Budget 2014 limits the scope for obtaining tax relief on investments in renewables projects, but it also opens up a new relief, of which some renewables investors may be able to take advantage.
The bad news: no more EIS or VCT for ROC or RHI projects
The Budget announced some unwelcome changes for investors in renewables projects. It states that, from the date on which the new Finance Act receives Royal Assent, it will not be possible for investments in companies benefiting from Renewables Obligation Certificates (ROCs) and/or the Renewable Heat Incentive scheme to benefit from the EIS, SEIS or VCT tax reliefs.
The Budget further noted that Government “is concerned about the growing use of contrived structures to allow investment in low-risk activities that benefit from income guarantees via government subsidies and will therefore explore a more general change to exclude investment into these activities, consulting with stakeholders. The government is also interested in exploring options for venture capital reliefs to apply where investments are in the form of convertible loans, and will be considering this as part of a wider consultation and evidence gathering exercise over summer 2014”.
This is not the first time that the scope of the EIS and VCT schemes has been narrowed with respect to projects benefiting from renewables subsidies. The Finance Act 2012 removed EIS and VCT relief from investments in businesses benefiting from Feed-in Tariffs (FIT). However, the 2012 Act made an exception for certain bodies which are subject to constitutional restrictions on the distribution of profits – namely community interest companies (CICs) and certain “asset-locked” community benefit and co-operative societies. Investors in these were still permitted to benefit from the EIS and VCT schemes.
But good news for social investors
The exempting of CICs and asset-locked co-operative and community benefit societies from the exclusion of FIT-supported projects from EIS and VCT relief in 2012 was in part an acknowledgement of the fact that the generation of electricity from renewable sources is the sort of activity which could qualify a business to be set up as, for example, a CIC. There is a clear benefit to the wider community in the avoidance of greenhouse gas emissions associated with coal or gas-fired generating plant, and for smaller scale renewables projects, the CIC structure is an obvious way of involving local host communities and enabling them to receive financial benefits from a renewable development. For an overview of the CIC regime, see our September 2013 briefing, Community Benefits Incorporated.
The Government is keen to promote community involvement in energy schemes, so it comes as no surprise that, just as EIS / VCT is removed from non-FIT projects, Budget 2014 offers an alternative route to tax relief for those who are prepared to live with any of the varying levels of restrictions on distribution of profits associated with investments in CICs, asset-locked community benefit and co-operative societies, or charities. Schedules 9 and 10 to the current Finance Bill set out a new scheme of social investment (SI) relief which bears more than a passing resemblance to the EIS regime in particular. FIT-supported schemes (but not ROC- or CfD-supported ones) are specifically excluded from the new SI relief but will presumably be able to continue to rely on the EIS and VCT schemes.
Of the various forms of business that may attract the new SI relief, CICs probably have the most to offer to any investors who expect to see a return on their money, rather than simply engaging in tax-efficient philanthropy. The announcement late last year by the Regulator of CICs of a significant liberalisation of the existing rules on dividend payments by CICs is a further advantage – although dividends remain restricted to a proportion (35%) of distributable profits.
The new SI relief will deliver the same rate of relief as the EIS scheme (30%). While the other restrictions applicable to CICs and the other kinds of businesses which are eligible for SI relief will mean that it is not an effective substitute for all types of investors in renewables projects who have benefited from the EIS and VCT schemes, those who are not looking for spectacular returns and are prepared to make the initial investment in reconciling the relevant Finance Bill provisions with the CIC regulatory regime, may find SI relief an option worth considering.