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After a long wait, early-stage investors will be relieved to hear that the UK government has finally confirmed an extension to the “sunset clause” for Venture Capital Trusts (VCT) and the Enterprise Investment Scheme (EIS). The precise dates are yet to be announced, but the deadline should surpass its previous date of 2025.
Below, we explain why the sunset clause extension matters and how this may affect early-stage investors. We hope these insights are useful. To learn more about our EIS projects and other early-stage opportunities, visit our portfolio page here. For enquiries regarding our latest projects and funding, you can reach us via:
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What is the “sunset clause”?
VCTs and EIS are popular choices for many successful investors because of the attractive tax reliefs they offer. The latter, for instance, allows the investor to claim 30% Income Tax relief on the value of their EIS investments. Given that an investor can commit up to £1m to EIS companies per tax year (or, £2m if these count as “knowledge-intensive”), this mechanism can add up to a lot of money.
Section 157(1)(aa) Income Tax Act 2007 states that this specific perk of EIS – income tax relief – is available for subscriptions to EIS shares before 6 April 2025. This deadline was causing some angst amongst many early-stage investors. Fortunately, with an extension now confirmed, investors should be allowed to continue claiming Income Tax relief past 2025.
In response to the report from the Treasury Committee on the venture capital industry, Richard Stone – Chief Executive of the Association of Investment Companies (AIC) – said:“
We [the AIC] warmly welcome the Treasury Committee’s support for urgent action on the VCT sunset clause.”
Mark Brownridge, a Board member of the Enterprise Investment Scheme Association (EISA), also highlighted the importance of EIS to the UK:
“The report correctly identifies that EIS, SEIS and VCT are globally competitive and a key draw for investors and that the renewal of the schemes represents a fantastic opportunity to extend and improve them.”
What this means for the UK
With the UK still struggling to get the economy back on track following COVID-19, high inflation and surging interest rates, it is vital in 2023 that a healthy ecosystem is encouraged for startups and other high-growth companies to thrive. Schemes such as EIS, SEIS and VCT are essential components to the UK economy, helping the country to stand out on the international stage as a great place to start a business – and invest in one.
The UK offers a range of benefits to founders and investors including the rule of law, a (comparatively) straightforward tax system, access to funding and a wealth of talent. Indeed, large developed nations such as France are currently looking at the UK and devising plans for their own versions of EIS and SEIS, trying to replicate their successes.
Discontinuing EIS would almost certainly affect thousands of jobs across the UK and lead many investors to divert much of their portfolios away from early-stage investments. The government simply cannot afford for that to happen. Of course, the political landscape does still raise some key questions about the future. A general election is due before 2025. So far, however, Britain’s main political parties seem to be focusing on discussions about other areas of taxation – e.g. inheritance tax (IHT) – rather than those pertaining directly to venture capital.
Thoughts of investors going forward
One interesting thing stood out from the Treasury Committee’s report – the authors were quite critical of VC firms which have concentrated their investments in the Capital and the wider South East of England. It is conceivable, therefore, that whilst the “sunset clause” for EIS and VCTs may be extended beyond 2025, there could be reforms soon which try to encourage early-stage investment into other regions of the UK.
Treasury Committee Chair Harriett Baldwin MP noted:
“Firms outside London tend to take longer to get established, which means they are disproportionately penalised by the upper age limits of businesses that can benefit from investment supported by the EIS and VCT schemes.”
Of course, savvy EIS investors will already be aware of the need to diversify their early-stage investments geographically. Yet the report is a good reminder for investors to not concentrate solely on London when picking startups for their portfolios. Indeed, going so could lead to missed opportunities elsewhere. Here at Bure Valley Group, for instance, our exclusive network offers a range of pre-vetted EIS opportunities from many areas of the UK. Perhaps startups such as these could benefit more from future tax reform, funding or regulatory changes if the Treasury report leads to changes in policy.
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