Question to the HM Treasury:

To ask Her Majesty’s Government what evidence they have of misuse of the Enterprise Investment Scheme for community energy projects that contributed to their decision to withdraw the scheme for those purposes.

The purpose of the tax-advantaged venture capital schemes is to encourage investment into smaller, higher risk companies that would otherwise struggle to access the funding they need to develop and grow.

Changes have been made to the schemes over time to ensure that asset-backed activities, as well as those that benefit from predictable and reliable income streams, do not qualify, since these often represent lower-risk investments that should be able to secure finance without the need for tax relief. For example, different types of energy generation were excluded from the schemes in 2012, 2014 and 2015, due to clear evidence that such investments were particularly low-risk products offering return of capital, and were being explicitly marketed as such.

Community energy projects in receipt of other government support were not excluded at the time of these previous changes. However, since then the government has become aware of significantly increased interest in the use of community energy for low-risk tax planning purposes. The number of community energy schemes registered as community interest companies (CICs) or community benefit societies has increased from about 5 in 2014 to about 200 by October 2015. The marketing material of these investments suggests that the level of investment risk for community energy, including solar, is comparable to that of activities that were previously excluded.

The government announced at the Summer Budget 2015 that it would monitor the use of the venture capital schemes by community energy organisations to ensure that there was continued value for money for the taxpayer and that they were not the subject of misuse. The government subsequently announced the exclusion of subsidised renewable energy generation by community energy organisations on 26 October 2015, taking effect for investments made on or after 30 November 2015, providing a notice period of five weeks. At the same time, the government announced the exclusion of activities making reserve energy generating capacity available, also with effect for investments made on or after 30 November 2015.

The government believes that the notice period given provided a good balance between the provision of notice to potential investors who might wish to take advantage of the tax reliefs provided through the schemes and the financial risk to the Exchequer that a longer notice period would carry.

To further ensure the venture capital schemes remain well-targeted and deliver value for money, the government announced at Autumn Statement 2015 the exclusion of all remaining energy generation activities from the schemes with effect for investments made on or after 6 April 2016. The new exclusions will apply to both non-renewable and renewable sources of energy generation and apply irrespective of whether a subsidy is received or of the nature of the company carrying on the activities.