EIS industry rejects tax status risks
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Fears have been raised that the government may clamp down on a popular means of tax-efficient investment, prompting denials from scheme promoters that investors will have to repay tax reliefs.
Enterprise Investment Schemes, which enjoy tax breaks to encourage investment in early-stage companies, have rejected comparisons with structures that are now deemed by HM Revenue & Customs to be tax avoidance schemes.
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Writing in Taxation magazine this week, Graham Webber, head of professional relations at Rebus Investment Group, a claims management company, argued that EIS investors may yet find themselves in a similar predicament to those involved in film partnerships.
HMRC has recently taken the view – disputed by scheme promoters – that many partnerships deliberately engineered losses so that their investors could claim tax reliefs.
Under EIS rules, investors in projects receive significant tax breaks on the grounds that their money is inherently at risk. But Mr Webber wrote that some asset-backed investments that have qualified for EIS are relatively low risk.
The government has made clear that it wants to reduce EIS investments into lower risk projects, and took the measure of excluding new solar power schemes – which also qualify for renewables subsidies – from EIS in July. Solar schemes, which have become more profitable as technology has improved, accounted for a significant proportion of EIS investments before the reforms.
“While it had become a little ridiculous by the end, solar investments were very risky when [the industry] started,” said Sarah Wadham, director-general of the EIS Association. “There are tax breaks, but there are real risks for EIS investors.”
Ms Wadham said that the manner of the removal of the subsidy for solar investments reflected the government’s continued support for the EIS industry. “It was done very well, with four months notice and it was not applied retrospectively.”
John Glencross, chief executive of Calculus Capital, said there was no evidence that the government is looking at EIS in terms of tax avoidance. “It is an important scheme that is meeting an important need.”
Mr Webber wrote that there are “many similarities” between film partnerships, which never received explicit government approval, and EIS schemes, which apply for so-called “advance assurance”. Under this process, EIS status is granted subject to the scheme operating as proposed to HMRC.
Gary Robins, director at EIS manager Radius Equity, said that while there have been some scheme promoters that have appeared to pushed the boundaries, HMRC takes an increasingly close look at structures that apply for EIS status. “Investors today should have a fair degree of comfort that their scheme won’t be reviewed retrospectively.”
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Ben Yearsley, head of investment research at Charles Stanley Direct, said that in cases where schemes lose their HMRC approval, investors will find out immediately, not retrospectively. “If you’re investing early in something that’s sailing close to the wind, you take the risk of [EIS] status not being granted.”
Government-approved venture capital schemes, which also include venture capital trusts, have raised more than £16bn in funding for small companies since their introduction nearly 20 years ago, according to HMRC.
In the 2011 Budget, the government increased the annual amount that taxpayers can invest under the EIS as well as the annual limit on EIS investment than companies can receive. The size of company qualifying for the status was also increased.
Investors receive 30 per cent income tax relief on their investment, and after two years investments are exempt from inheritance tax under business property relief. Capital gains are tax-free after three years and capital gains tax can be deferred for up to three years.
In a statement, HMRC said EIS was “an integral part of the government’s growth strategy, providing tax incentives for investment into small and growing businesses which would otherwise struggle to access finance.
