The Chancellor Philip Hammond today announced that HM Treasury would lead a review into the barriers preventing access to patient capital.

The announcement may potentially open the door to reversing some of the more restrictive new rules governing EIS and VCTs.

These changes, introduced in 2015 in order to comply with EU State Aid rules, include a seven year age limit on investee companies and a lifetime cap on how much investee companies can receive through these schemes.

Industry bodies such as the Enterprise Investment Scheme Association (EISA) and British Venture Capital Association (BVCA) have been lobbying government to get these changes amended, as they are thought to be unnecessarily restrictive, putting a brake on investment and growth.

“The announcement from Philip Hammond in the Autumn Statement proves there is some light at the end of the tunnel for our calls to remove the restrictive rules introduced in 2015. This won’t be a short process but this announcement proves all sides are working together for a mutually beneficial outcome. My understanding, having spoken to the Treasury today is that, the Treasury will be consulting on clarifying interpretations on many of the 2015 rules, particularly the Condition B rule. It’s also a victory for us to see a long overdue consultation on the Advance Assurance system which has largely dysfunctional for some time now.” Mark Brownridge, Director General, EISA

Clarifications for EIS and VCT Rules

The Treasury also announced that there would be further clarification and some technical changes to the rules that govern share conversions for EIS and follow-on funding for VCTs, responding positively to suggestions for improvements that have come from the tax efficient investment industry.

Furthermore, there will be a consultation on the EIS Advanced Assurance process, looking at options to improve the efficiency of the service.

Expansion of Social Investment Tax Relief

It has also been confirmed that the investment limit on Social Investment Tax Relief (SITR) will be raised to £1.5m from April 2017, making it more economically viable for managers to launch SITR investment funds.

Other changes will be made to ensure that the scheme is well targeted. Certain activities, including asset leasing and on-lending, will be excluded. Investment in nursing homes and residential care homes will be excluded initially, however the government intends to introduce an accreditation system to allow such investment to qualify for SITR in the future. The limit on full-time equivalent employees will be reduced to 250.

The government will undertake a review of SITR within two years of its enlargement.

“Today is a step forward for social investment tax relief. We welcome the modest increase to the size of investment able to be raised using SITR. It will enable a range of younger, dynamic charities and social enterprises, as well as recent spin-outs, to use capital to boost their operations to reach more people and try new business models.
However, whilst some helpful improvements have been made, SITR still needs to be put on a level playing field with other private tax relief schemes, such as EIS and VCT. Therefore, we implore the Chancellor to consider how the government should be further supporting investment into the social sector to encourage innovation and growth, but also to reach more people in need.” Simon Rowell, Senior Director Strategy and Market Development, Big Society Capital

However no further large-scale changes to the EIS, VCT or SEIS schemes were announced, ushering in a welcome period of stability after the comprehensive changes brought in over the last few years.

“The focus on enterprise and venture capital finance in a post Brexit/Trump world is very much to be welcomed” Roger Blears, Senior Partner, RW Blears LLP

Taken together, these proposals should be welcomed by the tax efficient investment industry as they will provide clarity on some technical areas, removing doubts and addressing inefficiencies – ultimately stimulating further investment.

Other Announcements

In addition, £400m will be invested into venture capital funds through the British Business Bank, with the objective of unlocking £1bn in growth finance for the UK’s startups and SMEs.

This additional investment should provide further stimulus for small and growing businesses, opening up yet more opportunities for managers investing in growth companies

In an Autumn Statement that was focused on business and innovation, the Chancellor also announced that the government would prioritise additional high-value investment in infrastructure by launching a new £23bn national productivity investment fund. There will also be an extra £2bn a year for science by 2020, £1.8bn from the Local Growth Fund to English regions and more than £1bn for digital infrastructure

The Chancellor reiterated the government’s commitment to eradicate aggressive tax avoidance schemes.

Key Points for Tax Efficient Investments:

  • Treasury led review into the barriers preventing access to patient capital
  • Clarity on share conversions and follow on funding
  • SITR scheme expanded
  • £400m will be invested into venture capital funds through the British Business Bank, unlocking £1bn in growth finance
  • No major changes to any of the UK’s tax advantaged venture capital schemes

No further large-scale changes to the EIS, VCT or SEIS schemes were announced, ushering in a welcome period of stability after the comprehensive changes brought in over the last few years to exclude renewables and comply with EU State Aid rules.

In Summary

The Chancellor announced several measures that will secure continued investment into growth companies ensuring that tax efficient investment managers will continue to see plenty of opportunities and healthy deal flow. It’s pleasing to see efforts to balance investment between London and the regions, and to know that there will not be another round of changes to the rules that govern the tax reliefs on growth investments in the near future. We will await the outcome of the review into the barriers that prevent access to patient capital, but hope that the treasury will be listening closely to the lobbying efforts of the EISA, BVCA and UK BAA and consider rescinding some of the more restrictive measures on these schemes that were introduced last year.

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