Chancellor George Osborne is facing calls to tighten the rules governing venture capital trusts and enterprise investment schemes in his Budget later this month.
VCTs and EIS are vehicles designed to encourage people to invest in small, high-risk companies.
Both VCTs and EIS offer a range of tax reliefs which are meant to provide an incentive for investors to take this risk.
But experts say some investment companies have used the schemes to invest in company debt rather than providing small businesses with equity.
Technical Connection joint managing director John Woolley says: “I expect the Government will try to tighten up VCT and EIS rules to make sure they only apply to true trading companies.
“When people make an investment through a VCT or EIS, the Government want there to be an element of speculation rather than making an investment where there is a guaranteed return.”
Yellowtail Financial Planning managing director Dennis Hall says: “The Government needs to clamp down on this. VCTs and EISs should really be investing in the equity of start-up companies.
“But some investment funds are using the rules to effectively invest in company debt, so you get very low volatility and very low risk. So the returns are just capturing the tax relief and there is no real risk being taken.
“That is going against the spirit of the schemes and ultimately it is the taxpayer that is underwriting investments for fund managers.”