Following on from our earlier articles on the potential changes in next week’s Autumn Budget, we now consider the potential changes to venture capital reliefs.
Access to capital and funding has been a perennial problem for start ups and growing businesses. The tax system has therefore included many tax incentives, primarily via the venture capital schemes such as EIS and SEIS, to encourage investors to invest risk capital in such ventures.
Following a consultation earlier this year in relation to financing growth in innovative firms (the patient capital review), it is considered that the budget could make further changes to the venture capital schemes (such as VCT, EIS and SEIS).
The rise in crowd funding platforms has led to an increase in the number of EIS investors. It is acknowledged that the EIS and SEIS reliefs have helped encourage angel investors to support younger, earlier stage businesses but the consultation intimated that changes may be made to the venture capital schemes to focus the reliefs on higher risk, less asset backed, companies and to target only those firms who would otherwise struggle to access finance.
The review also highlighted that the government believes that techniques are being used to reduce the investment risk, such as funds investing alongside one another or making loans on uncommercial terms. Measures to address these issues may also be put forward in the budget.
The venture capital schemes are already incredibly complex and adding further conditions and rules will also increase complexity. Some commentators have also predicted that there may be a cut in the reliefs (e.g. a reduction from 30% to 20% income tax relief for EIS and VCT investments), the review having noted (unsurprisingly) that investors in venture capital schemes tended to be wealthy taxpayers who achieved proportionately greater benefit from the tax reliefs afforded under the venture capital schemes.
At a time when investment funding for growth is desperately needed this would be a retrograde step. However, the Chancellor may sell this on the basis that it is a refocusing of investment to those higher risk, start ups that need it the most, possibly combined with an expansion of existing investment programmes such as the British Business Bank’s Enterprise Capital Fund programme (which also has the advantage of the possibility of a direct return for the government at the end of the investment period).
One other change that may arise out of the review is a restriction on Business Property Relief (“BPR”). BPR is an inheritance tax relief, rather than a venture capital relief, that was originally introduced to allow family businesses to be passed on to the next generation free of inheritance tax. It is however an important tax relief in the context of many investment products, one which HM Treasury estimate is costing the treasury up to £4billion. There is therefore be a real risk that any changes that restrict EIS relief, so as to for example exclude asset backed companies, will be mirrored in relation to BPR.
Haydn Rogan is a tax specialist and a partner and can be contacted on +44 (0)161 214 0517 or email firstname.lastname@example.org.