Announcement comes same day as HMRC publishes statistics for take-up of tax schemes
Official statistics have been released by HMRC today showing that UK businesses receiving investment and raising funds through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) has risen for another year. However RSM is raising concerns that new rules regarding these valuable tax breaks could prove disastrous for growing technology companies.
The EIS was launched in 1993/4, and since then nearly 22,900 companies have received investment through the scheme, raising over £12.2bn of funds. SEIS has been similarly popular, with around 2,900 individual companies receiving investment since the scheme was launched three years ago, and this has raised over £250m in investment. Both schemes are two of three tax-based Venture Capital schemes, with the other being the Venture Capital Trust (VCT) which has raised over £5bn for companies to date.
But as a result of EC direction, new rules affecting these schemes were proposed and as result, various limits have been imposed in the recent Summer Budget and Finance Bill, including:
A limit on the age of a company that can apply for EIS or VCT finance. The government had initially proposed an age limit of 12 years, but this has now been reduced to seven years in the Finance Bill. However an exception will be made if a company has exceeded this time period before raising its first investment under the schemes if essentially it raises more than 50 per cent of average group turnover over the last five years which can produce anomalous results. A limit in the total lifetime risk finance funds which are raised by a company of £12m - £20m for knowledge intensive companies. The rule that no VCT or EIS funds are to be used for the acquisition of other companies or trades.
Chilton Taylor, Corporate Finance Partner for RSM, said: ‘The Summer Finance Bill, clearly fuelled by the EC, has introduced new proposed legislation that will add to the already complex nature of these important and successful schemes, and many companies will find it impractical to obtain the necessary information needed to apply for these breaks. In the case of older companies where previous business models have necessarily changed or evolved imposing an age constraint is likely to have a detrimental effect on their growth opportunities, and begs the question as to why a simple growth test wasn’t introduced instead?
There’s a real concern here that these new rules will inadvertently hit the very companies that most deserve funding from these schemes, for example high growth technology and, in particular, software companies. The legislation continues to be unfriendly to acquisitions often made to compliment or further develop existing technologies or create wider market applications. Ironically it is these very companies that George Osborne is keen to help grow in the UK, and yet inadvertently may have switched off the tap to a vital source of funding for many of them.’