New tax relief rules threaten growth in Scotland’s tech sector

New tax relief rules introduced in this year’s Finance Bill could jeopardise growth plans for Scotland’s tech businesses, according to a leading accountancy firm.
Stricter guidelines introduced in the Summer Budget and Finance Bill which affect the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) could harm some firms’ growth plans, says Edinburgh-based Baker Tilly.
According to Baker Tilly, both the EIS and VCT schemes have, until now, raised billions of pounds in funding for small businesses – particularly in the technology sector.
But the new rules will mean the following:
  • A reduced age limit on companies eligible to apply for EIS or VCT finance. The age limit has been reduced from the proposed 12 to seven, with a few exceptions.
  • A cap on the total risk finance funds raised by a knowledge-intensive companies of £12- £20 million.
  • No EIS or VCT funding can be used for the acquisition of other companies or trades.
Ewan Grant, Baker Tilly’s Head of Corporate Finance in Scotland, said: “These new rules add to the existing complexity of these schemes, and we are concerned that some high growth businesses in the Silicon Glen and beyond could be hit hard.
“The 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. The Government may inadvertently have switched off the tap to a vital source of funding for many technology businesses across Scotland.”
The EIS and SEIS (Seed Enterprise Investment Scheme) are both government initiatives offering tax breaks to UK small businesses.
EIS offers tax breaks to investors buying shares in small private companies, whereas SEIS is aimed at those investing in even smaller companies.
VCTs are designed to provide equity capital for small expanding companies and capital gains for investors via lower taxation rates.