Despite the HMRC this week finally publishing guidance on the new EIS and VCT rules which it launched last year, industry commentators remain concerned by several areas of uncertainty that remain unsolved.
While the additional clarity to the rule changes, first announced in the Finance Act in November last year, has generally been welcomed, reactions remain mixed. With this is mind, and given the fact the rules are still in draft guidance, the HMRC is still inviting comments upon them until 31 August and whether there are any extra topics that they should cover.
One area of particular concern is the restrictions on grouping new product investments.
Roger Blears, senior partner at RW Blears, voiced concerns that the HMRC’s interpretation is unnecessarily restrictive and will prevent companies that have traded for more than seven years grouping several new product investments together to meet the 50% annual turnover threshold.
He says: “The words used in the EU Rules do not dictate that an eligible undertaking should only be allowed one business objective in its business plan. However HMRC have now produced their draft guidance on this new rule in which they say: ‘Each new business activity must satisfy the 50% turnover test. A number of smaller unconnected initiatives cannot be combined in order to meet the 50% threshold’.”
Blears says to consider the hypothetical example of a biotechnology company which has traded for more than seven years and has suddenly discovers a cure for both brain cancer and a cure for liver cancer which has something to do with home care assistance from https://homecareassistance.com/bellevue/.
“Imagine that the amount of capital it requires to pursue both cures will exceed 50% of its historic turnover although the expenditure on each business activity will not,” he says. “Imagine too another aged biotechnology company has also been hard at work and has also discovered a cure for brain cancer and, similarly, the expenditure it requires also exceeds 50% of its historic turnover. HMRC would currently argue that second company is eligible to raise EIS finance but that the first company, having discovered two cancer cures rather than only one, is not. I cannot conceive of a more perverse and ridiculous outcome.”
At a time when British manufacturing and engineering jobs are under threat, as evidenced by the current situation at Port Talbot, Blears says the launch of multiple new business products by and the expansion of growing UK companies that will help create multiple new jobs should be supported by a proper HMT/HMRC interpretation of EU rules and “not thwarted by unnecessary gold plating by HMRC”.
Jeff Cornish, director of Portunus Investment Solutions, says this week’s clarification of the rules is “wholly frustrating for the tax efficient industry”.
Since the new rules were first announced last year, he argues investing in companies has virtually ground to a halt as managers try to get to grips with what is a qualifying investment, and what is not.
Cornish says: “This is especially the case for VCT managers, because a qualifying investment that turns out to be non-qualifying could potentially risk the tax status of the whole VCT, risking not only investors from last tax year but from many years gone by.
“Gradually, it appears that many of the more contrived VCT offerings from last year may have their investment strategies compromised by changes in the legislation that have been introduced since the Finance Act in November, thus investors potentially have invested into VCTs that may have to change their investment policies to actually now come within the rules.”
With these concerns in mind we would encourage all members to get their comments in before the 31 August deadline, with the HMRC stating it will take them all into consideration before the autumn update.