SEIS, EIS and VCT restrictions

Mon 31 Mar 2014

VCTs are quoted investments and so can only be made through a provider within the structured VCT framework but EIS and SEIS investments can be made by individuals investing directly into companies.  Originally SEIS was to be a temporary measure, but it was announced in the Budget that the scheme is now to be made permanent, thus extending the current generous income tax and CGT reliefs.

EIS, SEIS, VCT and Social Investment Relief offer various income tax and CGT tax breaks:

• in VCTs the broad reliefs are a 30% income tax credit on investment of up to £200,000 into VCTs holding a portfolio of unquoted companies, plus tax free dividends and tax free gains after five years. 
• EIS offers a 30% income tax credit on investments up to £1m, capital gains rollover reliefs, and tax free gains on the EIS shares themselves after 3 years. 
• SEIS, the smaller company version of EIS, gives an even more attractive range of reliefs but with lower limits and for smaller and newer companies.
• Social Investment Relief (below) is broadly similar to EIS, offering 30% income tax credit relief on investment up to £1m but with different qualifying conditions for the enterprises concerned to embrace charities and not-for-profit undertakings.

Various Budget announcements are aimed at removing low risk investments from EIS, VCT and Seed EIS (SEIS) reliefs.  These include excluding companies benefitting from ROCs (Renewable Obligations Certificates) from the schemes, excluding investments in VCTs conditionally linked to a share buyback, or where the investment has been made within six months of a disposal of shares in the same VCT.  There will be a general consultation on excluding ‘contrived structures to allow investment in low risk activities’. 

As regards share buybacks, legislation will be introduced will be included in Finance Bill 2014 to prevent VCTs from returning share capital to investors within three years of the end of the accounting period in which the VCT issued the shares.

These changes may herald a drive to restrict these tax-favoured structures to higher-risk ventures as originally intended.  Furthermore, notwithstanding the general time limits for making assessments to recover tax, from 6 April 2014 HMRC will be able to withdraw tax relief in all cases if VCT shares are disposed of within five years of acquisition.

High investment and management costs of VCTs in particular but also EIS and VCT are perceived to be a problem.  The tax reliefs are meant to compensate investors for risk.  The purpose of the changes is to push promoters towards offering investments with lower and more transparent costs that will in the end benefit investors and companies seeking to raise risk capital.