A crackdown on enterprise investment schemes (EIS) could be on the cards at the next Budget, but specialists in the area have urged people to hold tight and not panic.
‘I think it’s a lot of speculation at the moment, I don’t think there is anything too concrete. But the general feeling seems to indicate that there are going to be quite some important changes to the tax relief,’ said Ian Battersby from Seneca Partners.
It was revealed by the Sunday Times that Treasury officials are looking at ways to crack down on abuses of the EIS system; however, Battersby pointed out that it is important to make the distinction between capital preservation and asset-backed schemes.
In a consultation paper published in August, the Treasury claimed that the majority of EIS funds are motivated by capital preservation, adding that 40% of companies which received funding could have accessed another form of credit which did not require a tax break.
While any changes will be announced in the Budget in November, with the Treasury so far declining to comment, it is thought that cutting the level of tax relief will be among the proposals. Increasing the period an investment must be held to more than two years and placing greater restrictions on companies that qualify may also be on the table.
Reform not crackdown
‘I think that this [capital preservation EIS] is clearly an area the government does need to and want to target. That is wholly different than an asset-backed EIS,’ said Vasiliki Carson from Sapphire Capital Partners.
She also said that any changes to the scheme should not be considered as a crackdown but a ‘makeover’.
Carson added that EIS should not be viewed as tax avoidance schemes. While they offer tax incentives, she pointed out that it is available to everyone and not just the rich, pointing out the system has been ‘a great success after the financial meltdown when banks stopped lending to small companies, it helped with the most difficult part of raising finance’.
Carson is part of a team that runs model portfolios that invest in EIS or SEIS, which were launched by platform provider GrowthInvest earlier this year.
The portfolios have a minimum investment of £10,000 and carry an initial charge of 2% followed by an annual management fee of 1.5%.
After looking at the Treasury’s patient capital review, Carson has said that any changes will be to better focus EIS on what they are intended for.
Battersby said: ‘The direction of travel has been very much that the government wants to see innovation and early stage businesses promoted. We’re already heading down that road with the seven year rule [which excludes companies that have been trading for more than seven years].
‘That means we are heading towards funding businesses at an earlier stage, which is probably riskier, but it is a vital part of the SME engine in the UK.
He added: ‘Governments need to be careful about what they do. The impact of [the seven year rule] is just now being felt by investors. To some extent, my interpretation is they are already heading down that road and with Brexit around the corner, doing anything too far-reaching runs the real risk of destabilising a vital system that is largely working well.’
He conceded that the government’s imperative to make sure the market is doing what it wants it to do, pointing out that some EIS offerings do look like manufactured products and focus on capital preservation, rather than using the money raised to promote growth and employment.
Rising stars squashed
Battersby warned that if EIS are restricted it would risk turning off the flow of funds to companies early in their lifecycle, which could be dangerous and should be avoided.
‘We are mainstream growth capital providers, and EIS is just another route to market. The key part about all this is we help them, not just by providing a check, but also by advising them on the growth journeys they’re embarking on.
‘I don’t think that’s something institutions have the appetite to do. At the end of the day, we’re not deploying hundreds of millions of pounds, we are talking about £25 million or £30 million per annum. This is not a tax avoidance tool at all. It’s about making sure we have a proper flow of money into genuinely growing companies.’
While Battersby and Carson argue that EIS is here to stay, perhaps with some tweaks, Wealth Club chief Alex Davies has a more stark warning.
He stated: ‘For those investors considering an asset-backed EIS this year, then doing it now would seem prudent. While a change is by no means certain, there are a lot of suggestions that this opportunity could be closed by the chancellor, come November.’
Graeme Clark, head of private clients at Courtiers, added that although the firm does not use EIS, finding them too high risk for its clients, he was a little surprised to hear about possible changes.
He pointed out that the seed scheme for smaller companies was only brought in a few years ago, and it would be surprising to see the government ‘fiddle with it’ so soon after.