"Hammond, and the Treasury have been true to their word, in that EIS/SEIS cannot be a ‘low risk’ investment option for anyone."
This might be the time of year when we are all supposed to look forward to the new year, and what it might hold for all of us, but without understanding the past we can’t hope to develop, adapt and grow in the future.
With that in mind, and given we’ve had almost a month to digest the Budget and in particular how it’s going to impact on the Enterprise Investment Scheme sector – and its Seed EIS sister – I think it’s important to highlight just how different the EIS environment will be from next year onwards.
Indeed, for some of those investment managers who might still be pushing the message that it remains ‘business as usual’, or that they are now suddenly experts in technology, disruptive innovation and ‘knowledge intensive’ businesses, they might well wish to spend the Christmas holiday season reviewing the new Budget requirements and their own business plans.
In a way, the Budget announcements – particularly the renewed focus on EIS investee companies and the new parameters that have been set for them – are not really new at all; indeed, as we’ve tended to highlight they actually return the sector back to its starting point, because when first introduced, EIS was all about supporting early-stage firms or those with the potential for large-scale growth. It certainly wasn’t envisaged as a ‘pure’ tax shelter where the investor’s money was subject to the minimal of risk, picking up the tax relief along the way and having the capital returned in full at the end of the investment term.
However, that’s ostensibly what many EIS offered and, over time, as there was no crackdown on such ‘investments’, it was unsurprising to see more and more managers pursuing this path. Thus, we were (and are still) left with a plethora of such investment options and it was only under George Osborne as Chancellor that we began to see the rolling back of these ‘benefits’ and ‘perks’, specifically around the sectors that could be invested in. Unsurprisingly, it was the recession and the ‘need for austerity’ that prompted the Government to act.
Then of course came the Patient Capital Review – and with a relatively new Chancellor in Number 11 – our sector was seeking to understand how the Treasury viewed EIS investment, what it might continue to permit, and how it seemed highly likely that those low-risk, tax-sheltering vehicles would no longer be acceptable. Let’s also not underestimate the role of Philip Hammond in all of this because he has been consistent in his public utterances around the importance of sectors such as digital technology and life sciences to the UK economy, and the need for investment to be targeted here. The little matter of Brexit has also encouraged the Chancellor to ensure UK investment is focused where it can have the most economic benefit.
And thus we came to the Budget, and again it was no surprise to hear the range of measures announced – on the one hand they are incredibly positive for the EIS sector in terms of increasing investment levels, but there is a significant caveat here in the form of the type of investments that will be permissible. Hammond, and the Treasury have been true to their word, in that EIS/SEIS cannot be a ‘low risk’ investment option for anyone. The introduction of the principles-based responsibility tests that investee companies will now have to go through makes this very clear, and while there is no further sector ‘purge’ there will be many schemes’ investments that will no longer be permissible in the future.
The focus is on disruptive companies, those that are ‘knowledge based’, those that have strong intellectual property – thus the favouring of tech and life sciences amongst others - those that have drive, energy and ambition and a team to match. The Treasury wants those firms who receive investment to be the leading lights in their fields in the years to come, and it’s clear that this will involve a significant increase in the number of employees, plus an overall potential for large growth which will obviously bring major benefits in terms of job creation but also generating taxation revenue for the Treasury coffers. These investee companies should be targeting the grandest of scales in terms of their outlook.
Understandably, there might be a degree of nervousness from schemes that do not currently fulfil such an investee brief, and perhaps the advisers and their clients who currently invest with them. There will undoubtedly be a period of uncertainty for these operations, which will be unable to change their spots over night, even if publicly they attempt to convince that this is possible.
Instead, advisers need to look at those managers who are already experienced in these sectors and have a track record of investing in such businesses – in this market they should now be much easier to spot and I suspect that as time progresses, the ‘old’ type of EIS/SEIS opportunities will begin to fall away and the opportunities in this space will become much clearer for all.