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Many UK investors have long enjoyed the tax benefits of schemes like Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS). However, recent news has highlighted a potential issue with the looming “sunset clause” in the relevant legislation.
Below, we explain the nature of the sunset clause, where things stand in 2023 and the likelihood (and implications) of an extension. We hope these insights are useful.
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What is the VCT / EIS “sunset clause”
Under Section 157(1)(aa) of the Income Tax Act 2007, subscriptions for shares held by investors under the EIS, prior to 6 April 2025, are allowed to enjoy income tax relief.
Both VCTs and EIS investments can offer investors up to 30% up-front tax relief, provided investors hold their shares for a minimum period. For instance, if an investor commits £100,000 to an EIS opportunity then she could claim back £30,000 due against her 2023-24 tax bill.
However, today in August 2023, the aforementioned date – 6 April 2025 – is not too far away. This is the point at which income tax relief for VCTs and EIS may become unavailable, assuming there is no extension.
Historically, EIS tax relief has fallen under the EU definition of “State aid” – requiring notification to the European Commission (approval was last given in April 2015). Now that the UK is no longer an EU member, however, this is now outdated.
The Income Tax Act 2007 also gives the UK Treasury power to change the 6 April 2025 deadline – “to substitute a different date for the date for the time being specified there.”
Note that SEIS (the Seed Enterprise Investment Scheme) is not affected by this sunset clause. It is considered a de minimis State aid since it is for smaller investment amounts. As such, under current rules SEIS investors can continue enjoying tax reliefs beyond 6 April 2025.
Will the government extend the sunset clause?
Frustratingly for EIS/VCT investors, the government has refused to confirm the extension of the sunset clause – despite repeated questions from MPs to the Treasury Committee in June.
Andrew Griffith, the economic secretary, argued that “It is the nature of parliament that we do not bind our successors any more than we absolutely need to.”
Conversely, Griffith also noted that the schemes “work well for the British economy, they work well for taxpayer fairness.”
The comments jarred with those from Kwasi Kwarteng, the previous Chancellor, who confirmed in his 2022 September “mini budget” that VC schemes would safeguarded beyond 2025.
Why the new reluctance from the Sunak/Hunt government? One reason could be that the political landscape has shifted since September 2022.
The Labour Party now enjoys a strong lead in the polls amongst voters. A Labour government may not be as friendly to the VC sector as the Conservatives, although the party has not issued overt signals either way.
The next UK general election can be held no later than 24 January 2025. Realistically, therefore, the Conservatives only have a year or so to close the gap in the polls. Over that time, high inflation and other economic issues may not be fully solved.
On its website, the present government states that the Treasury committee “Continues to express the importance of the EIS and VCT schemes and a desire to extend their sunset clauses.”
The government has also expanded the yearly company investment limit for SEIS, from £150,000 to £250,000. This suggests that the government wants to encourage investment into the UK’s startup scene – with more inclusive eligibility criteria.
Implications for investors
At present, there is no evidence to suggest that EIS or VCTs are threatened by regulatory change. Indeed, despite the reluctance of the Treasury committee, there are good reasons to be optimistic about the prospect of a tax relief extension by 2025.
The wider signals coming from the government indicate a desire to encourage investment into the UK’s early-stage companie – e.g. Jeremy Hunt’s plans to let pension funds invest 5% of their holdings into private equity.
Certainly, authorities will not want to encourage widespread capital flight by early-stage investors. However, investors should continue to receive updates about the EIS landscape and stay attentive to any potential changes.
Some may have concerns that pension funds venturing into private equity could leave less room for angel investors to offer value to startups looking for funding. However, Jeremy Hunt does not appear to be explicitly targeting the seed stage(s) with his plan.
Indeed, pension providers are naturally cautious when picking investments. They are likely to prefer early-stage companies which are further along their lifecycle, with a solid number of profitable years behind them to offer proof of concept.
In short, angel investing – and EIS – are likely to remain relevant for many years to come.
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