On balance, writes Jack Rose, the EIS and VCT changes proposed by the Patient Capital Review and revealed in the Budget seem pragmatic and underline the government’s support for the tax-efficient sector as a whole.

After months of anticipation, the waiting is over. Chancellor Philip Hammond delivered his Autumn Statement on Wednesday and, contained within it, were the results of the long awaited Patient Capital Review. And despite the initial concerns expressed over the summer and in the build up to the Budget, EIS and VCT investors can view the announcements and changes positively.

None of the fears surrounding changes to investors’ tax reliefs or minimum holding periods materialised. The changes that have been announced seem fair and sensible. They do not unfairly penalise or preclude specific sectors or business types but ensure funding is focused into the areas that need it most.

Autumn Budget 2017: EIS Boost For Knowledge-Intensive Businesses

The changes announced hardly come as a surprise – to many, the direction of travel from HM Treasury has for a number of years now been abundantly clear. The removal of renewables, followed by the more recent age limits imposed on state aid funding, have all been pushing investors in the direction of growth capital with genuine equity risk and away from the more structured offerings that look for defined returns with as little risk to capital as possible for investors – the so called ‘capital preservation’ market.

By far the biggest change is the introduction of a new principles-based test on EIS, SEIS and VCT investee companies. This will be in place from next year’s Royal Assent, which is expected sometime in the spring/summer. This will ensure funding is focused on investment into companies seeking long-term growth and employment.

There is a new ‘risk to capital’ condition, which will have two effects HM Revenue & Customs will assess – first, does the company have the objective to grow and develop over the longer term and, second, is there significant risk to EIS investor’s capital that could potentially result in them losing greater than their net subscription?

We will have to wait for further details on how this works in practice, which will be in a consultation paper to be released shortly. But it does seem a more pragmatic approach than simply the wholesale removal of sectors (such as media/film) or business types that naturally have assets within them (a restaurant business, for example).

As a result, the days of strategies with a defined low-return target that rely on tax reliefs to provide much of the returns for investors are coming to end. It seems to be the final nail in the coffin for ‘capital preservation’ EIS strategies and a line in the sand from where investors are going to have to accept that, if they are going to look at EIS, it will have to be within genuine growth capital opportunities with the appropriate risk attached to them.

If it was not clear enough from the above where the Treasury would like to see the funding going, it has also increased investors’ annual EIS investment limits from £1m to £2m – providing any amount above £1m is invested in knowledge-intensive companies.

In addition, the amount of money knowledge intensive companies will also be able to raise through EIS and VCT in any one year has doubled to £10m. They will also be granted more flexibility as to how they apply the age limit test currently in place. Finally the government is going to introduce a new knowledge-intensive approved EIS fund structure, with more details to be released at a later date.

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Source: Professional Adviser



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