The new scheme would offering a dividend tax exemption which could last between five to seven years.

The UK government is to consult on a new Enterprise Investment Scheme fund structure offering investors a dividend tax exemption. 

During Wednesday’s Spring Statement Phillip Hammond, the Chancellor of the Exchequer, aka finance minister, set out plans for a new form of the EIS, which follows the launch of the government's Patient Capital Review in November 2016. The EIS structure has, in broad terms, existed since the early 1990s as a way to encourage funding of small busineses, surviving a range of different administrations. The EIS have significant capital gains and income tax advantages for investors; they must hold certain types of investment and for minimum periods of time to qualify for tax reliefs.

Under the proposed new EIS version, qualifying investments would be required to have met at least one of two conditions: To have spent at least 15 per cent of operating costs on research and development or innovation in one of the three years preceding investment, and to have spent at least 10 per cent of operating costs on research and development or innovation in each of the preceding three years. Also, companies are required to provide evidence of creating, or recently creating intellectual property. 

Tax relief 
The government proposes a dividend tax exemption for those investors who stick with the scheme.

“A ‘patient’ dividend tax exemption could be applied in respect of investments made through a knowledge-intensive fund,” the Spring statement said. “Investors would not pay tax on dividends received from knowledge-intensive investee companies after a fixed holding period.” The government also said that an exemption could last between five to seven years.

“[This] would encourage and reward patient investment,” said the Spring Statement. “However the rules would need to address the risk that companies could be pressured into issuing dividends before they are making adequate profits, instead of reinvesting profits into the growth of the company. A dividend exemption effective only after a given period would fit well with the objective of encouraging patient investment. However there is a question about whether it would be effective at motivating additional investment given some stakeholders identify the potential for large capital gains, rather than an income stream, as the primary motivation for investment in high growth companies.” 

It also added that a small proportion of investments of up to 20 per cent could be invested in non-knowledge-intensive EIS companies. The latest enterprise scheme comes after the chancellor doubled the EIS investment threshold for knowledge investment firm to £2 million ($2.79 million) in his annual budget statement last November. 

Alex Davies, founder of Wealth Club, a broker that specialises in tax-efficient products for high net worth clients, commented on the EIS consultation paper: 

“Today’s consultation, published alongside the Spring Statement, moves to establish a specific EIS fund structure which invests almost solely in knowledge intensive companies,” said Davies. “This newly created EIS fund would exist alongside the current EIS scheme but their tax incentives might be different in order to attract money into these potentially higher risk, higher return investments. Anything that encourages investment in potentially world beating companies and gives us more businesses like Dyson, ARM Holdings and Abcam can only be a good thing. The one thing the government should avoid at any cost in my opinion is to introduce further complexity. However good the government’s intentions, and however great the benefits, if the rules are too complex investors will be put off.”