Investments

New EIS Rules May Sacrifice Investment Tax Reliefs

HM Revenue & Customs (HMRC) has halted processing advance assurances and compliance statements for Enterprise Investment Scheme (EIS) companies that have more than £10 million of risk finance.

The paperwork has also stopped for companies that are more than seven years old and have not yet raised risk finance investment.

The change of rules is to make Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) comply with European Union state funding rules.

HMRC is warning companies and investors that fall into the net that tax relief on risk finance may not be available for equity stakes taken after April 6, 2015.

For VCTs, HMRC warns that raising risk finance may not be a qualifying purpose.

Tax relief claw back

“Current arrangements appliers to any investments made before the new legislation is enacted,” said an HMRC spokesman. “However, the European Union may ask us to take back any tax reliefs if the funding was raised for a company more than seven years old or the investment exceeded £10 million.

“The investment figure could vary as the European Union commissioners work on a limit of 15 million euros. The exchange rate on the date of the investment becomes important as this is the one the tax relief issue will be based on.”

The new rules do not apply to the Seed Enterprise Investment Scheme (SEIS) as the maximum investment is £100,000 in a tax year or £150,000 overall.

HMRC also confirms EIS and VCT investments before April 6, 2015 remain unaffected by the new rules.

The possibility of a change in EIS investment rules was put forward in George Osborne’s Budget 2015, when draft legislation to change the rules was also published.

Risk finance issue

However, HMRC and the EU have discussed the implications resulting in the new guidance.

Under the new rules, before HMRC can issue an advance approval certificate for EIS or VCT, the company has to supply additional information, including the age of the company, the status of the investors and whether any risk finance was raised before or after April 6, 2015.

The guidance gives examples of whether HMRC can give advance assurance to investors so they can claim tax relief.

EIS offers 30% income tax relief and capital gains tax reliefs on raising cash for an initial investment and the growth in value of shares, providing the company qualifies for the scheme and the shares are held for at least 36 months.

For a detailed definition of risk finance for SEIS, EIS or VCT, see the HMRC web site.

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