Patient Capital Review: are EIS and SEIS under threat?
The Patient Capital consultation has generally been positively received. It contains a lot of high quality information and interesting research, and asks many pertinent questions as it seeks to inform policymaking designed to strengthen the UK’s ability to provide long-term capital to innovative, high growth businesses.
The proposal for a National Investment Fund (NIF), for instance, seems like a good idea. If it comes to pass and can, as the consultation paper suggests, exceed the level of funding UK firms currently receive from the European Investment Fund (EIF), then it could really begin to help to improve our record on converting start-ups into the major companies that contribute to our productivity and economy. However, as is implicit from the need for the Patient Capital Review in the first place, the value of EIF’s investment in UK firms is nowhere near that actually required for our patient capital needs, and neither it is active at the scale-up stage where the need is arguably most acute. So NIF will have a lot of heavy lifting to do and significant public funds may be needed to make it a success before the private sector can be persuaded to roll up its sleeves and take the strain over the longer-term.
The Enterprise Investment Scheme and Seed Enterprise Investment Scheme are referred to in positive terms in several sections of the consultation and are noted for being responsible for spurring a significant increase in younger, earlier stage, companies over the past few years, particularly via business angels.
Enhancements to the schemes do not appear to be in the sights of the Review Panel, which states that it is not currently minded to recommend new tax incentives for patient capital, which could, for example, come through enhancements to EIS or Seed EIS, or in the already mooted Patient Capital ISA. The consultation also states that there does not appear to be latent capacity to increase levels of effective investment through S/EIS or VCTs, either, implying their role in the future for patient capital will, at best, remain unchanged.
I say at best, because in the section on S/EIS and VCTs, the consultation – as it is within its rights to do, particularly given they are government-funded schemes designed to encourage risk investment – refers to what it says is the widespread use of the schemes for lower risk, capital preservation-focused investment goals – in fact it says that the majority of EIS funds in 2015/16 had a capital preservation objective, citing as its source for this claim ‘industry estimates’ (if you know whose estimates these are, please tell me). The consultation also cites a 2015 Ipsos Mori study that found 40% of companies that received S/EIS or VCT investment could probably have secured the investment without the need of tax incentives. I have read this report and my conclusion, based on its findings, were that it had shown EIS and VCTs were overwhelmingly doing a good job by providing much-needed capital and so I am slightly concerned about what could be interpreted as selective reading on this particular point. There are other questions raised about the effectiveness of the S/EIS and VCTs in the consultation, which later states in direct reference to these schemes that: “the government’s view is that the first step in funding any new commitments should be to re-prioritise existing resources where these are being used less effectively.”
There is no doubt some EIS money is used in ways that do not adhere to the spirit in which the scheme was created. Perhaps this has gone too far and a wake-up call is needed. The wording in the consultation seems to suggest that the government thinks so and may be considering taking action to “reprioritise” how the current tax reliefs are targeted.
We are currently in touch with HM Treasury and the Patient Capital Review to obtain more information on these points. And, being a consultation document, the review is seeking views on this position and we will be consulting members and responding in full to the consultation in due course (the deadline to respond is September 22).