for small businesses and investors alike,” says Ray Abercromby, partner in business tax at Smith & Williamson.
“Businesses and investors now have to pay very close attention to the structure of their businesses. The changes have forced individuals, who just want to get on and grow their business, to focus on the structure of the business in case they accidentally fall foul of the rules. At first glance, the changes appeared to discourage investment in the UK’s small and scale-up businesses, the lifeblood of our economy, and these statistics indicate that could be the case.”
Subject to trading and timing requirements, EIS allows a 30% income tax relief, set off against income, one year carry back of the income tax relief, as well as a capital gains tax exemption on the disposal of shares (if sold after a qualifying three year period). Existing gains can also be deferred by rolling it into the EIS investment. However, the rules and structures surrounding the use of, and claiming of, the relief have become increasingly complicated in recent years.
Will Brexit have an effect?
The Finance Act (No 2) 2015 introduced significant changes to the EIS rules, which took effect for shares issued on or after 18 November 2015. Most of the rule changes emanate from the EU as part of its continued review of EIS and the other venture capital schemes as part of the state aid provisions.
“Post-Brexit, the Government may choose to look at the relief associated with EIS/SEIS and return to pre-2015 levels. It has proved to be very popular, and beneficial to the economy as a whole, and could be a way of encouraging UK small business growth,” says Ray.
SEIS levels maintained
The statistics, which are the most up to date, show the changes for the 2015-16 year. The number participating, and amount claimed, under the Seed Enterprise Investment Scheme remained constant year on year with only a slight decline.
“The SEIS rules are similar to EIS, but allow for an enhanced up-front income tax relief of 50% for subscriptions of shares by investors, and a permanent elimination of tax on 50% of reinvested gains. However, much like EIS, the constant changes to the scheme have left it very complicated for investors and businesses,” says Ray.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.