The government plans to consult on creating a new fund structure within the existing enterprise investment scheme (EIS) structure as a method of encouraging cash to go into what it calls "knowledge intensive companies."
HM Treasury had previously produced a paper titled 'Financing Growth in Innovative Firms', back in August 2017, that examined the effectiveness of enterprise investment schemes (EIS) and venture capital trusts (VCT).
The report stated many EIS funds operating in the UK were investing for capital preservation and were not taking the risks to justify the tax breaks attached to the vehicle.
The Autumn Budget back in November saw chancellor Philip Hammond tighten the rules on the sort of companies EIS can invest in, with the aim of forcing capital into riskier investments that have more capacity to contribute to economic growth.
HM Treasury's term for those companies is "knowledge-intensive firms" because they typically have significant research and development (R&D) costs and therefore have the most difficulty attracting financing.
Knowledge intensive companies are those whose value is derived from the intellectual capital they own, rather than from physical assets.
The new fund structure being contemplated by HM Treasury would focus only on those companies.
HM Treasury stated today (13 March), alongside the chancellor's first Spring Statement, that the income tax reliefs available on existing EIS and VCT schemes are "among the most generous reliefs available on such schemes anywhere in Europe" and those rates won't change for any new fund structure.
But HM Treasury stated it may make investments in the new fund structure exempt from dividend tax.
A spokesman for HM Treasury said: "Any design would also need to ensure value for money for the taxpayer and to balance the government's need to ensure fairness across the tax system.
"It should be robust enough to defend against attempts to use the fund model for aggressive tax planning or capital preservation purposes."
The consultation exploring whether a new EIS fund structure is required is open until 11 May.
Mark Brownridge, director general of the Enterprise Investment Scheme Association, welcomed the action being taken by the government to support and increase investment into small businesses across the UK, especially as we move towards leaving the European Union.
Mr Brownridge said more than a quarter of investors believe that Brexit will benefit knowledge-intensive companies, such as those in the fintech and medtech sectors, so the announcement of a new consultation into the creation of knowledge-intensive funds was both timely and in the interests of small and medium-sized enterprises (SMEs).
david.thorpe@ft.com
