Review of tax reliefs
Obtaining venture capital investment is important for a number of UK businesses. Access to such investment is crucial for a growing economy and the development of industries. For early-stage companies it can mean the difference between sinking or swimming. For this reason the UK Government has long supported the relationships between companies and their venture capital investors through the provision of helpful tax reliefs. Whilst the recent extension of some of the schemes makes clear they are here to stay, change nevertheless looks to be coming.
Following the Spring Statement, a consultation was published concerning Research and Development ("R&D") tax relief. Specifically, this consultation aims to explore the introduction of a system of advance clearances to provide clearer guidelines and reduce errors for those who are relying on R&D tax reliefs. As this is merely a consultation rather than a legislative change, it is yet to be seen what may come of this. That said, if this does lead to changes which reduce risks and improve confidence for investors, this in turn could promote a more comfortable investing environment resulting in increased support for small companies.
As part of the Spring Statement, the UK Government announced that it is determined to ensure that the UK is the best place in the world to start and grow a business and is committed to fostering a positive, dynamic environment for entrepreneurs and scale-ups as a central part of the growth mission. The UK Government will continue to work with leading entrepreneurs and venture capital firms on how policy supports that, including the role of tax reliefs such as the Enterprise Management Incentives Scheme, the Enterprise Investment Scheme ("EIS") and the Venture Capital Trust ("VCT") Scheme. As part of this, the UK Government will be holding a series of roundtables with key stakeholders over April.
EIS, which could be relied upon by investors buying shares in higher-risk companies, looks likely to be reformed. Currently, investors utilising these benefits can gain an income tax relief up to 30% provided they hold investment for a minimum of three years. Whilst the actual legislative changes are yet to be seen, there may be adjustments to the amount of the relief available or a change to the types of businesses that can qualify for the relief.
Likewise, VCTs, which provide tax benefits to investors purchasing shares in funds that invest in smaller companies, and the Seed Enterprise Investment Scheme ("SEIS"), designed for investment in very early-stage companies, may well also undergo changes. Currently, investors committing capital to a VCT will receive a tax break of 30% so long as they hold the investment for a minimum period of five years. Similarly, the SEIS relief allows investors to claim up to 50% of the capital invested as a reduction on their income tax bill. So long as they hold this investment for three years, any gain made on disposal of the shares will be exempt from capital gains tax liability.
Again, it is not clear what any reform may look like. Given that last year the UK Government extended EIS and VCT tax reliefs for a further ten years it will be hoped that the reforms will be to simplify the schemes and remove some of the more technical barriers on entry in to the schemes. Those that benefit from these tax reliefs should give consideration to the extent of their reliance on them and their ability to adapt if the reliefs were to change. Reform of these reliefs will undoubtedly have an effect, for better or worse, on the flow of capital into businesses. With the UK Government's commitment to growth and fostering a dynamic environment for entrepreneurs it is hoped that any reforms will see an increase in the availability and utilisation of SEIS, EIS and VCT tax reliefs.
A move towards tighter compliance
The Chancellor stated the UK Government's intention to raise an additional £1 billion per year by 2029-2030 through better equipping HMRC to do its job. The UK Government has already committed to invest an additional £300 million into HMRC over the course of the next five years with aims to increase the debt management capacity via the hiring of more debt management staff. Alongside the Spring Statement, the UK Government announced a number of consultations with the shared focus of tightening compliance to raise additional revenue and closing the tax gap. Of particular relevance is the consultation titled: "Closing in on promoters of tax avoidance". The existence of this consultation makes clear the aim to enhance HMRC's ability to disrupt the business models not just of those non-compliant businesses but also of those linked and engaging with them.
Unfortunately, EIS was an area that was exploited by tax avoidance schemes and will remain under scrutiny. Anyone who will be investing through SEIS, EIS and VCT schemes should ensure that the reliefs are available and the arrangements are justifiable.
With a more stringent approach being taken by HMRC, it is now even more crucial that investors give consideration not only to their own tax obligations but those of the businesses they are investing in. This renewed priority from HMRC may require investors to undergo more rigorous due diligence to ensure those they are investing in have an evidenced history of compliance. Importantly, investors will need to understand their investee companies’ tax planning and strategy perspective so they can have ease of mind when making their investments. With newly reformed penalties and enhanced powers being provided for HMRC to tackle tax avoidance, it is clear: if there is tax to be paid, HMRC will come knocking.
If you are a venture capitalist or an early stage business relying on investment and have concerns about how any changes may affect you, or you would like assistance with your due diligence, or advice on the tax reliefs available, please do not hesitate to get in touch. Our venture and growth capital group regularly works with venture capitalists, and businesses of all types and sizes in relation to early stage investment, the raising of capital and tax compliance.
DWF has the largest venture and growth capital group in the UK with over 85 lawyers in 10 offices, and supports investors and companies across several sectors including financial services, technology, media and telecommunications, life sciences and healthcare and real estate and infrastructure. If you have queries on any of the issues covered in this note please connect with one of our experts.
Please do not hesitate to contact James Cashman, Caroline Colliston, Tom Rank, Jon Stevens, Dhruv Chhatralia BEM or your usual DWF contact.
This article was authored by Adam MacDonald, Trainee solicitor.
