The Treasury is thought to be considering plans to come down hard on high-earning individuals who abuse the Enterprise Investment Scheme (EIS) tax relief system.
Proposals being weighed up include cutting the level of EIS tax relief, increasing the period an investment must be held under the EIS scheme to more than two years, and putting greater restrictions on firms that qualify for funds, The Sunday Times has reported.
The EIS scheme is designed to incentivise investment into promising high-risk UK startups, giving much-needed funding to entrepreneurs. However, accusations that the system enables tax avoidance amongst wealthy investors may be causing HMRC to change its rules.
Tax experts have been worried that the EIS scheme may be scrapped altogether as a result of findings from the government’s Passion Capital review of barriers for growing businesses when accessing long-term finance. But, HMRC have instead sought to tighten the rules surrounding the scheme, according to The Sunday Times’ reports.
Qualifying startups can benefit from up to £5m a year in EIS scheme funding, but they must have been operating for less than ten years and have assets worth less than £15m.
In a statement, direct general of the EIS Association, Mark Brownridge, said that changing the EIS scheme ran the risk of “magnifying, not mitigating” problems small companies currently have accessing finance, but admitted a review of the scheme’s rules could be helpful.
He said: “There is no doubt some EIS money is used in ways that do not adhere to the spirit in which the scheme was created. Perhaps this has gone too far and a wake-up call is needed.”
Brownridge added that the EIS Association was in “constructive dialogue” with HMRC to find a way to ensure the EIS scheme remained fair and transparent.
He went on to say: “EIS has been instrumental over its long history in helping small companies to start, grow and build their businesses.”
“We are already facing an extremely uncertain outlook for the economy as the UK leaves the EU. Now is not the time to experiment with whether our economy might prosper without these tax relief schemes.
“We need the innovation that comes from EIS-funded companies, which by their nature are risk-taking ventures and rely on tax reliefs to encourage investment into their businesses from private individuals, without which they may not have the risk appetite.”
According to the EIS Association, since 1994 the EIS scheme has raised over £15.9bn for more than 26,000 small UK companies through angel investors, funds and direct investment.
Recommendations for the scheme’s future are likely to be announced by the chancellor, Phillip Hammond, in his inaugural autumn budget speech on 22 November.
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