HMRC have published another consultation related to Patient Capital, 'Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund'.
The Patient Capital Review outlined how many knowledge-intensive companies struggle to receive the capital they need to grow and scale up. In response to this the government announced an action plan to unlock £20 billion of investment in innovative firms over ten years which included a number of extensions and reforms of the venture capital schemes (Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), Venture Capital Trusts).
The new consultation is in respect of the introduction of a new approved fund structure within the Enterprise Investment Scheme, with the possibility of additional incentives to attract investment. This would be focused on mainly investing in Knowledge-intensive companies (KICs).
The government is not looking at introducing a new scheme, rather a new model based on existing rules where:
- Investment is almost entirely in knowledge-intensive companies but with the possibility that a small proportion of investments, possibly 10-20%, could be in non-knowledge intensive EIS companies.
- Any new such fund would be subject to HMRC approval.
- The removal of the current HMRC approved fund structure for general investments, which has a low take-up and confers relatively few benefits.
The proposals are:
- A dividend tax exemption after a fixed holding period or
- CGT relief by way of the write off of a proportion of gains when reinvestment is in a KIC fund (like SEED Enterprise Investment SEIS) but less than the 50% under SEIS) or
- Extended carry back of income tax relief or CGT deferral, with relief in the period of investment in the fund rather than when the fund invests in the underlying companies which will effectively extend the period in which capital needs to be employed.
The government has said that they would look to introduce some but not all of these options. The consultation closes on 11 May 2018 and responses should be sent to
Consultation questions:
- Why are some younger knowledge-intensive companies unable to obtain the levels of patient capital that they require?
- What would be the best way(s) of further improving the flow of patient capital to knowledge-intensive companies, bearing in mind state aid constraints?
- What barriers are there to the development of investment funds that specifically target knowledge-intensive companies?
- Would a targeted knowledge-intensive EIS fund model help increase the supply of patient capital to knowledge-intensive companies?
- Which of the options outlined above would most attract investors to knowledge-intensive funds? Please rank and critically compare the benefits and disadvantages of each.
- What other features would a knowledge-intensive EIS fund need in order to address the funding gap for knowledge-intensive companies, keeping in mind the constraints within which such a structure would be created?
- Would a ‘patient’ dividend tax exemption provide the right incentive to both attract investors in the fund structure, and encourage longer term approaches to investment?
- To what extent would relief at the level of the fund be attractive when weighed against the additional complexity that would be necessary?
Links:
Financing Growth in Innovative firms: industry panel response
EIS: Enterprise Investment Scheme (Subscriber guide)
SEIS: Seed Enterprise Investment Scheme (subscriber guide)
External link: Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund consultation
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