Can EIS be patient?
As my email to EISA members immediately following the Budget noted, the Chancellor and Treasury have confirmed that the Patient Capital Review will cover all existing tax reliefs that are aimed at encouraging investments and entrepreneurship, so will include EIS, SEIS as well VCTs and Entrepreneurs’ Relief.
This will take a similar format to the Advance Assurance consultation and will see a consultation paper issued into the public domain which will provide initial Government thinking and then pose questions for the industry to feed back on. In terms of a timetable, the consultation will take place over April and May with recommendations to follow in the Autumn Budge 2017. EISA have already arranged a meeting with Treasury in order to shape the initial thinking.
So what does this mean for the EIS industry and should we welcome the consultation or view it with suspicion?
Firstly, it’s important to understand what the Government is looking to achieve from the review. The review’s stated objective is to “strengthen the UK further as a place for growing innovative firms to obtain the long-term ‘patient’ finance that they need to scale up, building on current best practices”. So, it appears as Philip Hammond mentioned at least twice in the Budget that the review seeks to put structures in place to cement the UK as one of the best places in the world to set up and grow a business. Well, if that is the case EIS is bang on message. Funds invested using EIS are specifically aimed at helping businesses start and grow and EIS funds tend to be extremely patient as there is an in built 3 year mechanism that ensures monies remain invested in a business for at least 3 years but in general far beyond that. In addition, HMRC’s own research (The use and impact of venture capital schemes) concluded that “The schemes appeared on many measures to have a particularly strong impact among the smallest and youngest companies, as well as those aiming to expand, broadly suggesting they are being targeted at those most in need of investment.” Surely strong evidence that EIS is zeroed in on exactly those areas of the economy that the Government wishes to stimulate through patient capital.
The review would appear to be focusing on access to and the availability of finance for growing, innovative firms. Again this should put the ball firmly in EIS’s hands as a scheme that has focused its attention on precisely this area for over 20 years. The problem for EIS hasn’t been around making funds available to small companies, it has been educating small companies and entrepreneurs about its very existence in the first place. Too many small companies experience the “computer says no” syndrome from banks and lending institutions and then have little or no idea where to turn next. So any proposal to help raise awareness of alternative sources of financing for small companies should be welcomed. Indeed a Department of Business, Energy and Industrial Committee Access to Finance report highlighted that “The main barrier to greater take up of the schemes (EIS and SEIS) appears to be low awareness of both businesses and investors” and concluded by saying that “we recommend that he Government directs resources towards promoting the SEIS, EIS and VCT schemes”.
On a higher, principle based level, what we are seeing from Theresa May’s government is concern that the UK needs to raise its game in order to raise productivity as this is the only sustainable way to raise living standards for people across the UK. Small businesses are able to deliver this effectively and over the long term so the direction of travel is positive.
In terms of fundamental changes to EIS however, don’t expect too much. We still remain as part of the EU and the review will therefore be unable to propose any loosening of existing EU State Aid rules. Until we are free of State aid (likely to be 2 years at least) major changes can’t be implemented without re-notifying the scheme to the European Commission. Given the UK has a long list of Brexit wishes and demands, EIS is unlikely to be high on the list of issues to tackle first. However substantial changes can take place to EIS without the need for EU rubber stamping and we could see a refocusing of EIS in terms of qualifying investments, greater emphasis on growth or specific areas of the UK and new and innovative ways of how the tax relief operates and is effected (EIS in an ISA anyone?!).
Whatever happens, EISA are fully engaged in the consultation process so keep checking back for me as matters progress.
Director General – EIS Association
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