The Chancellor of the Exchequer has presented Autumn Budget 2017 to Parliament.
One of his most significant announcements – formally unveiled in the government’s response to its consultation to its ‘Financing growth in innovative firms’ – was that the qualifying rules of Entrepreneurs’ Relief will be changed to ensure that entrepreneurs are not discouraged from seeking external investment through the dilution of their shareholding.
By allowing founding entrepreneurs to elect to be treated as disposing of and reacquiring their shares at the then market-value will enable new funding to be raised and stimulate further investment in small, growing companies. This will remove a major obstacle for growth in small and mid-size quoted companies and incentivise entrepreneurs to grow their businesses by introducing new shareholders without being at a significant tax disadvantage to external investors.
The Quoted Companies Alliance patiently and persistently campaigned on this aspect of Entrepreneurs’ Relief reform in both our response to the ‘Financing growth in innovative firms’ consultation and in our proposals for taxation reform, which we submitted to the Chancellor and HM Treasury in September 2017. We believe changing the rules of Entrepreneur’s Relief in this regard sends a strong signal that the UK values those prepared to take a high risk in investing in growth companies.
Other announcements made by the Chancellor included:
- Save As You Earn scheme – Employees on maternity and parental leave will be able to take up to a 12 month pause from saving into their Save As You Earn employee share scheme, increased from 6 months currently. The change will take effect from 6 April 2018.
- Research and development expenditure credit – To encourage companies to invest, the R&D expenditure credit will rise from 11% to 12%.
- Business Property Relief (BPR) – The government restated its commitment to protecting the important role that this tax relief plays in supporting growth investment in AIM and other growth markets. It will keep BPR under review.
- Tax-advantaged venture capital schemes (the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) – A principles-based test will be introduced into the tax-advantaged venture capital schemes to ensure that schemes are focused towards investment in companies seeking investment for their long-term growth and development. The new test will not affect independent, entrepreneurial companies seeking to expand. However, tax-motivated investments – where the tax relief merely intends to preserve an investors’ capital – will no longer be eligible.
The new ‘risk to capital’ condition will have two parts: first, whether the company has objectives to grow and develop over the long-term; and second, whether there is a significant risk that there could be a loss of capital to the investor of an amount greater than the net return. It is hoped that the exclusion of capital preservation arrangements from the schemes is also expected to reduce waiting times for genuine growth companies seeking HMRC’s opinion on the eligibility of prospective investments under its Advance Assurance service for the venture capital schemes.