Written evidence submitted by Shoosmiths LLP

Shoosmiths LLP is a major law firm with a network of offices around the UK and in Brussels. Part of the work that we do is to assist start-up and scale-up growing companies to raise funds through the Seed Enterprise Investment Scheme (“SEIS”), Enterprise Investment Scheme (“EIS”) and from venture capital trusts (“VCTs”). We also act for many serial investors, both individuals and institutions and act for most of the main VCTs in the industry. We have one of the UK’s leading EIS, SEIS and VCT tax and legal practices and advise on approximately 160 SEIS/EIS/VCT fundraisings each year. We therefore believe that we are well-placed to comment on certain aspects of the call for evidence.

We very much welcome this inquiry and the opportunity to provide our comments. We believe that SEIS, EIS and VCTs have played and continue to play a hugely important role in filling the funding gap that exists in the UK for start-up and scale-up companies. The schemes are the envy of the world and have been hugely helpful to a very large number of high-risk, highly innovative companies which have developed market-changing products, processes and services through being able to access funding under the schemes.

However, whilst the schemes have been very effective, there are certain unintended consequences of the current rules. This is a fantastic opportunity to take a step back and review the rules. In our view, if certain modifications were made, the schemes could do even more to contribute to the levelling-up agenda, to support businesses which are started by those from under-represented backgrounds, to help in the fight against climate change and to drive the UK economy forward further and faster than the schemes do currently.

We have commented on those specific questions which are most relevant to our experience on a day-to-day basis.

If you have any questions, we would be delighted to discuss this further with you.


The current state of the venture capital industry in the United Kingdom, including opportunities and threats, such as the availability of domestic capital to allow firms to scale up in the UK.

As set out above, we believe that the SEIS, EIS and VCTs have played and continue to play a hugely important role in filling the funding gap that exists in the UK for start-up and scale-up companies. The schemes are the envy of the world and have been hugely helpful to many high-risk, highly innovative companies which have developed market-changing products, processes and services through being able to access funding under the schemes.

Typically, SEIS, EIS and VCT investment is taken at the point in a company’s life cycle where other forms of investment can be extremely hard to obtain in the UK due to the high-risk, smaller, private nature of the companies involved and the potential for investment to have to remain in those companies for a significant period of time until an exit event occurs.

If the schemes did not exist, then the funding gap would be even greater than it is currently, and many companies would never be able to raise the initial funding required to develop their product, process or service beyond the initial stage.

Whilst the schemes currently perform an extremely valuable role in plugging the funding gap, as we have set out further below, there is current uncertainty around the schemes as well as changes we think could be made which would make the schemes even more effective.


The operation and effectiveness of the current tax incentives (such as the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs)) in the venture capital market, including any options for change.

As you will know, the EIS and VCT schemes have been around for more than 25 years, with SEIS having been around for 10 years. Investors like schemes with which they are familiar, and it is clear from the level of funds raised that the schemes have provided significant investment for businesses that would otherwise have struggled to secure the funding needed.

It is also clear that investors want to support, and enjoy supporting, start-up and scale-up businesses and are willing to do so under the schemes in return for the targeted and proportionate tax reliefs available for making higher risk investments for the benefit of the UK economy. This was clearly shown during the pandemic when there was little reduction in investment, certainly compared to other sources of funding.

However, both investors and companies alike are currently facing uncertainty as to the future of the EIS and VCT schemes and this is already impacting behaviour at both an investor and company level. At a time of huge geo-political and economic uncertainty, any further avoidable uncertainty is regrettable.

This uncertainty is caused by the so-called “sunset clause” which provides an end date for several of the key tax reliefs available under EIS and VCT in April 2025 (and which we refer to more fully below).

In summary, absent the current uncertainty, the schemes are incredibly effective. But we believe that the effectiveness of the schemes could be improved still further by making a number of changes. However, we are realistic about the appetite to make wholesale changes to the schemes at this stage and have therefore focused on the three changes that we think would make the biggest impact to the schemes and help achieve the Government’s objectives:

  1. Removing the “sunset clause”

As set out above, this is the single biggest factor currently causing uncertainty in the EIS and VCT markets (albeit SEIS is unaffected). Whilst it may seem that April 2025 is still some way away, companies and investors alike require certainty of whether they will be able to raise or invest more funds under the schemes in future.

Currently s.157 Income Tax Act 2007 provides that certain of the key EIS and VCT tax reliefs will cease to apply for shares issued on or after 6 April 2025. In our view, this will mean the end of the schemes as we currently know them and have a catastrophic effect on the ability of start-up and scale-up businesses to raise the funds they need to be able to grow to a size where they can access alternative forms of funding.

We do appreciate that the “sunset clause” was a requirement imposed on the UK by the EU in order to obtain the previous State Aid approval in 2015 but now, post-Brexit, we would implore the Government to act to either remove (or at very least extend for a significant period) the “sunset clause” as soon as possible. For the avoidance of doubt, the legislation currently provides the ability for the Government to do this by secondary legislation, so this change could be made relatively easily.

  1. Supporting the levelling-up agenda by removing or extending the maximum age limits for the schemes

As you will no doubt be aware, the SEIS, EIS and VCT schemes contain age limits so that only companies which meet certain age-related criteria can qualify. For EIS and VCT and subject to a few narrow exceptions, EIS and VCT investment can only be received by a company within 7 years from its first commercial sale (or 10 years for knowledge-intensive company from the later of the first commercial sale or the end of the accounting period in which the company first achieved over £200k in turnover).

As things stand, whilst a significant amount of investment under the schemes is made outside of London/the South East, the majority is still made within that region. The age rules unfairly prejudice those companies which are outside of London and the South East as they generally take longer to reach a stage where they can access other sources of funding or become economically viable without outside funding. This has been made even more acute for companies in those sectors which have suffered during the pandemic as they have effectively “lost” 2 years of this 7 (or 10) year period.

We do not think that the age limit is a good test to determine which companies should be able (or should not be able) to access the schemes. The schemes already contain a number of other conditions to ensure that they are focused on high-risk, smaller trading companies, such as the risk to capital condition and limits of the number of employees and gross assets. The current age tests are prolonging the drive to invest into the London and the South East, at the expense of other regions of the UK.

Abolishing (or extending) the age limits for those companies which can access the SEIS, EIS and VCT schemes would, in our view, lead to a dramatic increase in those companies outside London and the South East being able to obtain the investment they need to create more jobs, contribute more to the UK economy and help support and deliver the Government’s levelling-up agenda more quickly.



  1. Retaining but modifying the financial health requirement

As you will know, the financial health requirement is contained in the schemes to ensure that companies which are already insolvent do not raise further investment and cause greater losses to their investors. We entirely support this aim and the limb of the financial health requirement which states that a company will not be able to access funding under the schemes when it meets the criteria for insolvency under the Insolvency Act is, in our view, absolutely correct.

However, for companies which are more than 7 years past their first commercial sale, there is an additional limb contained in HMRC’s guidance which states that: “where more than seven years have passed since a company’s first commercial sale, it will also be regarded as being in difficulty [and therefore not eligible for investment under the schemes] if more than half of its subscribed share capital has disappeared as a result of accumulated losses.”

Our experience is that to-date, HMRC has not consistently applied this limb which is to be applauded. However, the uncertainty it creates is unnecessary and this limb should be removed.

This additional test is arbitrary in nature – whether a company has significant accrued losses compared to the amount of investment it has raised in its lifetime is irrelevant as to whether the company has a cogent, robust long-term plan through to sustainability and growth and development to a size where it can access other sources of funding.

In addition, companies which are supported by the SEIS, EIS and VCT schemes are very often likely to be loss-making early in their life cycle and, as set out in our comments on the age limits above, may not have achieved the requisite size to cease to be reliant on the schemes by the seventh anniversary of their first commercial sale.

Also, whilst we appreciate that the aim of this test is to protect investors, we believe that the limb dealing with insolvency combined with the other protections in the legislation provide the right balance on this issue.

We would therefore strongly recommend that the limb relating to insolvency remains, but the element comparing accrued losses to subscribed share capital is removed. We note that, again, this was one of the requirements imposed on the UK to obtain EU State Aid approval in 2015 and so now, post-Brexit, this could be altered.


June 2022