This blog is part of a series. Have you read ‘Spring Statement 2018: What’s Next for Entrepreneurs? (Part One)?’

Building on his earlier pledge to unlock £20 billion of investment (an announcement made in the 2017 Autumn Budget), in the Spring Statement the Chancellor unveiled plans to consult on the Enterprise Investment Scheme, with a particular focus on knowledge-intensive companies.

This interest in what is known as ‘knowledge-intensive’ companies was pointed to in the Autumn Budget. At that time, Philip Hammond signalled his intention to limit the sorts of companies EIS would be able to invest in. The aim was to focus capital on investments that would be able to contribute significantly to economic growth – targeting innovative, riskier propositions (deemed ‘knowledge-intensive’ by HM Treasury due to the research and development costs commonly incurred by these ventures) as opposed to asset-based companies that are typically more interested in preservation of share capital than expansion. But what does this mean for entrepreneurs and investors going forward?

What is the EIS?

Since its inception in 1994, the Enterprise Investment Scheme (EIS) has aimed to encourage investment into start-up companies. In return for providing funding, investors are able to take advantage of some attractive tax breaks: for example, tax relief equal to up to 30 of their investment, as well as exemption from paying capital gains tax when EIS shares are disposed of, and the opportunity to defer capital gains tax obligations arising from their investment. Further relief is available should the investment result in a loss.

Why Are Changes Being Made?

As mentioned above, the government feels that EIS (among other schemes) should focus on innovation and expansion, as opposed to supporting ‘sure-thing’ investments. As such, the Finance Act 2018 makes certain companies ineligible for investment and adds new provisions that will make the scheme more viable (and appealing) to investors, in an attempt to stimulate growth in this sector.

What About Tax Incentives?

The Treasury’s consultation document, ‘Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund consultation’, sets out a number of proposals. Primary to the proposed alterations is a commitment to a design that ‘would also need to ensure value for money for the taxpayer and to balance the government’s need to ensure fairness across the tax system’ and which would also ‘be robust enough to defend against attempts to use the fund model for aggressive tax planning or capital preservation purposes.’

In addition, the government’s consultation includes proposals that seek to make the prospect of investing more attractive to eligible individuals (enhanced tax incentives, for instance). These include:

  • Immediate tax relief. At present, when an individual invests through an EIS fund, they are not eligible to receive relief until the fund doles out the payment to an eligible company – rather than when their own investment is deposited. Under discussion is the idea that income tax and capital gains tax deferral relief would be granted at the point at which the investor deposits money into the fund, providing that the capital is then invested within a defined timescale.
  • CGT exemption. Akin to the current SEIS rules, it is proposed that exemptions may be granted for a portion of additional capital gains arising from capital invested in an EIS fund geared towards knowledge-intensive companies.
  • Carry-back facility: extension. At present, if EIS investors are unable to fully utilise their income tax relief within the investment year, they may ‘carry it back’ to the previous year. As an added bonus for those who invest in a knowledge-intensive company, the government is consulting on the possibility for such investors to carry back income tax relief to even earlier periods.

What’s Next for Entrepreneurs and Investors?

Having reviewed the Spring Statement and the various supporting materials, we feel that there is good reason for both investors and entrepreneurs to feel hopeful. Clearly, the government recognises the value of start-up companies, and the powerful contribution that investors and entrepreneurs can make to economic growth within the UK.  That said, the worry with making such changes to existing schemes is that – no matter how attractive the financial incentives may be – the new rules may be overly complex and dense, and as such will deter where they seek to attract. We will look forward to learning more in the coming months.

It is likely, too, that any such changes will necessitate HMRC involvement, particularly where tax breaks are concerned. With this in mind, if you’re an investor or entrepreneur and are concerned about how these proposals could affect your tax planning or future financial matters, we highly recommend that you contact an experienced tax adviser to discuss the best strategy for your business.

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