 Refocusing on higher risk ventures could hit VCT and EIS investment
11 July 2011: A government consultation document on the tax reliefs given to investors in small companies could lead to a significant fall in tax-advantaged investment from April 2012 warns PKF Accountants & business advisers.
As well as developing a new tax incentive for business angels to provide ‘seed-stage’ funding to help new ventures in their set-up stage, the government is consulting on ways to focus the current tax breaks for enterprise investment scheme (EIS) and venture capital trust (VCT) investors on ‘genuine high risk capital investments’. It seems that excluding companies generating electricity and claiming the government feed-in- tariff is just the start: it is seeking ways to exclude companies specifically created to access the tax reliefs. Such companies, often put together by intermediaries, use the investment funds raised to trade but in relatively secure ways – not the sort of business that the government wants to subsidise.
Rhodri Whitlock, partner specialising in VCTs at PKF, said: “These proposals will have a considerable impact on some parts of VCT market. It is only natural that investment managers want to minimise risks for investors and, in recent years, VCTs that have managed to limit the risks for investors have seen substantial increases in funds invested. Limited life and other more secure offerings have been the main source of the growth in VCT investment because they are attractive to investors. If these proposals are enacted, the risk profile of many VCTs is bound to increase in future years. Investors recently tempted in the market may feel that future risks outweigh the tax breaks and decide to invest elsewhere.”
“The industry had been expecting changes to move the EIS and VCT rules back to the principle that you only get tax breaks when you take big risks. But these proposals go further than expected by effectively guaranteeing much more separation between fund managers and investee companies: this will force some VCTs to change their business models.”
Marios Gregori, tax partner at PKF says, “The opportunity to get a higher rate of tax relief for EIS investments and to invest more each year from April 2012 was one of the good news stories in this year’s Budget. Only now do we find out the trade off - that in the future such investments will have to be at the riskier end of the spectrum, higher risk than most investors choose now. Those who don’t move to other investments ‘products’ are likely to want to take a more bespoke approach – perhaps ‘Dragon’s Den’ style matching of investors and companies will be more common.”
Ends
For further information, please contact: Rhodri Whitlock, Tel 01483 408005 (Mobile 07767 843979) rhodri.Whitlock@uk.pkf.com or Marios Gregori, Tel 020 7065 0475 (Mobile 07771 974404) marios.gregori@uk.pkf.com
Notes to Editors:
1. PKF (UK) LLP is a leading firm of accountants and business advisers with more than 1,500 partners and staff operating in 23 offices in the UK mainland firm, incorporating a wholly-owned financial planning company and associated offshore practices. The firm specialises in advising growing and entrepreneurial/owner-managed businesses, AIM and fully listed companies, and also has extensive experience in the public and not-for-profit sectors. Principal services include assurance and advisory; taxation; consultancy; corporate recovery and insolvency; corporate finance and forensic. The firm has particular expertise in advising sectors such as hotels and leisure; mining and resource; public sector; real estate and construction; professional practices; not-for-profit; and medical. The firm’s web site is www.pkf.co.uk
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3. PKF (UK) LLP is a member firm of the PKF International Limited (PKFI) network of legally independent member firms. The PKFI member firms have around 2,200 partners and more than 21,000 staff in around 125 countries.
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