Tax relief

The Enterprise Investment Scheme Association (EISA) has urged the government to introduce a radical package of measures to support the EIS market during the coronavirus Covid-19 pandemic – including upping the rate of income tax relief to 60%.

Warning that many companies supported by EIS investment currently face “an existential threat” as a result of the measures being taken to tackle the coronavirus threat, the EISA said: “Urgent support and funding is required to ensure, through no fault of their own, these companies don’t suffer a premature demise.”

As a result, the organisation listed a series of temporary measures that the government should take to help the sector.

These include: 

  • Raise the rate of income tax relief for both EIS and SEIS to 60% (instead of 30% and 50% respectively) “until such time as the government see fits to reduce back”
  • Relax the ‘growth and development’ requirement for investee companies
  • Remove a number of requirements, including the maximum age and financial health requirements of investee companies, and maximum investments allowed into companies

A bold but proportionate response

While many might consider such moves to be bold steps for the government to take – and potentially set precedents that would be harder for it to go back on in the future – it is clear that these are unprecedented times and we are in uncharted waters. The government has already made promises that would have been inconceivable only a few weeks ago, such as pledging to pay certain private sector wages while jobs are on the line or temporarily made redundant as a wide variety of workplaces are closed.

And the EISA believes that the measures it has set out will be a proportionate response to the current difficult situation.

While it suggested that the size of the EIS market could drop by £100-200 million as a result of the coronavirus, it also claimed its plans would give a boost of around a similar figure to the market.

Meanwhile, the EISA argued that many small businesses will provide vital support to the coronavirus response, supporting the NHS as it deals with a massive spike in demand, the like of which it has never seen.

“Many EIS and SEIS investee companies are at the forefront of fighting coronavirus and relieving pressure from the NHS with innovative healthcare solutions,” it said. “This work can only continue if such companies get access to finance in the short term to guarantee their long term future.”

It also said that the benefits of making these changes will outweigh the negatives faced by the government, in the form of lower tax revenue.

“Clearly, raising the income tax rate to 60% incurs a cost to the Exchequer,” acknowledged the EISA. “Our sense is that this cost is far below the cost of the loss of revenue that these companies currently provide to the economy in terms of tax revenue paid as well as the human cost.”

Asking for more

The EISA has not been the only organisation calling on the government to relax or change its rules during the crisis.

Vala Capital is spearheading a campaign seeking to increase the income tax rate of relief to as much as 80%. If adopted this initiative could see up to £1 billion committed to thousands of small companies that have no other support available to them.

Government needs to give private investors an absolute incentive to back small companies, and to encourage them to lock up capital for a five to seven-year period,” argued Vala founder Jasper Smith. “What I believe we need is a proposition that encourages every citizen to get involved in the recovery effort and that harnesses the power, intellect and determination of private investors and entrepreneurs together.”

As part of this effort, Vala has launched a petition online, which you can find here 

Meanwhile, former pensions minister Steve Webb has said the government should relax the rule that says those who have taken taxable cash from their pensions are limited in future to £4,000 per year in contributions on which pension tax relief can be claimed. He argued that people who have taken money out to tide them over during the crisis – or alternatively watched their pension investments tumble – may want to start building their pension pots back up at a faster rate than the current rules allow once the pandemic has passed.

Whether the government will bow to such demands remains to be seen. Balancing the demands of the economy with the need to raise taxes is likely to become even more precious over the years ahead, given that the various government efforts to tackle the economic impacts of the coronavirus pandemic have meant huge, unfunded investments into the economy that will need to be paid for over years, and quite possibly decades.

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