The first Budget since the 2017 General Election will take place on 22 November and everyone with an interest or stake in the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) tax reliefs will be holding their breath.
The rumour mill has been in overdrive and it now seems inevitable that some significant changes to these schemes will be announced.
In a sense, a big change like this has been coming for a while. For instance, the number of applications under the EIS scheme has rocketed in recent years. The amount of money raised through EIS alone rose from £548 million in 2010/11 to £1,647 million in 2015/16. In the same period, the number of EIS and SEIS advance assurance applications and compliance statements increased from about 3,500 to over 12,000.
In this context, HMRC's Small Company Enterprise Centre (SCEC) has struggled to cope with the increasing demand and taxpayers have experienced regular delays in corresponding with SCEC regarding potential and actual investments. A consultation to change and simplify the advance assurance process was launched at the end of 2016 with the aim of easing their burden, although no final decisions have yet been reached.
On top of this, the changes in law announced in 2015 have caused further frustrations, both for taxpayers and for SCEC itself. As an example, the "growth and development" test has obliged companies to provide detailed business plans and SCEC has needed to devote extra time and resource to analysing plans for growth. More questions have been asked of companies and letters and correspondence have passed back and forth – hence delaying prospective investments.
These issues have stretched SCEC's resources and caused headaches and frustrations for tax payers – but are not themselves the cause of the impending change. This is the "Patient Capital Review" launched by the Government in February 2017. The Government's objective was to identify barriers to access long-term finance for growing firms and more fundamentally consider the best way to help and support growing firms. It was intended to be a large scale review but it quickly became clear that the venture capital reliefs would be under scrutiny.
The feeling in Government appears to be that many businesses with lower risk profiles and predictable income streams were benefiting from the reliefs – which clearly was not the intention behind granting the reliefs in the first place. A formal consultation was launched in August as part of the Patient Capital Review and relevant industry bodies (such as the EIS Association) have responded and continued to lobby the Treasury.
It has become apparent over the last months that major changes will be announced on 22 November. It is hard to predict exactly what the changes will be. However, given the significant benefits which these schemes provide to early stage businesses and to the wider UK economy, and with the backdrop and uncertainty of Brexit, one can be cautiously hopeful that we will see neither the wholescale abolition of the reliefs nor any aggressive restrictions which might severely limit the availability of the reliefs. More likely are changes to and the tightening of some of the long standing rules – such as increasing the 3 year investment period or restricting the types of companies which can qualify. There has been concern regarding film production companies and so this may be a particular target. It is also possible that new restrictions will be introduced as to how EIS funds can be used. Possible targets may be the acquisition of freehold or long leasehold land by trading companies even for the purposes of their trade.
Finally, we do not know from when any new rules would take effect. It is possible that the Treasury may seek to backdate the rules to take effect from the date of the announcement of the change (22 November). Therefore, companies in the late stage of fundraising via EIS, SEIS or VCT may wish to act now to expedite the investment process and complete these investments in advance of the date of the Budget.
It is therefore unlikely that EIS, SEIS and VCT will disappear completely on 22 November, but nevertheless those impacted by these schemes should keep a watchful eye on developments on Budget day.