In the recent Autumn Statement, Chancellor Jeremy Hunt announced the long-awaited and hoped for confirmation that the government would legislate to extend the EIS and VCT ‘sunset clause’ to 6 April 2035 (previously 6 April 2025). As entrepreneurs and early-stage investors breathe a sigh of relief, George J asks Roger and Adam for their thoughts on how the schemes have contributed and developed over the years, and their view on the outlook for the next ten years.

Q: By way of some background, how long have you each been advising in relation to the EIS and VCT schemes (the “Schemes”) and how do you think they have evolved during that time?

Adam: I’ve been involved in the EIS and VCT space for over 12 years in which time I’ve seen the Schemes move away from supporting infrastructure projects and older, more established businesses to an almost exclusively early-stage focus. Various provisions such as the restriction on disqualifying arrangements and risk-to-capital gateway test mean investment structures driven by fund managers and institutional investors are far rarer than they once were.

Roger: I began advising on the ‘Business Expansion Scheme (‘BES’) in 1985. The BES was originally intended to tackle the problems of business start-ups attracting investment.

In 1986 all companies holding more than half their net assets in the form of land and buildings were excluded, as were companies whose main purpose was to invest in objects, such as fine wines, whose value might be expected to rise over time.

In 1988, the scope of the scheme was extended to include investment in private rented housing to substantially increase the supply of housing for rent. Investment through the BES came to be dominated by this one sector and the BES acquired a reputation as a vehicle for tax avoidance with the introduction of ‘loan back’ schemes in 1992.

In November 1993, the then Chancellor, Ken Clarke, announced a consultation on a new type of investment – the Venture Capital Trust – and the introduction of the enterprise incentive scheme (‘EIS’) to encourage investment in unquoted trading companies – the son of BES that was intended to avoid some of the drawbacks of its predecessor. EIS replaced BES with effect from 1st January 1994.

Q: How much of a positive impact do you think the Scheme has had over the years that it has been in existence?

Adam: From an anecdotal perspective, I’ve seen multiple companies and entrepreneurs achieve great success, not only in terms of generating wealth for themselves and their investors but also in creating cutting-edge technologies, exciting consumer concepts and multiple jobs. It must also be said that we’ve seen many EIS and VCT backed companies fail. The risks of EIS and VCT investments are very real and the tax reliefs are necessary to cushion the blow of potential investment losses.

What one guidance or policy change do you think has been the most impactful for the Scheme to date?

Roger: The most positive impact has been the introduction of the requirement that investments should satisfy a risk to capital requirement.

Q: What do you think has not worked so well up until this point? Are there any current requirements which you think could be amended, removed, or added in order to remain attractive to early-stage investors moving forward?

Adam: The age restrictions introduce unnecessary complexity to the Schemes and stop worthy businesses raising capital. A business older than 7 years might be just as risky as a business starting out. Every business differs.

Also, entrepreneurs should not be penalised for using an existing corporate vehicle previously used for another business for a new business. At the very least, the clock should track the trade for which EIS/VCT funds are being raised for. Many founders have been denied access to the schemes because of an innocuous decision to save on corporate administrative fees at the outset.

Q: Now that the Autumn Statement has provided long-term reassurance to the Scheme, what else do you think can be done, aside from regulatory changes, to make the Scheme more attractive?

Adam: Allowing the use of some VCT money for replacement capital (which used to be the case pre-2014) would give VCTs access to stronger businesses, more likely to generate returns for the Treasury in the long run.

Roger: The reassurance is technically still only partial! The Autumn Finance Bill provides that the extension of the 2025 date to 2035 comes into force on such day as the Treasury may by regulations appoint.

HMRC has since confirmed by email to us that, owing to the Windsor Framework (the post-Brexit legal agreement between the EU and the UK which adjusted the operation of the Northern Ireland Protocol)…

“the UK-EU Trade and Cooperation Agreement serves as the primary framework governing subsidy control between the UK and EU. For the [EIS & VCT] schemes we are therefore engaging with the EU on approval for extension due to Northern Ireland’s unique access to the EU Single Market.”

The Windsor Framework constrains the limited circumstances in which the initial concept of the old Protocol applies to subsidies to where there is a proven real, genuine and material link to Northern Ireland’s trade with the EU for any proposed aid to be in scope, so the requirement for a ‘proven real’ link rules out all but the largest subsidies and those firms with no material presence in Northern Ireland, and otherwise the Windsor Framework confines the application of EU rules to cases where there is a genuine and material effect on cross border trade.

Given these limited circumstances, we might be forgiven for hoping that this technical uncertainty will be short lived.

George Jones
RW Blears LLP
5 December 2023

Roger Blears

0208 159 2501

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Adam Lawrence

0208 159 2504

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