At first glance, there seemed to be little mention of the venture capital schemes in today’s Spring Budget. However, there is scope for the Seed Enterprise Investment Scheme (“SEIS“), the Enterprise Investment Scheme (“EIS“) and Venture Capital Trust (“VCT“) reliefs to be subject to scrutiny through the ‘Patient Capital Review’. The Chancellor stated the review will “consider existing tax reliefs aimed at encouraging investment and entrepreneurship to make sure that they are effective, well targeted, and provide value for money“. HM Treasury have confirmed that EIS will be included as part of this review and a consultation will take place in Spring 2017.
The only other published comment on S/EIS relates to a technical change included in the Finance Bill published in December which will be coming in as anticipated. EIS relief is not available in relation to an issue of shares where there is a ‘pre-arranged exit’ inherent in the shares or the arrangements relating to their issue. This forms part of a package of rules designed to ensure that an S/EIS investor’s return on investment is not in any way protected or guaranteed.
The draft Finance Bill includes provision to ensure that shares carrying a conversion right from one class of shares to another do not fail the S/EIS ‘pre-arranged exit’ test. In our view (which we believed to be shared by HMRC), a right to convert a share from one class to another would not, under the existing rules, have constituted an arrangement for a ‘pre-arranged’ exit causing S/EIS relief to be denied. However, rights to convert shares from one class to another ” will be excluded from being an arrangement for the disposal of those shares within the no pre-arranged exits requirements…for shares issued on or after 5 December 2016“. This indicates that shares issued prior to that date containing conversion rights do not qualify for S/EIS.
Whilst the existence of a conversion right will not (specifically for shares issued after 5 December 2016) be fatal to their initial S/EIS qualifying status, HMRC will regard any exercise of a conversion right within the three year minimum holding period as a disposal which could result in clawback of S/EIS relief.
We understand that the anticipated response to the Government’s consultation on streamlining HMRC’s EIS Advance Assurance service will not be published until the end of March.