Tim Smith

Written by: Tim Smith and Mike Down

Tim Smith

Office Managing Partner, Basingstoke

HMRC's targeting of EIS investors could damage the growth of the UK economy

HMRC appears concerned about perceived abuse of the enterprise investment scheme (EIS) tax reliefs available to individuals. It is undertaking a data-mining programme, using profiling, to open detailed formal tax enquiries into the personal tax affairs of investors, principally to gather data.

EIS is a government-approved programme, highly regulated by legislation, to enable new businesses in their formative years to attract equity investment to help them develop and grow, at the time when they are in most need of investment. More traditional sources of finance such as bank borrowing are generally not available to such early stage unproven companies.

Under EIS, investors can claim 30 per cent income tax relief on investments of up to £1m in shares held for at least three years. On disposal, any gains are exempt from capital gains tax.

Before investors can claim tax relief under EIS, the investee company must go through a detailed process and supply significant information to HMRC. Only when HMRC is satisfied will the relevant documentation (forms EIS3) be issued to the company, for distribution to investors.

This approach by HMRC may dissuade individuals from making investments that are critical to new entrepreneurial businesses and the growth of the UK economy. While HMRC may have genuine concerns about perceived abuse, it is critically important that its investigations are targeted precisely. For individuals whose tax affairs are beyond reproach, receiving notification of a formal tax enquiry can be very distressing. This is particularly so when they have invested under a government-approved and promoted scheme, designed specifically to attract wealthy individuals to provide equity investment for entrepreneurial companies.

The understanding is that the overwhelming majority of EIS investors make genuine investments into qualifying companies which have a very significant impact on the growth of these entrepreneurial businesses.

An attack by HMRC on individuals who are prepared to provide risk capital could have a very negative impact on this vital source of investment. Numerous studies have concluded that this is the most difficult period of growth to fund, which is why seed EIS with higher tax reliefs was introduced. 

HMRC’s investigation initiative comes at a time when the amount raised under EIS has fallen by £41m, according to government figures released last October. In 2015-16, funds totalling £1,888m were raised under EIS compared to £1,929m in 2014-15. A large proportion of companies (44 per cent) obtained investments of £150,000 or less in 2015-16 so this is a vital source of funding.

More than £16bn has been raised under EIS since its launch in 1993.

For more information please comment below or get in touch with Tim Smith or Mike Down.

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