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Autumn Budget 2017: Chancellor goes after “low risk return” investors with SEIS and EIS reform

SEIS and EIS reform was contained within chancellor Philip Hammond’s 2017 Autumn Statement – measures aimed at targeting so-called “tax-motivated investments”.
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Established as investment incentives for those will to back riskier businesses, EIS (the Enterprise Investment Scheme) and SEIS (the Seed Enterprise Investment Scheme) have helped thousands of early-stage businesses attract funding.

Now, however, the government has outlined intentions to exclude tax-motivated investments – those where the tax relief provides most of the return for an investor. To counter this, the chancellor also announced a doubling of limits for EIS and SEIS for “know-how investment companies”.

In his speech to parliament, Hammond unveiled the government’s “Action Plan”, established to unlock over £20bn of new investment in UK scaleup companies.

Alongside a further £2.5bn commitment to the British Business Bank and pension fund access to long-term investments, there will also be a “doubling of EIS investment limits for knowledge-intensive companies, while ensuring that EIS is not used as a shelter for low-risk capital preservation schemes,” he added.

Leon Ifayemi, CEO and founder of student lettings app SPCE highlighted EIS reform as one policy which may hold back small businesses. This could, he suggested, result in many “lower risk” firms becoming except from EIS investment – potentially overshadowing the positive announcement that the government will double the EIS limit for knowledge-intensive companies.

However, Hugi Clarke, director at investment firm Foresight Group, believes EIS remains “attractive” to those investors who can take advantage of tax benefits and accept the associated risks.

“The ability to access 30 per cent income tax relief, 40 per cent inheritance tax relief and up to 28 per cent capital gains tax deferral while enjoying the potential for significant upside compares favourably with ISA and pension alternatives and will continue to be an attractive part of a diversified portfolio,” he said.

As reported by Real Business back in May, EIS applications had witnessed a near 20 per cent decline year-on-year. These drop off can to a certain extent by credited to the changes made by former chancellor George Osborne in 2015.

Back then, the chancellor announced alterations to the framework as part of the Finance Act, adding new layers of complexity and confusion to EIS.

EIS and SEIS usage

Year Companies using EIS Amount raised
2011-12 2,680 £1bn
2012-13 2,470 £1bn
2013-14 2,845 £1.6bn
2014-15 3,330 £1.9bn
2015-16 3,285 £1.6bn
Year Companies using SEIS Amount raised
2012-13 1,175 £87m
2013-14 2,125 £174m
2014-15 2,340 £178m
2015-16 2,225 £170m

Genevieve Moore, partner and head of corporate tax at Blick Rothenberg, hopes the new changes from Hammond will not make an “already complex tax incentive even more complicated”. She sees the announcement as a possible indication that further anti-avoidance legislation may be introduced.

In an official release, the government said the EIS reform introduces a principles-based test to determine if, at the time of investment, a company is a genuine entrepreneurial company. “It requires a conclusion to be reached as to whether the company has objectives to grow and develop and whether there is a significant risk of loss of capital, where the amount of the loss could be greater than the net return to the investor,” it went on to say.

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About Author

Hunter Ruthven

Hunter Ruthven is the editor of Real Business. He is also the editor of Business Advice, a title focused solely on a section of the business community currently underserved – micro companies. Alongside this, he is part of the team that hosts the Growing Business Awards, First Women Awards and Future 50 initiative.

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