EIS Industry Report 2018/19

18 19 There has still been some confusion over which companies would be considered as KICs. Cathy Wilson said: “On KICs, we’re not going to be able to say, for every company that comes along, whether it’s defined as a KIC. We need a reason for a firm to be a KIC for us to give an opinion. “If they’ve got investors who are interested in going over the £1m limit, then we will review the situation, but we will not do that routinely. We have limited resources and obviously the more work we do on KICs, the less time there is for everything else.” How will the tax landscape change? The changes to EIS in the 2017 Budget were fairly significant, but came as no surprise. The risk-to-capital condition built upon the growth and development test that was set out in the 2015 Budget, and most investment managers in the EIS space were prepared for the exclusion of capital preservation strategies in the run-up to the 2017 Budget. The advantage of these legislative changes is that it gives EIS a new sense of legitimacy. The scheme is now focused back on its original purpose — funnelling investment into growth capital businesses. This investment will be crucial as the UK approaches Brexit. Because of this, we believe it is unlikely there will be wholesale legislative changes to EIS over the coming years. Keeping the rules the same should improve investor confidence, which may have been somewhat rattled in the months approaching the 2017 Budget. What will be interesting to see is how HMRC approaches the application of the risk-to-capital condition. As more stories of Advance Assurance applications are accepted and rejected, we will get a better picture of how these principles are to be applied. BUDGET 2018 IMPACT FORMALISING THE NEW RULES Little change for EIS Philip Hammond’s 2018 Budget on 29 October did not prompt a fright for the tax-efficient industry. No news is good news as far as the industry is concerned, as there had been wholesale changes to EIS and VCTs in the chancellor’s last Autumn Budget. In the lead up to the Budget, there were murmurings of changes to the annual tax-free pensions allowance — which could have increased subscriptions to EIS and VCTs, with wealthier investors having little place to go in terms of tax-efficient investing. Some pundits had also predicted changes to SEIS, via lowering its income tax mitigation from 50% to 40%, as well as increasing its annual investment limit from a base of £125,000. However, these predictions did not come to fruition, but there were a few technical changes: New EIS fund structure In response to a consultation on a knowledge- intensive company (KIC) fund structure, the government introduced a new approved EIS fund structure. Updated guidance was released to coincide with the Budget. 20 The new EIS fund structure has the following features: Focusing on knowledge-intensive A minimum of 80% of funds raised must be invested in KICs, reducing the risk of inadvertent non-compliant investment threatening approved fund status. Flexibility for managers Funds will have two years to deploy capital, with at least 50% of each raise to be invested within the first 12 months, with monies not yet invested held in cash. This improves on previous rules where 90% of each raise had to be deployed within the first 12 months. Clearer timings for tax relief Investors to be allowed to set their relief against income tax liabilities in the year before the fund closes, where previously this was only permitted in the same year that the fund closes. The government will not introduce relief at the point that investors contribute to the fund, as this would be a fundamental change to the entire structure of EIS as the market continues to adjust to the Patient Capital Review (PCR) changes. The new approved fund structure will be rolled out in April 2020. At the same time, the government is withdrawing the current approved fund structure to avoid complication. The removal of the current fund structure is unlikely to have a significant impact on the EIS market. Currently, there is only one open EIS offer that uses a HMRC approved fund structure. BUDGET 2018 Market Update / Tax and Regulatory Updates EIS legislation is unlikely to change drastically in the coming years