Following Brexit, the Chancellor has a great opportunity to think about how to enhance the venture capital schemes – the Enterprise Investment Scheme (EIS), Seed EIS (SEIS) and Venture Capital Trusts (VCTs). My comments below are intended as a wish list about what I would like to see in this Budget and although I’m going to focus on the EIS, my comments will apply equally to all three schemes.
Firstly, it is important to say that, in the middle of a global pandemic and immediately post-Brexit, there is every chance that the EIS simply won’t be on Rishi Sunak’s radar at the moment; he has bigger issues to deal with. On the other hand, he needs to provide a boost to the UK economy, and the venture capital tax reliefs should be an important part of his armoury – mobilising private investors to inject capital into the UK’s early stage and fast growth companies.
The venture capital schemes have all been subject to EU State aid regulations. Now that we are out of the EU, there is an opportunity to strip out those parts of the EIS legislation which have been imposed by State aid requirements. Whether or not the Chancellor takes this opportunity to do so is a political question for him and consideration would also have to be given to the position for Northern Ireland.
The UK permanent establishment requirement
Before 2011, EIS companies had to trade wholly or mainly in the UK. Due to State aid requirements, that was replaced with a requirement to have a UK permanent establishment (UKPE). Current legislation allows companies to spend EIS money anywhere in the world, and in many cases, that makes sense: opening a sales office in the US will drive exports, which is a good thing for the economy. Arguably though, using EIS money to pay software developers in Hungary, for example, is less so.
There are good grounds for retaining the UKPE requirement – helping overseas companies set up in the UK shows that we still ‘open for business’ – but if this is going to be changed, a requirement to spend most of the money in the UK might be the answer.
The 2015 changes
The last major changes to the EIS legislation came into effect on 15 November 2015 and were driven by EU State aid requirements, and if the Chancellor decides that EU-driven legislation can be reviewed, then the following could be repealed:
- ITA 2007, s 164A: the previous shareholdings requirement
- ITA 2007, s 175A: the permitted maximum age requirement.
These requirements tend to obstruct companies from raising venture capital funding and the age limit means that some companies in desperate need of growth capital find themselves ‘too old’ due to a quirk of their business’s history. Tax simplification is always popular and removing these requirements would make the EIS process considerably simpler.
The Chancellor will want, I would hope, to review the annual and lifetime maximum fundraising limits. Knowledge Intensive Company rules are likely to stay, particularly given the recent launch of Knowledge Intensive Approved Funds and if a more thorough overhaul of the EIS legislation were proposed, I would like to see relief linked to the creation of jobs in the UK, and further focus on the technology and manufacturing sectors.
The venture capital schemes have been very important in helping growing businesses to access finance and bridge the equity gap and this will be all the more important for growth after the pandemic. This is an opportunity to enhance and direct the venture capital schemes to companies in the UK that need it.
David Brookes and Mark Ward are authors of our title Venture Capital Tax Reliefs which is available as part of Bloomsbury Professional Tax Online. Want to take a look at the range of high quality tax news and commentary our platform has to offer? Visit our website for further information or click the below to sign up for a free trial today.