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Budget 2011: Relief all round as EIS and VCT win tax backing

In a Budget clearly aiming to get the SME sector to fuel the recovery, the new initiatives came so thick and fast that each lacked enough detail to ascertain its real impact.

However, the detailed releases from the Treasury and HM Revenue & Customs, unlike the Brown/Darling era, did not contain any really nasty surprises.

The dominant driver from an investment perspective are the changes to enterprise investment schemes and venture capital trusts. Osborne’s earlier statements that he was reviewing these reliefs has led until now to a massive hold-off of VCT investment as a result of this uncertainty. I now expect a wall of money to flow into VCTs over the next two weeks now that the existing regime has been supported in the Budget.

More curious is the decision to split the tax treatment of VCTs and EIS. In all the documents I have seen, EIS alone benefit from the immediate increase in relief to 30 per cent and an increase next year in the annual limit to £1m.

The welcome widening of eligibility criteria applies to both from next year while neither benefits from a relaxation of qualifying business types.

From an investor perspective, the prevalence of single-company EISs makes them higher-risk, justifying the higher tax incentive over the spread offered by VCTs. Quite how this increased incentive for risk sits with the FSA’s concern over IFAs’ risk -profiling of clients is an interesting conundrum.

It had been expected that Osborne would also put a stop to limited-life VCTs but this has not happened.

I remain concerned about their suitability for SME investment as they mismatch the business’s need for long-term investment with the investors’ explicit relatively short-term exit requirement.

As a final investment incentive, the doubling of the lifetime entrepreneurs capital gains tax relief to £10m is really good news.

The country needs successful businesspeople to repeat the trick several times, bringing not just their money but also their expertise to allow more companies to prosper.

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