EIS and VCT income tax relief has been considered to be a form of State aid by the EU, and the UK was required to introduce an expiry date on these schemes (a sunset clause) when the last EU approval was granted in 2015. As it stands, the current legislation is due to expire on 05 April 2025. The government may amend or abolish this sunset clause by secondary legislation.
The sunset clause, were it to be activated, would affect subscriptions for shares made after 5 April 2025 and would affect access to 30% income tax relief for both EIS and VCT investors. It would not affect EIS or VCT investors where shares have been issued before that date, nor would it affect access to Business Property Relief, tax-free growth, or capital gains tax deferral under EIS, or tax-free growth and dividend tax relief for VCTs – as these tax reliefs are not subject to the sunset clause. There is no similar provision for SEIS, as the smaller investment limits make it a de minimis State aid, so SEIS is unaffected by the sunset clause.
If not amended, the sunset clause could have a significant impact on EIS and VCT managers’ ability to raise funds after 05 April 2025 and continue to support their existing portfolios of investee companies.
The EIS and VCT schemes fall within the remit of Treasury ministers, and the EISA understands that the Government is likely to address this at a fiscal event before the end of 2023. The EISA is keen for the government to announce its intentions quickly to alleviate any investor concerns, as it has a significant impact on the start-up businesses that the UK government is keen to support – as evidenced by the continued shaping of the schemes’ rules to target funding appropriately – for example the recent amendments to the Knowledge Intensive EIS approved funds. The Association of Investment Companies (“AIC”) which represents VCTs is also asking the government to take early steps to remove or defer the clause to ensure VCTs can continue to fund smaller businesses seeking growth capital. This request is consistent with the government’s ambition to make the UK one of the best countries in the world to set up and grow a small business. The AIC also wants the government to take steps to address the sunset clause before the end of 2023.
For more information on the sunset clause with respect to EIS you can read the EISA’s guide to the sunset clause hosted by Intelligent Partnership: https://intelligent-partnership.preview.ceros.com/eis-may-2022/page/page-6282a4fb4581e
For more information on the sunset clause with respect to VCTs you can read the AIC’s submission paper to the Treasury Select Committee on the subject: https://committees.parliament.uk/writtenevidence/109003/html/