The dust has now begun to settle following the Autumn Budget and the impact it has on SEIS and EIS reliefs.
The budget coincided with the 21st birthday for EIS relief, which has become an essential component of the UK investment eco-system. There had been concerns in some quarters that there could be a dramatic curtailment on some of the benefits of the reliefs but on an initial view, nothing too disruptive has been introduced. Indeed the Government might be seen to have given a vote of confidence in SEIS/EIS by increasing the annual investment limit from £1 Million to £2 Million for investors and increasing the limit for companies from £5 Million to £10 Million.
While there may be no new exclusions or reductions in the reliefs, there is however a new focus on the underlying motivation behind any investment.
HMRC has previously raised concerns that the inherent flexibility of the SEIS/EIS regime enables it to be utilised in investments which are not in line with the entrepreneurial spirit of the reliefs. This has resulted in certain kinds of investment being considered to have pushed the boundaries and resulted in “capital preservation” investment strategies rather than high risk, early stage investments.
It is this kind of capital preservation that is now going to be more rigorously challenged as part of any HMRC assessment. A new two-part test is being rolled out which will require companies to demonstrate that they have the clear objective to grow and develop, while the investment also needs to carry a significant risk of the investor losing more capital than they gain as a return. These two tests will now be assessed against a number of stated principles, with the guidance having been published on 4th December (https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm8500).
There is now a real likelihood that many investments which might have previously ticked the boxes technically could now fail to satisfy these conditions and the feedback coming from HMRC appears to hint at a fairly strong line being taken on the application of these principles.
This will increase the importance of obtaining “advanced assurance” from HMRC before making an investment. It has been noted however that the response times on current advanced assurance applications have become unacceptably long and so it is now expected that HMRC will make a renewed commitment in Spring 2018 to a 15 day turnaround on all applications.
This commitment would obviously be a welcome development and a return to the response times achieved a number of years ago. Another welcome development may be other minor changes which give companies more flexibility around the start date for the ten year period in which knowledge intensive companies can remain eligible for SEIS/EIS.
While the challenge now being made to capital preservation arrangements will be a serious concern for many investors and advisers, it should not impact the majority of the genuine risk capital investments that MBM clients undertake with continued entrepreneurial enthusiasm.
Looking forward, we will await with interest the implications for the 2018 budget arising from the government’s consultation on its ‘UK Patient Capital Review’, following our own submission and discussions with HM Treasury (please see our blog).
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