The government has followed up its Patient Capital Review with a consultation exploring possible options for an Enterprise Investment Scheme (EIS) fund structure aimed specifically at investment in knowledge-intensive companies.
The paper, Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund consultation, said the government would do this while making clear the limitations within which such a fund model would operate.
A further aim of the consultation is stated as being to build the government's understanding of the capital gap that knowledge-intensive companies face and to seek views on the best way of closing that gap.
The government stressed it did not intend to introduce a new scheme but, rather, envisaged any new fund model would build on the existing EIS rules. It said, for example, it did not plan to change the requirement that all EIS investment must be equity investment in ordinary shares, or to reduce the three-year holding period that applies to EIS investments.
Instead, the consultation paper suggested, any new fund model would need to focus on investing "nearly entirely" in knowledge-intensive companies, adding: "However, it is possible a small proportion of investments - possibly 10%-20% - could be in non-knowledge-intensive EIS companies."
Any new knowledge-intensive fund would be subject to HM Revenue & Customs (HMRC) approval, the government has anticipated, which would place "a compliance obligation" on fund managers - "although the precise extent of this would depend on the incentives attaching to the fund and the way in which tax relief is given".
As an example, the paper pointed to the way approved fund managers already provide information to HMRC concerning their investments, the investors in the fund and other relevant information. "These obligations would need to be formalised and strengthened to ensure HMRC has adequate oversight of the fund, including annual reporting obligations and that the structure is robust against attempts to use it for aggressive tax planning," it added.
The government also said it was committed to simplifying the tax system, continuing: "Any new EIS fund model would therefore be accompanied by the removal of the current HMRC-approved fund structure for general investments, which has a low take-up and confers relatively few benefits on fund managers or investors."
Seeking respondents' views about which incentives would be most effective in attracting investment to high-risk, knowledge-intensive companies and ensuring those investments are made for the long term, the consultation paper set out a range of alternatives relating to dividend tax exemption, capital gains tax relief (CGT), extended carry-back of income tax or CGT deferral, and upfront tax relief.
The government concluded by saying it wished to ensure "the EIS knowledge-intensive fund is well designed and targeted while being robust against abuse" and committing to provide "an update on implementation" as part of its response to the consultation.
The consultation is set to close at 5pm on 11 May 2018 and responses can be emailed to [email protected] or sent to Joseph Spencer, Business and International Tax, 1 Yellow, HM Treasury, 1 Horse Guards Road, SW1A 2HQ.