The government is taking aim at VCTs and EISs with a new consultation aimed at clamping down on activity it considers as being against the spirit of the tax-free structures.
VCTs may also face a ban on investing in renewable energy companies, while the government confirmed its opposition to VCT conditional share buybacks.
In this year’s Budget, the government said it was “concerned about the growing use of contrived structures to allow investment in low-risk activities that benefit from income guarantees via government subsidies”.
This means that instead of doing what they were designed to do, invest in normal risky companies that can’t get funding elsewhere, VCTs and EIS have found ways to generate low-risk income for investors combined with significant tax relief.
They have done this by investing in areas that have implicit or explicit government backing.
One particular area the government will focus on is the renewable energy sector.
Ben Seager-Scott, senior research analyst at Bestinvest, said a large number of VCTs had been looking to make investments in the renewable sector recently.
Part of the attraction is that, as well as the income from the business itself, renewable businesses can sell renewables obligation certificates (Rocs). Rocs are certificates that declare that the energy being produced is renewable.
These Rocs are then sold to big energy companies that use them to meet their government quota for investing in renewable energy without having to generate that renewable energy themselves.
As the ability to sell Rocs is a government-backed scheme, VCTs investing in these companies are benefiting from government backing.
Mr Seager-Scott said the near term impact of this consultation and focus on Rocs was unclear, and the industry would likely be talking with the Treasury in the coming days to work out the details.
But he suggested the direction of travel seemed to be that eventually VCTs will be banned from investing in companies that benefit from these Rocs.