Income Tax: exclusion of energy generation from venture capital schemes
Published 9 December 2015
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Who is likely to be affected
This measure will affect certain companies and their investors intending to use the tax advantaged venture capital schemes - the Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) - and, at a later date, an enlarged Social Investment Tax Relief (SITR).
General description of the measure
This measure makes amendments to the excluded activities lists, so that any company whose trade consists substantially of energy generation activities (including the production of gas or other fuel), will be unable to use the venture capital schemes. These activities will also be excluded from SITR when this scheme is enlarged.
Policy objective
The measure ensures that the venture capital schemes continue to remain well-targeted and sustainable. The measure ensures that investment into those companies most in need of support in accessing finance, smaller higher-risk companies seeking to grow and develop, is not crowded out by the presence of low-risk investment opportunities.
Background to the measure
The government has taken several steps in recent years to exclude certain energy generation activities from the venture capital schemes, including in 2012, 2014, and 2015.
At Summer Budget 2015 the government announced that it would monitor the use of the EIS, SEIS, VCT and SITR by community energy schemes to ensure that they continue to represent value for money for the taxpayer.
As part of the passage of Finance (No. 2) Act 2015 the government announced that the subsidised generation of renewable energy by community energy organisations and activities concerning the provision of reserve energy generating capacity would cease to be qualifying activities for the venture capital schemes.
These activities ceased to be qualifying activities for EIS, SEIS and VCT with effect from 30 November 2015 and will not be eligible for SITR when SITR is enlarged. This tax information and impact note takes account of the impact of those measures.
Previous exclusions of subsidised energy generation activities have resulted in investment shifting to other forms of energy generation, rather than to higher-risk investment that the schemes are intended to support. Therefore this measure excludes all remaining forms of energy generation from the tax-advantaged venture capital schemes.
Action will be taken on enlargement of SITR, expected within 6 to twelve months, to exclude all remaining energy activities.
Detailed proposal
Operative date
The measure will have effect from 6 April 2016 for the exclusion of all energy generation activities from the venture capital schemes.
Current law
The EIS legislation is contained in Part 5 of the Income Tax Act (ITA) 2007.
The SEIS legislation is contained in Part 5A ITA 2007.
The SITR legislation is contained in Part 5B ITA 2007.
The VCT legislation is contained in Part 6 ITA 2007.
Proposed revisions
Legislation will be introduced in Finance Bill 2016 to make amendments to the excluded activities lists of the venture capital schemes. Activities involving the generation of any form of energy, including the generation or export of electricity, the generation of heat and the production of gas or other fuel will be added to the excluded activities list.
Summary of impacts
Exchequer impact (£m)
| 2015 to 2016 | 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|---|
| +15 | +95 | +95 | +95 | +90 | +95 |
These figures are set out in Table 3.1 of Autumn Statement 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2015.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
The costing accounts for a behavioural response whereby a proportion of the investment excluded is reinvested elsewhere through these schemes.
Impact on individuals, households and families
There may be some impact on individual SEIS, EIS and VCT investors who have been expecting to make particular investments in companies intending to carry out the excluded activities. These investors reflect the demographic of investors in these schemes. These individuals will not be eligible for tax relief on investments made on or after the amendments to the excluded activities list take effect, where the investments no longer qualify under the tax-advantaged venture capital schemes.
The measure is not expected to impact on households or the formation, stability or breakdown of families.
Equalities impacts
The changes to the schemes are not likely to change the impacts of the policy on any group. After careful consideration, the government has concluded that there are no significant impacts on groups of people sharing protected characteristics differently to other groups, and has not identified any equalities impacts.
Impact on business including civil society organisations
This measure is expected to have a negligible overall impact on businesses and civil society organisations. Funds will incur some one-off administrative costs to check that their investments meet the new conditions. These costs are expected to be negligible.
Small and micro business assessment: the impact will be the same for all businesses that are currently eligible for the tax-advantaged venture capital schemes.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
The additional costs to HMRC in implementing this change are anticipated to be negligible. There will be some small costs in updating forms and guidance.
Other impacts
Competition assessment: the changes should not have any impact on competition as they do not affect or limit suppliers’ ability to compete.
Wider environmental impact: this measure is not expected to have a material impact on climate targets.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns. Uptake of the reliefs in terms of numbers of investors and investees, amounts of investment and the distribution of levels of investment will continue to be regularly monitored and published.
An evaluation of the EIS and VCT schemes will be completed in accordance with the state aids evaluation requirements. This report should be published by the end of 2019.
Further advice
If you have any questions about this change, please contact Alex Buckley on Telephone: 03000 586048 or email: alex.buckley@hmrc.gsi.gov.uk.