South: New tax relief rules could hold back tech sector, warns Baker Tilly

South: New tax relief rules could hold back tech sector, warns Baker Tilly

Accountancy firm Baker Tilly is warning that new rules introduced in this year’s finance bill could jeopardise growth plans for tech businesses in the south.

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are government initiatives which offer attractive tax breaks to small businesses in the UK. EIS offers tax breaks to investors purchasing shares in small private companies, whereas SEIS is aimed at those investing in even smaller companies.

Both schemes, along with Venture Capital Trusts (VCTs), have raised billions of pounds worth of funding for small businesses, and helped drive investment in many companies – particularly in the technology sector. However, as a result of EU direction, new stricter rules affecting the EIS and VCT schemes were introduced in the recent summer Budget and finance bill, which could harm some businesses’ growth plans. 

These new rules impose:

• A limit on the age of a company that can apply for EIS or VCT finance. The Government had initially proposed an age limit of 12 years, but this has now been reduced to seven years in the finance bill, albeit with some exceptions.
• A limit in the total lifetime risk finance funds which are raised by a company of £12 million – £20m for knowledge-intensive companies.
• The rule that no VCT or EIS funds are to be used for the acquisition of other companies or trades.

Kirsty Sandwell, Baker Tilly’s head of corporate finance in the south, said: "These new rules will only add to the existing complexity of these important and successful schemes, and I’m concerned that high-growth technology businesses such as software companies in the south will inadvertently be the victims of new legislation.

"These new rules could deter acquisitions made to compliment or further develop existing technologies or create wider market applications, and yet ironically it is these very companies that George Osborne is keen to help grow in the UK. It’s very possible that the Government inadvertently may have switched off the tap to a vital source of funding for many businesses in the south."