The ‘Sunset Clause’ And Its Potential Impact On EIS Tax Relief
Investors have been encouraged to invest in early-stage start-ups by various venture capital schemes, including the Seed Enterprise Investment Scheme (“SEIS”), Enterprise Investment Scheme (“EIS”) and Venture Capital Trust Scheme (“VCT”), which have greatly benefited the UK economy. The EIS scheme saw 3,755 companies raise a total of £1.66bn between 2021 and 2022, while 4,165 firms raised £1.89bn the year prior, according to data from HM Revenue & Customs.
The ‘Sunset Clause’ was introduced by the Treasury for EIS and VCT reliefs to be reviewed and renewed by 6 April 2025. This clause was requested by the European Union to review the assistance the UK government was providing to UK businesses under the aforementioned schemes. As the UK is now no longer bound by such EU requirements, it was envisaged that the Government would confirm that EIS will be made permanent, but such assurances have not yet been forthcoming. Interestingly, there is no sunset clause currently proposed for the SEIS scheme.
Effects of the Sunset Clause
The prospect of such a sunset clause has sparked considerable alarm. Many UK venture capital bodies have raised concern over the closure of the schemes, which they have said would deter investors in young, high-risk start-ups. For example, Will Fraser-Allen, Chair designate at The Venture Capital Trust Association (VCTA), stated:
“There is an absolute recognition that what we do is high risk. We’re backing young companies without track records and a significant number will fail,” said Will Fraser-Allen, Chair designate at The Venture Capital Trust Association (VCTA). But what the tax incentives are designed to do is to unlock the pool of capital from retail investors, and whenever we have surveyed our shareholders we always come back with absolute resounding confirmation that it is because of those tax incentives.”
Fraser-Allen also stated that these schemes play a vital role in ensuring that early-stage companies can unlock investment opportunities to ensure that they grow to be both of scale and importance.
Given the importance of EIS tax relief to the UK economy we expect that the UK Government will Government will almost certainly not let the tax relief offered under the schemes expire. Hopefully they will instead use the sunset clause as an opportunity to improve the availability and ease of use of these shares.
Opportunity to Improve
Some commentators have suggested the sunset clause presents an opportunity for the improvement of the schemes. One key focus of this is the seven-year rule, which prevents investment into businesses that are more than seven years old. Others call for simplification of the legislation surrounding the schemes (particularly EIS) as it is often considered that it is too complex and there is not enough publicity as to its benefits:
The EIS scheme is complex and there are indeed provisions that can be missed or misinterpreted entirely without specialist knowledge. Terms such as ‘preferential right’, ‘risk to capital’ and ‘excluded activities’ have a whole range of inherent complexity. A great deal of simplification of the complex provisions are needed and would be welcomed both from the perspective of companies and investors.
There are many situations where companies either consider EIS to be “too difficult” or “not beneficial” and it is regrettable that in these situations it is not considered at all. Therefore, the benefits of EIS should be publicised more widely to ensure that more companies and potential investors understand and take advantage of the tax reliefs available to them.
How we can help with SEIS/EIS compliance requirements
At JLN we understand the importance of submitting well-considered EIS advance assurance and compliance statement applications to HMRC, and our expertise ensures that your application has the best possible chance of success. Please see our dedicated SEIS/EIS services page which provides further details as to how we can assist you and your business.