CAPITALISING ON CALMER WATERS

EISA’s Mark Brownridge gets his telescope out and looks at what might lie ahead for EIS and SEIS

Whilst the Budget passed without a single mention of EIS or SEIS, there was however some insight into how the Government may transition from fostering recovery to fostering growth within the “Build, Back, Better” document that accompanied it. This document did mention EIS and SEIS, albeit in passing, but this was certainly an acknowledgement that the schemes have an important part to play in future plans and are not being ignored. But let’s not worry. Firstly, as has been abundantly apparent for some time now, EIS and SEIS are fully focused on growing and developing businesses. Whilst the Government is more concerned with saving and propping them up, it’s easy to understand why the schemes aren’t being talked about. For now, at least. As we slowly move out of the pandemic (fingers crossed), economically attention moves away from recovery mode i.e. simply keeping companies from going out of business by making access to loans and grants much easier, to growth mode i.e. now these companies have survived, how do we get them back on that growth path that they were following preCovid so they can expand, develop and increase revenue staff and the other usual key business growth metrics. To use a simple Jonathan Van Tam style analogy, the pandemic has been a perfect storm for many businesses (particularly hospitality and retail) who have been rocked by strong waves and appalling weather, some sunk but others with the help of Government funding and loans have made it to shore, battered but intact. Now these businesses have reached a safe harbour, how do they rebuild and strengthen their ships, get back out on the waves and capitalise on calmer waters?

REBUILD AND STRENGTHEN

And it’s rebuilding and strengthening where we believe EIS and SEIS can play a significant part. The Government has already signalled its intentions towards the schemes as announced in the Tory manifesto. More recently the Chancellor pronounced in the House of Commons as recently as December 2020 that the “world beating EIS and SEIS programmes provide significant support for private investors to help fund new businesses and we look forward to hearing thoughts on how to expand those schemes”.

What could some of those expansions look like? Well, EISA have lobbied for a raise in the SEIS limit from £150,000 to £250,000, an abolition of the rule that restricts companies more than 7 years being eligible for the relief and an increase to the limits on how much a company can raise both annually and over their lifetime. From the Government’s Building Back Better document, it’s clear it particularly wants to focus attention and funding on certain sectors. The majority of those sectors are smack bang in the sweet spot of where EIS and SEIS is already focused, specifically, Net Zero, Impact Tech, Artificial Intelligence, Fintech and Deep Tech. The recent Tech Nation report identified that the UK’s tech sector is growing 6 times faster than the rest of the UK economy combined; is valued at almost $600bn (double that of our nearest competitor, Germany). The UK also has more than 80 unicorns headquartered around the country. These companies are already driving our economic recovery (5 unicorns in the tech sector have already been created in 2021) and will continue to shape the society of the future. The tech sector already employs almost 3 million people and creates both high value tech and non-tech jobs. Funding this sector has to be a priority. Speak to any tech entrepreneur and they will quickly and vocally tell you how important EIS and SEIS was and will continue to be for their business as only equity funding supports fast and effective growth. Debt funding keeps the engine ticking, equity funding supercharges the engine! So keep an eye out on fiscal announcements and budgets later this year.

TALKING TAX

Lately, we have seen rumours swirl around a number of tax options. A Wealth Tax had backers for a while but seems to have lost support. The Independent Wealth Tax Commission (doesn’t sound very independent!) suggested a wealth tax on all individual wealth above £500,000 and charged at 1% a year for five years would raise money from those least affected by the pandemic. Traditionally, Tory Governments have veered away from these types of tax rises but they are popular abroad. CGT rises have also been mooted, in particular aligning CGT rates with income tax rates. This is a double-edged sword as it would most certainly affect founders and entrepreneurs when they come to exit their business and penalise a group who already get little in the way of reliefs either at the inception of the business or at the end. However, it probably makes EIS a more attractive investment as investors seek to utilise CGT deferral to invest gains made from other investments. There is also a suggestion that IHT could be in the crosshairs. Again, given EIS has IHT reliefs, this may have an effect on the schemes and given the nature of the recommendations on IHT already made, any changes are likely to beneficial.

EU STATE AID

Thirdly, although EIS and SEIS no longer come under auspices of EU State Aid, the schemes are in somewhat of a no man’s land. Whilst the Trade and Cooperation Agreement (TCA) agreed with the EU has a subsidy regime, the EIS and SEIS schemes aren’t classified as subsidies so aren’t part of TCA. The UK has announced it will introduce its own subsidy regime and are currently consulting as to the best way of doing this. Add to all this that whilst the UK has repealed all EU State aid regulations from the UK domestic law from 1 January 2021, it is necessary to retain them for the purposes of the Protocol on Ireland/Northern Ireland. This keeps Northern Ireland under most EU State Aid restrictions and means any relaxations to EIS and SEIS are unlikely, at least in the short term.

Why is this third point important? The EIS and SEIS legislation comes (or came) under EU State Aid legislation which means whilst we were part of the EU, the UK had to abide by EU legislation relating to the scheme and had no independent mechanism for making any changes we would like to make. Remove the EU from the situation and all of a sudden we become masters of our destiny again and potentially have the ability to make as many changes as we like to the schemes, including increasing tax reliefs and limits or removing unhelpful conditions. So whilst it might take a while to work through what changes would be most beneficial to the UK, we do at least now have the power to do so. So, the omens are good. The UK has the power to make substantive changes to the scheme now we have left the EU. It has the incentive to make substantive changes in terms of fostering and nurturing a tech start and scale up economy and we also have the technical ability to make substantive changes with proposals to radically alter the tax environment. The question now is whether it is prepared to rise to the challenge and embrace such changes.

GBI

About Mark Brownridge

Mark has over twenty years’ experience in financial services and prior to becoming Director General of the EIS Association, he was Head of Research and Development at Mazars, a leading UK financial planning firm. Mark is highly qualified being a Certified Financial Planner, Chartered Financial Planner, Chartered Wealth Manager and Fellow of the PFS and also sits on the CISI’s Accredited firms committee and TISA’s Distribution Policy Council. Mark’s involvement with EIS began 8 years ago and he has since championed EIS investing within a financial planning context and is extremely passionate about promoting the industry, increasing its effectiveness and ensuring the private sector continues to drive much needed funding to small companies.