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Finance Act 2014

Section 56: Exclusion of Incentivised Electricity or Heat Generation Activities.


1.Section 56 amends the list of excluded activities within the tax-advantaged venture capital schemes, so that a company whose trade consists substantially in the generation or electricity or heat which attracts Renewables Obligation Certificates (ROCs) or payments under the Renewable Heat Incentives (RHI) scheme will no longer qualify for investment under the Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS) or the Venture Capital Trusts (VCT) scheme (with some limited exceptions). The restriction will apply in respect of both UK ROCs and RHI schemes, and overseas equivalents. The section also extends the list of non-excluded community companies involved in the production of electricity from renewable sources, to European Co-operative Societies.

Details of the Section

2.The tax-advantaged venture capital schemes exist to incentivise investment in smaller companies carrying on, or preparing to carry on, qualifying trades.  A trade is qualifying if it is carried on commercially and with a view to profit, and if it does not consist to a substantial extent in “excluded activities”.

3.The legislation listing the activities which are “excluded” for the purpose of the schemes can be found at sections 192 to 199 Income Tax Act 2007 (ITA) for EIS; those sections apply also for SEIS by virtue of section 257DA ITA. The equivalent VCT provisions are at sections 303 to 310 ITA.

4.Legislation already exists at section 198A and 309A to exclude the generation or export of electricity attracting feed-in tariffs or overseas equivalents, with exceptions made for electricity generated or exported by community interest companies, community benefit societies, co-operative societies and Northern Irish industrial and provident societies.  Companies producing electricity by anaerobic digestion or hydro power are also excepted from the exclusion.

5.Section 56 extends the existing exclusions at sections 198A and 309A in respect of the subsidised generation or export of electricity, to cases where a ROC is issued in connection with the generation or export, or where the production of the electricity has been incentivised by a similar overseas scheme.

6.The new section adds new sections 198B and 309B to exclude the generation of heat, or the production of gas or fuel, where the generation or production attracts a payment (or other incentive) under the RHI scheme or a similar overseas scheme.

7.As is the case with the feed-in tariffs exclusion, community interest companies, community benefit societies, co-operative societies and Northern Irish industrial and provident societies will not be affected by the new restrictions. The amendment extends that list of excepted entities to European Co-operative Societies, for all forms of renewable incentive.

8.The new section ensures that the new restriction will not apply where the electricity is generated by anaerobic digestion or by hydro power, nor where heat is generated, or gas or fuel produced, by anaerobic digestion.

Background Note

9.The tax-advantaged venture capital schemes are designed to encourage investment by individuals in qualifying early-stage and developing companies, by offering a range of tax reliefs to investors who meet the conditions of the relevant scheme.  There has been concern about the proportion of investment into renewable energy companies whose activities are relatively low-risk and which already benefit from generous government subsidies.  Much of this investment activity is explicitly marketed as lower risk or aimed at capital preservation, emphasising the generous tax reliefs, the relatively predictable income stream from the energy generation, and the generous government subsidies in the form of ROCs and RHI to attract investors.

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