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EIS and VCT are under the watch of the FSA – but is this good news for SMEs?

This is part of the FSA’s ongoing efforts to regulate investments that are not regulated, and the suggestions made in August’s consultation paper will limit the sale of these funds at the discretion of “sophisticated investors”.

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VCTs have raised over PS300m during each of the three tax years. This included PS325m in 2011/12, and EIS investments last year believed to be in excess of PS400m. Both schemes permit qualified SME businesses to raise equity investments and, in turn, receive financing from outside sources that is not normally accessible to the company.

VCTs are trusts for investment that invest in unquoted shares. These could comprise some AIM or PLUS markets shares. The shares are traded in the London Stock Exchange and there is a secondary market for the shares. However, because they function in a manner similar to investment trusts which are excluded from UCIS There is a strong pressure for VCTs to be exempted from this decision.

Investors who invest in VCTs get 30% tax relief on their investment, and all earnings (ie dividends) and gains are tax-free. Rates of return after tax relief for VCTs generally match with comparable investments, however it is essential to examine the performance of individual investors. In 2011, half of the top ten performers in investment included VCTs. VCT investors also get tax-free dividend income, therefore it is crucial to be aware of the yield. The VCT Generalist sector’s after tax yield is currently in excess of 7percent..

Through the EIS Fund on the other on the other hand, money invested by investors is distributed across a variety of businesses with the aim of spreading risk. The performance of the investment varies greatly and, therefore, it is crucial to keep this in mind and not base investments solely based on the substantial tax reliefs that are available.

Investments made under EIS could be made directly in an individual qualified firm or via an EIS Fund or the post-tax relief performance of EIS individuals varies greatly. The tax benefits available partially limit the risk in the event of a company’s failure. If you are a 50% tax payee, your net amount will be:

Investment 100

First relief of 30 percent (30)

Net investment 70

Other incomes are not set against 50 percent relief (35)

Net loss 35

It will be fascinating to know the final outcome of VCTs and EIS during the consultation process regarding UCIS. If they aren’t explicitly excluded and this could significantly diminish the funding source for SME companies in a time where getting external financing, such as banks, is very difficult. Help to assist SMEs to grow and expand is essential to the success economic growth of the country.

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