15 August 2023
The Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and the Venture Capital Trust (VCT) scheme are some of the most valuable tax incentives to taxpayers and help encourage individuals to take on riskier investments and provide funding to early-stage businesses.
Qualifying EIS and VCT investments can offer up to 30% income tax relief on the amount invested, whilst SEIS can offer up to 50% income tax relief. There are potentially further tax reliefs available as well, such as any future gain on the sale of qualifying investments being exempt from capital gains tax. One further valuable relief to encourage reinvestment of the proceeds of other investments into businesses is the potential for previous capital gains on those investments to be exempted or deferred when qualifying SEIS or EIS investments, respectively, are made.
Unsurprisingly, with the tax burden increasing in recent years, there has been an increase in the number of individuals making such investments and claiming relief. Looking at the latest statistics for EIS relief, the number of EIS investors claiming income tax relief on their tax returns has increased from 36,550 individuals in the 2019/20 tax year to 45,155 in the 2021/22 tax year, a 23.5% increase.
The amount of EIS investments on which income tax relief was claimed totalled around £1.8bn in the 2021/22 tax year, providing potential income tax relief of up to £540m. On the face of it that might appear expensive to the exchequer, but financing of this nature is inherently risky as there is no guarantee that the businesses invested in will go on to be successful.
Nevertheless, this boom in tax relief may be set for a sudden bust. There are many who are unaware that some of these reliefs have an expiry date. Specifically, the tax legislation provides for an expiry date for both EIS and VCTs, sometimes referred to as ‘sunset clauses’. The ‘sunset clause’ deadline for these two schemes is currently 5 April 2025. This differs from SEIS which has no such expiry date.
Understandably, there have been calls from industry and more recently the House of Commons Treasury Committee for the Treasury to provide much needed clarity on the issue and to extend the sunset clauses. As it stands, however, there is an ominous silence from the chancellor on the issue.
The chancellor has previously spoken about being an entrepreneur himself and will no doubt appreciate the importance of these reliefs in supporting the growth of businesses. In the absence of any clear government plan, however, taxpayers and businesses may seek to fill in the gaps themselves. Perhaps this could be the latest stealth tax raid on businesses and investors? We could see more investments raised in the short term through fear of the reliefs disappearing, distorting taxpayer and business behaviour.
Whatever the chancellor’s thoughts on the issue, a vow of silence is not a helpful policy and clarity needs to be given so businesses and investors can plan ahead appropriately.