INNOVATION SUPPORT PACKAGE MAY CARRY EIS RISK

Businesses driving innovation and development will be helped through the coronavirus pandemic with a £1.25 billion government support package. Chancellor Rishi Sunak said the help would ensure firms in some of the most dynamic sectors of the UK economy – ranging from tech to life sciences – are protected through the crisis so they can continue to develop innovative new products and help power UK growth.

However, Harwood Hutton’s head of tax advisory Cormac Marum is calling for clarification on how the new package might affect investors under the long-standing Enterprise Investment Scheme (EIS).

“By taking up the well-intentioned emergency support, some recent EIS investors could be at risk of throwing away future expected tax breaks,” said Cormac. “Not only that, they may be asked to pay back tax relief they thought they had legitimately secured. We are trying to get some clarity on this.”

The Government’s package includes a new £500m loan scheme for high-growth firms, called the Future Fund, and £750m of targeted support for SMEs focusing on research and development. Delivered in partnership with the British Business Bank and launching in May, the Future Fund will provide UK-based companies with between £125,000 and £5m from the Government, with private investors at least matching the government commitment. These loans will automatically convert into equity on the company’s next qualifying funding round, or at the end of the loan if they are not repaid. To be eligible, a business must be an unlisted UK-registered company that has previously raised at least £250,000 in equity investment from third party investors in the past five years.

The Government is committing an initial £250m in funding toward the scheme, which will initially be open until the end of September. The scale of the fund will be kept under review.

The £750m of targeted support for the most R&D-intensive SMEs will be available through Innovate UK’s grants and loan scheme.

Innovate UK, the national innovation agency, will accelerate up to £200m of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis. An extra £550m will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding. The first payments will be made by mid-May.

What is the potential EIS issue? Cormac Marum explains…

Many innovative companies raise money using EIS. It provides investors with up-front tax relief at 30% when making the investment and offers the prospect of a tax-free capital gain should, at the end and against all the odds, the investment proves successful.

Such generous tax relief is subject, not surprisingly, to stringent conditions which the company and the investors must satisfy throughout the three-year initial qualifying period which often commences only once the company commences to trade.

The small print in the tax legislation is notoriously complicated and it appears that by accepting the Government’s new package of measures designed to assist such innovative companies, the EIS investors may breach the complex rules which limit the percentage of shares and loans they can hold if, as required by the new support measure, the EIS investors match the Government loans.

I can see a solution, which would be a simple addition that says that any loan given by an EIS investor in connection with the Government’s new package to protect innovative companies is, by definition, a ‘normal commercial loan’. That should resolve the issue at a stroke.