Venture capital trusts (VCTs), enterprise investment schemes (EIS) and seed EIS (SEIS) will no longer be able to invest in renewable energy schemes such as anaerobic digestion and hydroelectric power. In Wednesday's Autumn Statement the government said that all community energy generation undertaken by qualifying organisations will be eligible for social investment tax relief from 6 April 2015, but after this VCT, EIS and SEIS will not be able to invest in them. All other companies benefiting substantially from subsidies for the generation of renewable energy will also be excluded from receiving EIS, SEIS and VCT investment from that date.
VCTs, EIS and SEIS have not been allowed to invest in solar and wind schemes since July because they can no longer benefit from the Renewables Obligation Certificates (Rocs) and the Renewable Heat Incentive (RHI) scheme, and now the Treasury is extending the exclusion to anaerobic digestion, hydroelectric power, and other companies and organisations benefiting from contracts for difference (CFDs). Companies which do not benefit from feed in tariffs, Rocs, RHI, CFDs or foreign equivalents, remain eligible for funding from VCTs, EIS and SEIS.
With regard to VCTs, the change will apply in respect of investments made on or after 6 April 2015 so a VCT must invest in anaerobic digestion or hydroelectric power before the 6 April 2015 for it to be a qualifying investment.
With regard to EIS and SEIS, the change will apply in respect of shares issued on or after 6 April 2015. The underlying investee companies also need to have raised the money and issued shares before 6 April 2015 as no money raised after this date will qualify for the reliefs.
The Treasury says that "this change will ensure that the tax-advantaged venture capital schemes continue to be focused on supporting higher risk small and growing business, provide value for money for the tax payer, and are compliant with state aid rules."
Anaerobic digestion and hydro power do not account for a substantial portion of VCT investments, although the Albion VCTs have some investments in those areas and Triple Point VCT 2011 Hydro Shares is seeking to raise £10m.
"We've done some anaerobic digestion and quite a lot of hydro, but we've limited our overall exposure to renewable energy to 20 per cent of the VCT portfolios - a level which we've now reached – so we're reasonably relaxed about the changes," says Patrick Reeve, managing partner of Albion Ventures.
EIS invested in renewable energy include Downing Renewables Enterprise Investment Scheme tranche 8 (2014/15), Octopus EIS tranche 17 (2014/15), Deepbridge Hydro EIS Fund 2014 and Guinness Sustainable Energy EIS 6 (2014/15).
Deepbridge says that since the announcement interest in its Hydro EIS Fund has shot up. But Deepridge adds that not being able to invest in this area via EIS anymore is not a big loss as it can still do this outside the EIS wrapper, for example, for inheritance tax solutions. It will continue to do EIS focused on areas such as disruptive technologies and life sciences.
Renewable energy Enterprise Investment Schemes
|EIS||Strategy||Seeking (£m)||Closing date*|
|Deepbridge Hydro EIS Fund 2014||Hydroelectric||20||19-Mar-15|
|Downing Renewables Enterprise Investment Scheme tranche 8 (2014/15)||anaerobic digestion and hydroelectric power||20||18-Dec-14|
|Downing Indian Solar EIS tranche 8||anaerobic digestion and hydro||20||18-Dec-14|
|Foresight Anaerobic Digestion EIS Fund||anaerobic digestion||20||02-Apr-15|
|Guinness Sustainable Energy EIS 6 (2014/15)||Hydroelectric||10||31/12/2014/3 April 2015|
|Ingenious Renewable EIS (2014/15)||anaerobic digestion and hydroelectric power||20||27-Mar-15|
|Octopus EIS tranche 17 (2014/15)||renewables||NA||19-Dec-14|
|Oxford Capital Infrastructure EIS (2014/15)||Small scale agricultural anaerobic digestion, high frequency grid support, and other infrastructure projects||40||Evergreen|
|Sustainable Technology Investors Approved EIS Fund 3 (2014/15)||50-67% anaerobic digestion assets, 33-50% hydro assets||10||02-Apr-15|
|TIME:EIS Renewables Tranche 1 to 3 (2014/15)||hydroelectric||10||Evergreen|
|Triple Point EIS||infrastructure and renewable energy||30||Evergreen|
Source: Tax Efficient Review, Clubfinance, Investors Chronicle.
*These dates are intended as a guide and should be checked with the fund provider.
The government, meanwhile, plans to introduce a new social venture capital trust vehicle which will operate in a similar way to VCTs. More details will be published on this next week.
"We welcome the government's commitment to growing the social investment market and believe an evergreen, quoted structure, similar to a VCT, could prove popular among retail investors who are keen to see their money used to encourage positive social results," says Mr Reeve. "However, the tax breaks will need to be thought through carefully in order to compensate for the inevitably modest investment returns and should encourage the very long investment profile that social projects deserve– our own suggestion is that inheritance tax relief would be a crucial ingredient."
In the meantime, investors can access renewable energy infrastructure via investment trusts. Read more about this here.
Gains eligible for entrepreneurs' relief which are deferred and invested into companies qualifying for EIS and the social investment tax relief will retain the lower capital gains tax rate of 10 per cent when the gain is realised. This aligns the existing CGT deferral relief for investments into EIS and social investment tax relief with entrepreneurs' relief, and the change takes immediate effect. Previously, potential investors were discouraged from re-investing gains into unquoted trading companies because of the loss of entrepreneurs' relief on those gains, resulting in them being taxed at 28 per cent rather than 10 per cent.
The government will also introduce a new digital process for investors and companies qualifying for EIS, SEIS and social investment tax relief in 2016, making it easier to use the schemes. The current system for both EIS providers and investors is largely paper based so this new online process should make this simpler and reduce administration.
"The digitalisation of EIS should simplify the administrative processes EIS investors, their advisers and qualifying companies are required to complete, making EIS an even more accessible planning tool," said John Thorpe, business line manager for EIS at Octopus Investments.
A new format for VCT returns will also be developed making it easier for them, for example, to do their tax returns.
The government has also conducted a consultation on tax advantaged venture capital schemes over the summer, and one of the aims was to be able to argue to the European Union that the current investment limits for VCTs and EIS are in keeping with state aid guidelines. An update on this is expected to be published soon, or at least within the first quarter next year.