Tax
Enterprise Investment Scheme: Cracking down on misuse of tax breaks |
|
|
| Tax | |
| Written by Shimon Shaw, Solicitor in the Wealth Management team for Matthew Arnold & Baldwin LLP. | |
| Tuesday, 04 October 2011 | |
|
Test to be introduced to catch tax cheats.
Over the last few weeks, HM Treasury and HMRC have announced that they plan on cracking down on the misuse of the tax breaks offered by the venture capital schemes – the Enterprise Investment Scheme (“EIS”) and the Venture Capital Trusts (“VCT”) schemes. In a consultation document which closed on 28 September 2011, the Treasury state that “the Government has concerns over companies that appear to have been created solely for the purpose of allowing relief under the schemes to be accessed. One proposal to tackle this problem is a test which would consider a number of characteristics commonly displayed by such companies. Companies found to be displaying a certain amount of these characteristics would be disqualified from the scheme.” The abuse relates to the highly complex rules for companies to qualify for EIS or VCT status, some of which are summarised below. Since VCTs are themselves listed companies, with all that entails, it is hard to see how one could seek to circumvent these rules other than in very exceptional circumstances. It is therefore more likely that any changes will focus on the EIS. I have concerns about the implementation of any changes (final proposals are not yet known) since these are key reliefs for start ups and any restrictions have the potential to damage the ability of new businesses to raise funds from business angels. Further, the reliefs already contain a number of anti-avoidance provisions designed to prevent EIS relief for certain types of company – typically the investor’s personal company. If any changes are too broad, then there is a risk to growth in this active part of the economy. For now we will have to see. The rest of this article considers, very briefly, some of the conditions for relief. Before getting into the details, it is important to recall that there are two sides to the story. From the investee companies’ point of view these reliefs are a superb selling point and can greatly assist in attracting new investment. Investors, need to be consider that whilst the tax reliefs sound attractive, EIS and VCT investments are typically made in businesses with potential for high risk and reward. Investors should consult with a financial adviser prior to acquiring any EIS or VCT investments. EISEIS relief is only available for individuals who make direct investments in companies (or investments through a nominee or an EIS investment fund) that qualify under the scheme. Income tax reliefInvestors may claim relief against income tax, up to a total investment of £500,000 a tax year (increasing to £1 million from 6 April 2012) if this is used to subscribe for new ordinary shares. The relief is equivalent to 30% of the amount invested, provided that the shares are held for, broadly, three complete years. Investors can carry back relief for 100% of the investment and set it against income of the previous tax year. Capital gains tax exemption and loss reliefAn investor qualifying for income tax relief is also entitled to exemption from capital gains tax on a disposal of those shares. Capital Gains Tax deferral The payment of tax on a gain on any asset can be deferred by investing the gain in EIS eligible shares. Unlimited deferral is available for a subscription made in a period beginning one year before and three years after the investor has realised the gain. Qualifying companies The conditions for a company to qualify are complex and include :• Limits on the gross assets (no more than £7 million immediately before the shares are issued and £8 million afterwards) (due to increase next year). • The company must carry on a "qualifying trade" or be the parent company of a trading group. • The company must be unquoted at the time of the share issue (AIM listing is allowed). • The money raised by the share issue must be employed within 2 years for the purpose of the qualifying trade, although an insignificant amount can be used for any other purpose. Since these rules are complex it is possible (and recommended) to obtain advance assurance from HMRC. Venture capital trustsA venture capital trust (VCTs) is a vehicle for indirect investment in shares listed on AIM (and other unquoted shares). Investments are made into the VCTs itself, which in turn invests in the debt and equity of a spread of unquoted smaller companies. Income tax reliefSimilar (but less generous) to EIS, relief is at 30% on up to £200,000 invested each tax year in new VCT shares, provided that the investor's VCT shares are held for at least five years. Tax reliefs on sharesInvestors in VCTs are exempt from CGT on any chargeable gains on the disposal of the VCT's shares and exempt from income tax on dividends from the VCT. The dividend relief and exemption from CGT on disposals apply to both new issues of shares and the acquisition of existing shares.
|
|
Digg it! 
del.icio.us 
Newsvine 
Reddit 
Stumble It! 
