ACCA Advanced Taxation (ATX) Practice Exam

In terms of risk levels, how do EIS and SEIS compare to VCT?

1. EIS and SEIS are low risk

2. EIS and SEIS have risk spread across multiple companies

3. EIS and SEIS are high risk due to single company investment

4. VCT is the highest risk investment

The correct answer is: EIS and SEIS are high risk due to single company investment

EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) investments are considered high risk because they typically involve putting capital into early-stage or smaller companies that may not yet have established a proven track record. These investments are often concentrated in individual companies rather than spread across a diversified portfolio, which exposes investors to greater risk. If a single company fails, the entire investment can be at risk, leading to potential total loss. On the other hand, while VCTs (Venture Capital Trusts) do involve investments in smaller and more volatile companies, they generally hold a diversified portfolio. This diversification spreads the risk among multiple companies rather than concentrating it in one, which can mitigate the potential for loss compared to investing in a single company. Thus, the characterization of EIS and SEIS as high risk due to the nature of their investment structure—often directed towards single or very few companies—correctly highlights why these avenues are less stable and more prone to volatility when compared to other vehicles like VCTs, which benefit from diversification strategies.