UK venture capital market review should look to simplify tax rules

Peter Morley of Pinsent Masons said: “The various tax reliefs available when investing in venture capital structures provide valuable stimulus to investment. Given that the Treasury inquiry seeks evidence on options for change, it is hoped that the inquiry provides an opportunity for the industry to raise some of the challenges associated with the complexity of the tax rules.”

A call for evidence into aspects of the venture capital market was published by the House of Commons Treasury Committee at the end of April. The short inquiry document specifically asks for feedback on the operation and effectiveness of the venture capital market, including options for change of the current tax incentives such as the Enterprise Investment Scheme (EIS), and the Seed Enterprise Investment Scheme (SEIS).

“At a time of increasing uncertainty in the economy, the inquiry provides an opportunity for those involved in the venture capital industry to shine a light on the enormous contribution venture capital backed businesses make to the UK economy,” said Morley.

EIS relief aims to encourage investment in start-up companies. Where certain conditions are met, income tax relief at 30% is available for individuals investing in qualifying companies on the amount invested up to £1 million in any tax year. The limit is increased to £2m for investment in a “knowledge intensive company”.

Gains on any increase in value of those shares are tax exempt provided the individual holds the shares for more than three years. Although offering attractive tax incentives for investment in start-ups, the conditions are complex.

For smaller companies, SEIS may be available. The qualifying conditions are based very closely on EIS. Although the maximum amount of investment qualifying for SEIS relief is quite low, at only £100,000 a year, in certain circumstances, qualifying investors will be able to claim income tax relief of 50% of the cost of buying shares in the company. Qualifying SEIS investors will also be exempt from paying tax on gains on SEIS shares and benefit from a 50% exemption from tax on gains reinvested into SEIS shares.

Beyond tax, the Treasury inquiry also focuses on the current state of the UK venture capital industry, the operation and effectiveness of the various regulatory regimes governing the industry and the effectiveness of current venture capital policies in meeting wider government objectives, such as ‘levelling-up’, the aim for the UK to be a science and technology “superpower” and delivering on the net zero emissions target. The document is particularly seeking evidence on the effectiveness of the UK regime when compared internationally.

The consultation is open until 7 June 2022.