Chancellor George Osborne announced during his Autumn Statement to Parliament today that from April next year people who invest up to £100,000 in a qualifying new start-up business would be eligible for income tax relief of 50 per cent. The relief will be offered regardless of the rate at which the investor pays tax.
The scheme, which has been given the name the Seed Enterprise Investment Scheme (SEIS), will also be open to companies, but with a total investment limit of £150,000.
As an added incentive to encourage more people to back ‘riskier’ companies, the chancellor has offered a capital gains tax holiday for investments made into the new scheme. The move will mean a capital gains tax exemption on gains realised on disposal of an asset in 2012-13 and invested through the SEIS in the same year.
‘We’ve supported enterprise by increasing the generosity on the Enterprise Investment Scheme,’ he comments. ‘We are extending this scheme specifically to help new start-up businesses get the seed investment they need. Even at the best of times they can struggle to get the finance they need – and in the current credit conditions that struggle too often ends in failure.’
The Autumn Statement papers reveal that the new scheme is a result of government-initiated consultation on funding options for early-stage businesses in the UK that closed in September. As part of the proposed EIS reforms announced today, the papers state that the government will simplify the EIS by relaxing the connected person rules and the definition of shares that qualify for relief.
It will also tighten the ‘focus of the schemes’ by introducing a new test to exclude companies set up for the purpose of accessing relief, exclude acquisition of shares in another company and exclude investment in Feed-in-Tariffs businesses.
In addition to these changes, the government will remove the £1 million investment limit per company for venture capital trusts (VCTs) to reduce the administrative burdens of the scheme.
The reforms follow Osborne’s strong backing of EIS in March. In the 2011 Budget, he announced that additional income tax relief for scheme investors would increase from 20 per cent to 30 per cent in the 2011-12 tax year. The rate matched the current tax relief for VCT investment.
The EIS is designed to encourage investment in start-up and early-stage businesses. For SMEs to attract investment through EIS, it is necessary to register for the scheme.
Certain criteria needs to be met in order to qualify, such as the company must be unquoted and must not be under the control of another company or of a company and persons connected with that company. It must also be a qualifying trading business or be the parent company of a qualifying trading group. Certain types of company, for instance those dealing in property, are not eligible.
Fund manager Octopus Investments and professional services firm Deloitte have welcomed the plans for the SEIS.
Alex Macpherson, head of the ventures division at Octopus, comments, ‘We’re very pleased with the introduction of SEIS, as it addresses a critical driver of the UK economy that previous governments have left neglected.’
‘With these proposals, the chancellor will help ambitious young companies access the financial support required to accelerate their growth and prosper even in this adverse economic climate.
‘There has long been a significant gap in the funding of start-up companies, as the risk of failure is so much higher than with larger, more established businesses. And, even when successful, the returns achieved by early investors are often not commensurate with the risks taken.’
Bill Dodwell, head of tax policy at Deloitte, adds, ‘The enhanced rate of relief reflects the inherently risky nature of small start-up companies and has been estimated to cost the Exchequer £50 million in the first year and lower amounts in later years, when the capital gains relief drops away.
‘Tax relief at up to 78 per cent in the first year will make SEIS an attractive option for individuals who wish to invest in start-up companies. It is unlikely that the rules will allow investment in a connected company, so that investors will not be able to invest in a company they control.’
Ian Sayers, director general of the Association of Investment Companies (AIC), adds, ‘The chancellor’s decision to remove the £1 million investment limit demonstrates his commitment to reducing red tape in the VCT sector. Making this change will significantly enhance the capacity of the sector to support entrepreneurial businesses. The impact of this change should not be underestimated – it could transform the VCT sector.’