Income Tax relief and the Enterprise Investment Scheme approved knowledge-intensive fund
Published 11 July 2019
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Who is likely to be affected
Companies and individuals using the Enterprise Investment Scheme (EIS), fund managers, and other promoters and advisers associated with the EIS.
General description of the measure
This measure amends the current EIS approved fund rules to focus investment on knowledge-intensive companies. It also provides additional flexibility for fund managers to make subscriptions in shares and for investors in the timing of the claiming of tax relief.
Policy objective
This measure helps to ensure that tax-advantaged EISs continue to encourage fund managers to specialise in knowledge-intensive companies.
Background to the measure
At Autumn Budget 2017, the government published its response to the Patient Capital Review (PCR) and its accompanying consultation Financing Growth in Innovative Firms.
As part of a re-focusing of the venture capital schemes on higher risk, innovative firms, it announced that ‘a new knowledge-intensive EIS approved fund structure will be consulted upon, with further incentives provided to attract investment’.
The government published a consultation, ‘Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund’, on 18 March 2018 which asked for views on improving the supply of capital for knowledge-intensive companies.
The consultation responses suggested that the new rules for the approved fund provide more flexibility for investors to claim relief.
The Chancellor announced at Spring Statement 2019 that HMRC would publish the EIS approved guidelines of proposed policy and practice for approving funds.
The published legislation in the Finance Bill 2019 includes powers for HMRC to set appropriate conditions and approve funds. New guidance will be published alongside the Finance Bill.
Detailed proposal
Operative date
The measure will have effect from 6 April 2020.
Current law
The current EIS legislation is contained in Part 5 of Income Tax Act (ITA) 2007.
Proposed revisions
Legislation will be introduced in Finance Bill 2019 to amend the requirements for an EIS approved fund in section 251 ITA 207.
The rules will be amended to introduce an ‘approved knowledge-intensive fund’ that will:
- require the funds to focus on investments in knowledge-intensive companies
- give approved funds a longer period over which to invest fund capital (requiring 50% investment within one year of the fund closing and 90% within two years, compared to the current requirement of 90% within one year)
- allow investors in an approved fund to set their Income Tax relief against liabilities in the tax year, or against their liability of the previous tax year, before the fund closes
The fund manager must provide HMRC information relating to their fund.
These changes will be subject to State aid approval.
Summary of impacts
Exchequer impact (£m)
| 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 |
|---|---|---|---|---|---|
| negligible | negligible | negligible | negligible | negligible | negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
The measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure is expected to impact on individuals using the EIS by amending the current EIS approved fund rules to focus investment on knowledge-intensive companies.
For individuals who do not currently get full tax relief, or who are able to better optimise their position by moving the relief to different years, the impact is expected to be negligible given that gains to be had are small and there are a small number of individuals in approved funds at the moment.
This measure will redistribute investments between unapproved and approved funds as they both have the same rate of Income Tax relief, so there is no additional cost from Income Tax.
There is not expected to be any impact on family formation, stability or breakdown.
Equalities impacts
The measure may impact on individuals in any of the groups sharing protected characteristics, if they invest more in knowledge-intensive companies. If they do they may benefit from the measure.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on approximately 3,700 businesses, fund managers and other promoters and advisers using or associated with the EIS. This measure amends the current EIS approved fund rules to focus investment on knowledge-intensive companies.
One-off costs include familiarisation with these changes and the application of the extended EIS definition of a knowledge intensive company. There are not expected to be any ongoing costs. There is not expected to be any impact on civil society organisations unless using or having association with the EIS.
Operational impact (£m) (HMRC or other)
There will be a negligible impact on HMRC operational staff resources involved in approving and managing applications from EIS funds.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected companies and fund managers.
Further advice
If you have any questions about this change, please contact Alex Buckley on telephone: 03000 586 048 or email: venturecapitalschemes.policy@hmrc.gov.uk.