Mark Brownridge, Director General of the EIS Association, on the Patient Capital Review and its implications for EIS and SEIS:
Back in the cold days of February, HM Treasury (HMT) announced that it would be launching a Patient Capital Review with the objective of “strengthening the UK further as a place for growing innovative firms to obtain the long-term ‘patient’ finance that they need to scale up”. There was some confusion as to whether EIS and SEIS would be within the remit of the review, but, a few weeks later, in the Spring Budget, we received confirmation they would be.
I was always intrigued by the term ‘patient’ and, to some extent, still am, because it has never been officially defined, though we have certainly had to be patient waiting for the release of the consultation document that promised to bring us more insight!
It seems, however, that the wait is very nearly at an end. Our friends at the BVCA tell us they have heard from reliable sources that the consultation document is due for release very soon, perhaps even this week, with an anticipated closing date of late September. Recommendations to the Chancellor will then take place with potential new policies possible as early as the Autumn Budget.
Much has, of course, changed since February. At the time of launch of the review, no one could have envisaged a snap election resulting in a severely weakened Government and a chastised PM desperately clinging onto power. So perhaps it’s no surprise we have had to wait a little longer than we would have liked.
Compare the makeup of the Government in February to that of now, for example, and we see a very different line up in personnel. Back in February, the Chief Secretary to the Treasury was David Gauke. Fast forward to now and Gauke heads up the Department for Work and Pensions. His replacement, Liz Truss, was Lord Chancellor and Secretary of State for Justice in February. Six months ago, the Financial Secretary to the Treasury, Jane Ellison, and the Economic Secretary to the Treasury, Simon Kirby, were both sitting MPs. Now both have lost their jobs and Mel Stride and Steven Barclay occupy those positions. All in all, we view these appointments as positive because the new incumbents are viewed as having more extensive business experience than their predecessors. Mel Stride, for example, set up his own business in 1987 specialising in trade exhibitions, conferences and publishing, before expanding and later selling the business in the United States. And perhaps the appointments reflect the greater emphasis placed on business since the election and the growing influence and authority of the Chancellor, whose position before the election looked somewhat precarious.
Will these changes mean a different approach, perhaps one that is more collaborative and open to listening to outside views? We can hope and the Patient Capital Review consultation process may shed more light on that question.
So, what will be in the consultation? It’s clear from our discussions with HMT that the emphasis is going to be very clearly on how to help generate growth, foster innovation and providing financial structures to encourage leading UK firms to remain in the UK at the point when they are looking to scale up, rather than, as so often happens (just ask Mel Stride!), feeling the need to move operations to the US or China, where the venture capital industries are more sophisticated and advanced than our own.
There has been talk that this could be where EIS has a part to play, through an enlarged scheme that builds a bridge from the financing role EIS currently has to something that helps businesses scale up further and encourages more significant rounds of funding – a ‘Super EIS’ if you like. Of course, this would mean expanding EIS and potentially increasing the amount the Government pays out in tax relief. At a time when Treasury is looking to save, not spend money, the argument in favour would need to be incredibly strong. The real issue here is value for money. The case can quite easily be made for expanding EIS and SEIS if their economic impact, stimulating business growth, revenue and employment, can be demonstrated. Similarly, failure to do this could open the door to reducing EIS and SEIS limits or even complete withdrawal of the schemes. Food for thought, and a topic the EIS Association will be pursuing. Watch this space!
An important area to watch out for in the consultation will be around how the government proposes to help generate economic growth. I read with interest this week the annual release by HMT of statistical information on the creative industries’ tax reliefs. According to this, the creative industries employ two million people across all parts of the UK and generated £1bn of investment believed to be worth £4.3bn to the economy. Mel Stride noted that “UK creative leaders are championing British culture and innovation both at home and abroad. This tax relief provides vital support to our world-class creative industries as they continue to boost growth across the country. These tax reliefs are helping to ensure creative sector companies can continue to hire people and boost local economies”. Two points struck me here. First, and related to my point above, the significant economic impact that a well targeted tax relief scheme can have and how statistical information can prove that such schemes offer value for money. Second, Stride mentions that creative industries contribute two key elements that the patient capital review also seeks; innovation and growth. Yet we are often told by HMRC that the creative industries don’t meet these criteria. It will be intriguing to see if the patient capital review takes a view on this and what that view will be.
And while we would all like to see changes to the EU State Aid rules, we don’t expect them to come any time soon, although we will continue to question and challenge their application.
A final consideration is that while increased limits and lifting of restrictions for EIS and SEIS would be most welcome, retaining the status quo would also be a good outcome. In that respect, a renewed public commitment to the long-term future of both EIS and SEIS would be a good result from the Patient Capital Review.