budget 21
Shedding light on EIS and VCT changes
Background
The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) give tax relief to individuals investing in higher-risk unquoted trading companies.
In the past few years the size of companies being able to claim the relief has been reducing and consequently the ability of UK companies to raise needed equity investment from EIS and VCT investors has diminished.
The changes
Subject to receiving State Aid approval the following changes have been announced: • For shares issued after April 5, 2011 the rate of income tax relief for EIS investors will increase from 20% to 30%.
• For shares issued after April 5, 2012 the size limits will be relaxed: - The investee company must have fewer than 250 employees (currently 50 employees) for EIS and VCT - The company must have no more than £15 million gross assets (currently £7m) for EIS and VCT - The maximum amount an investee company can raise in a 12 month period will be £10m (currently £2m) for EIS and VCT - The annual amount an investor can subscribe under the EIS will be £1m (currently £500,000).
The Government has also suggested it would like to refocus the EIS and VCT reliefs on risk capital investments and as a
The manufacturers’ view
Commenting on the Budget, Jim Davison, south east region director for EEF, the manufacturers’ organisation, said: “The chancellor has clearly acknowledged that we are in an international race for investment and that manufacturing is at the heart of this. He made a crucial down payment on creating a stronger and more balanced economy with measures to boost investment in technology, research and development, and skills. The Growth Review has now started to deliver tangible process in removing the barriers to growth, investment and job creation in the UK.
“However, for manufacturers, despite the encouraging measures on investment and on the UK R&D tax regime, the significant rise in energy bills threatened by the Carbon Price Floor is unwelcome. The next stage of the Growth Review must seek to develop a more co-ordinated and cost-effective approach to creating a low carbon economy.
“From a skills perspective, which is vital in maintaining the UK’s competitive position, the additional support for apprenticeship placements was good news,
although government needs to make sure the pipeline of suitable students from schools is also being addressed.
“We were also pleased to see some helpful measures on regulation. But the Government now needs to go further and set out a plan that will leave the burden of regulation lower by the end of this parliament. It needs to move beyond the focus on individual regulations to tackle whole areas of regulation and to develop a plan to stem the flow of new measures from Europe.
“I was also pleased that government recognised that the tax treatment of investment in the UK was antiquated. Extending the short life asset election is a simple way of recognising the true cost of modern machines with shorter lives. This will make the tax system more efficient and remove in part barriers to investment.
“Regarding low-carbon industries, while the increase in funding and the prospect of the Bank raising further funds on capital markets is welcome news, it will only make a real difference to the UK’s low- carbon future if it is targeted at our best green economy prospects.“
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – APRIL 2011
starting point has announced that ’feed in tariff’ businesses will be added to the excluded activity list – shares issued before Budget day will not be affected.
The Government will also consult on options to simplify the rules further by removing some restrictions on qualifying shares and types of investor.
Comment
Paul Braye, tax principal at BDO LLP in Southampton, commented: “The changes are a welcome shot in the arm for companies seeking venture capital investment and for those entrepreneurs who are willing to risk their money by subscribing for shares in smaller businesses. However, the EIS and VCT rules are still too complicated for a
relief aimed principally at small and start-up businesses and more can be done to simplify the reliefs.
“This improvement to tax reliefs should encourage more high- net-worth individuals to invest in entrepreneurial businesses and the increase in size limits will allow more businesses to qualify for these valuable reliefs. This will reverse the trend in recent years to narrow the availability of these reliefs to the smallest companies.
“I am, however, disappointed that the reforms except the income tax relief increase will not apply to funds raised in the traditional EIS/ VCT fundraising ’season’ in January to March 2012. In reality the chancellor’s delay will equate to a year’s lost investment.
“Many of this year’s VCT funds have been aimed at raising money for companies in the renewable energy sector claiming feed in tariffs. The announcement will mean that no more of these investment opportunities will be available for companies receiving subsidies.“
REITs review in the pipeline
The Government has announced that it is to consult on changes to Real Estate Investment Trusts (UK-REITs) regime with legislation being included in the Finance Bill 2012. The stated intention is to support good business practices and remove barriers to entry, and investment in, the UK-REIT regime, including a removal of the 2% conversion charge.
UK-REITs were introduced in January 2007 to encourage the development of the residential letting sector and to enable shareholders in the listed real estate investment property sector to be treated for tax purposes as if they had acquired the underlying portfolio of investment property. Most of the listed sector converted at that time but there have been very few new entrants since and limited impact upon the residential letting sector. One of the hurdles has been the practical need to establish a portfolio of properties before going for a listing on a recognised stock exchange. However, there is a tax cost to obtaining UK-REIT status in this way as at the time of election to become a UK-REIT it is necessary to pay a 2% conversion charge based upon
the market value of property within the UK-REIT. This has been seen by many as a barrier to the expansion of the UK-REIT sector.
At the time of the original introduction of UK-REITs, HMRC viewed the conversion charge as effectively a proxy for the tax that could no longer be collected on a future disposal of properties based upon the historic growth in capital value of the properties already owned by the listed real estate investment property sector.
Paul Braye, tax principal at BDO LLP in Southampton, commented: “The removal of the conversion charge is a very welcome development to stimulate the success of this market but why does this hard-pressed sector need to wait for another year for this to occur? Of the other areas that are being considered I consider that one of the most key is the relaxing of the requirement for a UK-REIT to be listed on a recognised stock exchange. In a number of other jurisdictions private REITs have been a major factor in driving the overall success of the REIT sector and hence encouraging the development of the commercial letting sector and the establishment of a UK-REIT residential sector.“
www.businessmag.co.uk
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