Tax Insights 1,044 views Sep 28, 2017
EIS Relief and the Autumn Budget 2017

The advent of the Government's Autumn budget statement always brings forth a number of predictions. Some wise, some hopeful, and some just plain odd. Into this mix, one this year caught my eye. Apparently, the Government is likely to reduce the amount of income tax relief available to investors in the EIS scheme and increase the qualifying period required to achieve that income tax relief. The originator of this suggestion is RSM, reportedly a tax consultancy service.

 

Given that nothing is impossible, yes, it could come to pass. However, do we think it is probable? No, not even remotely. I accept that if you take as your context the idea that EIS is a tax shelter for the wealthy, people who can shelter £300k of income tax relief by making a £1m investment, then I think you can convince yourself that this is indeed a possibility. But how many people actually invest £1m into EIS? Not many, that's for sure. Once upon a time when the Government offered EIS relief for investing in renewable energy, or asset backed investments there were a goodly number of people who invested well over £500k a year into these EIS backed schemes.

 

Times have changed though, with the Government steadily tightening the EIS rules to remove all of these from EIS eligibility over the last few years. That was done to ensure that EIS support was focused onto UK venture businesses, those companies that were likely to generate high growth and, commensurately high contribution to UK GDP. The UK needs this support, as we are not yet that good at supporting our later stage venture companies, the so-called 'Scale Up' stage.

 

EIS has been very successful at nurturing seed and start up investing, especially with the creation of Seed EIS relief, which increased income tax relief for those who would take a higher investment risk by supporting a start-up business. The challenge for the Government now is to repeat that success with scale-up businesses, in some cases those who benefitted from Seed EIS earlier in their lives, and now need another helping hand to underpin their high growth. Typically, this is when they start tackling international expansion, and have annual revenues in excess of £2-3m and growth rates over 100%.

 

The question that the Government has been grappling with, and has consulted on widely, is how to best support later stage scale-up businesses in the UK. Most reasoned contributions suggest a marginal increase in EIS relief for investors that support companies in the scale-up stage, with ideas that range from increases in Loss Relief to enhanced Capital Gains Tax deferral. These are ideas that alter the balance of risk for investors, without cost to the Government and as such, are much more likely to appear in the fullness of time.

 

In conclusion, the idea that the Government would knowingly hit UK venture businesses, and hit them hard by reducing the flows of EIS cash to them, just doesn't make any sense. It also goes against the evidence of the last few years, where successive Governments of all three hues, Labour, Conservative and coalition have repeatedly strengthened and refined the EIS reliefs to support UK businesses. I see this continuing, although given we now have the best set of tax support measures for venture businesses in the world, it's difficult to see too much of major significance changing.

 

Dr Julian Hickman
Partner
Juno Capital LLP

 

jhickman@junocapital.co.uk
www.junocapital.co.uk