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Will Govt crackdown spark last minute renewables surge?

The Autumn Statement has closed off the final loophole enabling investment in subsidised renewables within a tax shelter like EIS or VCT

The Autumn Statement has closed off the final loophole enabling investment in subsidised renewables within a tax shelter like enterprise investment schemes or venture capital trusts.

But could this trigger a last minute dash of funds coming into renewables before the Government ends such arrangements from next year?

The new rules were buried in the statement’s supporting documents and indicate that community energy projects and anaerobic energy plants will cease to benefit from EIS, seed enterprise investment scheme and VCT eligibility from next April. 

The document also says: “All other companies benefiting substantially from subsidies for the generation of renewable energy will be excluded from also benefiting from EIS, SEIS and VCTs with effect from 6 April 2015.”

Jonathan Gain, chief executive of Stellar Asset Management, says the wording is ambiguous. 

He says: “Between £500m and £1bn is invested within renewables through tax strategies like EISs, SEISs and VCTs. The worst-case scenario – and we won’t know this until the draft legislation is published – is that rules will be applied retrospectively, and the benefits will no longer apply to money already invested, which will create a furore. 

“The most likely scenario is the rules will apply to new money invested after 6 April, which will mean anyone with renewable-based EIS or VCT structures in place has just four months to raise the funding and invest. Expect to see products pulled.”

The rules follow the announcement in the Budget that VCT and EIS could not invest in solar or wind projects. This left hydro and anaerobic digestion, where waste is broken down to produce energy, as the remaining renewable alternatives eligible for VCT and EIS investment.

Robertson Hare partner Philip Hare says the latest announcement could trigger a surge of money coming in before the curtain comes down on them on 6 April.

“I suspect there will be a mad rush into these investments up until 5 April a bit like when solar and hydro were excluded in the Budget.

“I think most firms expected this to be extended across the renewables piece but probably not as early as this.”

Hare adds EIS and VCTs are still searching for eligible new sectors to invest in outside of renewables.

“This is something that everybody is thinking about at the moment but I don’t think anyone has reached a conclusion as yet.”

EIS specialist firm Deepbridge Capital launched a hydro EIS scheme in October but technical partner Kieran O’Gorman says it was only ever intended to be a short-term raising.

“We understand the ethos of EIS’ significant tax relief is to go some of the way to compensating the risk profile of the underlying companies. There is a thought that this has come slightly earlier than people expected.

“The fact that anaerobic digestion and hydro, which are already Government-supported, were permitted as EIS investments always felt like an anomaly as the associated risks were mitigated.”

He adds the establishment of the Deepbridge Hydro Investment Scheme is seeing some significant flows prior to the implementation of the ban.

“We have already seen evidence of an increased interest in the EIS and we are looking to ensure we get in any money people want to invest by the end of the tax year.”

Tax Efficient Review editor Martin Churchill says the change is not as big as some people have made out.

“I think this is a benign change for investors and VCT operators,” he says. “Most VCTs look at companies which are going to offer them the best returns on their investment rather than focusing on specific sectors.

“Personally I think anaerobic digestion is riskier than solar and people are probably less inclined to invest because they do not understand it. I think the sector this year probably only attracted around £60m.”

The move comes as no surprise to Tilney Bestinvest managing director Jason Hollands, who says HM Revenue & Customs was concerned at the double tax breaks and the fact there was no real risk involved.

“These are essentially underpinned by Government subsidy and are obviously attractive to investors because you are able to access tax efficient investments which are relatively low risk.”

Charles Stanley head of investment research Ben Yearsley agrees it was inevitable the Government would eventually ban all renewables for VCT and EIS.

“This is unsurprising really as it was only a matter of time before this happened. Clearly the Government and HMRC were uncomfortable giving effectively two layers of state aid to these schemes through renewable subsidy and VCT and EIS relief.”

Triple Point principal Ben Beaton says he is confident investors will not be affected by the changes. 

”We identified hydro as an attractive renewable energy proposition over four years ago and as such we have already completed all the necessary due diligence with six schemes now under construction,” he says.

“Consequently Hydro VCT investments will be made ahead of the 6 April deadline, ensuring investors are able to support the development of this portfolio of hydroelectric projects.”

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